Q3 2023 Jerash Holdings (US) Inc Earnings Call
Greetings and welcome to <unk> Holdings fiscal 2023 third quarter financial results Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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I'll now turn the conference over to your host Roger Palmdale Investor Relations for dress Holdings, you may begin.
Thank you operator, and good morning, everyone and welcome to Jewish Holdings.
Fiscal 2023 third quarter conference call I'm, Roger Palmdale, with Pinedale Wilkinson Jewish Holdings Investor Relations firm it would be my pleasure momentarily.
Produce the company's chairman and Chief Executive Officer, Sam Choy is.
As Chief Financial Officer, Gilbert Lee and Eric Chang, who leads the company's operations in Jordan.
I turn the call over to Sam.
I want to remind our listeners that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factors section.
<unk> of the company's most recent Form 10-K and Form 10-Q.
Filed with the Securities and Exchange Commission copies of which are available on the SEC's website.
At Www Dot FCC Dot Gov, along with other company filings made with the SEC from time to time.
Actual results could differ materially from those forward looking statements and duress holdings.
Undertakes no obligation to update any forward looking statements, except as required by law.
With that I am.
My pleasure to turn the call over to Sam Choy Sam.
Okay.
Thank you Roger and Hello, everyone.
Our fiscal third quarter performance demonstrates the company's ability to navigate through continue.
Challenging market conditions.
Six of them.
Although orders received from a major global brand customers continue to be smaller.
Paired with last fiscal year.
Tim in Jordan was able to keep our facilities running at full capacity by adding supplementary production for other customers.
Accordingly, we had two.
Right.
Third quarter residential.
Nevertheless, we continue to see fiscal 2023 that's a transitional and opportunistic year for DRAM.
While we make progress on our initiatives to diversify our customer base and product mix.
Since the last conference call.
We have successfully begun to ramp up production on orders from timberland and Skechers.
Newark Ripple brand customers.
Additionally test runs for our previously announced first European based high end apparel brands were well received with initial shipments to begin at the end of March.
Our plans to form a joint venture with FAW send the payroll book.
Proceeding well.
Anticipate launching the red the venture early in our new fiscal year.
I think the rash no opportunities to step Hussein. This group of brand customers that have expressed interest in shifting the production from southeast Asia to Jordan.
Which has long standing duty free agreements with the U S EU and other countries.
Additionally, we are gaining visibility into the Leicester.
Sure we are in clinical clothing segment.
Is concerned I guess well known for its high quality, we'll fund that parallel production in chemical Commons at keeps what where and for Maria.
Before I turn the call over to Eric who space in Jordan.
I want to say that our thoughts and prayers go out to all of the families that were impacted by the recent devastating Turkey Syria earthquake.
I will now turn the call over to Eric to talk about our operations and Dupont will then discuss the quarters financial results.
Thank you Sam Hello, everyone.
Okay. Thank you Sam and Hello, everyone.
Sam mentioned.
We will set challenging retail environment or this crazed by all the top global brand customers have been smaller.
While retailers continue to work through economic and inflation.
Recovery.
We expect these trends to continue for several more months.
During this time, we are actively communicating and maintaining excellent relationships to better understand our customers' needs going forward as market conditions improve.
Fortunately, we continue to receive inquiries from other premium brands global.
Global brands.
<unk> remained to diversify supply chain away from Asia.
Specialty China.
On the new customer front we.
<unk> and ship initial orders for timberland and sketches in the third quarter and our scheduling additional production for both.
In the current quarter, but you've recently began production for our first European base High end apparel brand with initial shipments to start soon.
Please keep in mind that new customer inquiries and test runs for premium brands typically take several months.
Also the initial new customer orders in there.
Relatively small quantities.
Generally lower margins just stopped.
During this timeframe, we are able to maintain a full stop and facilities fully book, but again stop pre mandatory production of products for bias other than our major customers in the U S.
We are also expanding the capacity at some of our factories.
For our joint venture with both Sandler that Sam.
I mentioned earlier.
Lastly, please note that our sourcing of fly breakdown other materials from new partners in the Middle East and North Africa is continuing.
And it's not expected to be impacted by the earthquake.
With that I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 outlook Gilbert please.
Thank you Eric.
Revenue for our fiscal 2023 third quarter increased 17% to a record $43 million from $36 8 million in the same period last year.
The increase was mainly due to supplementary sales to customers outside the U S with lower margin products.
Gross margin was 13, 5% in the fiscal 2023 third quarter compared with 18, 8% in the same quarter last year.
The increase the decrease was primarily driven by the lower proportion of export orders to two major customers in the U S that typically generate higher margins.
Operating expenses totaled $4 $5 million in the physical 2023 third quarter, mainly from SG&A compare with essentially the same amount in last years third quarter, including SG&A expenses of $4 2 million and stock based compensation expenses of 319000.
Operating income totaled $1 $3 million in the fiscal 2023 third quarter versus $2 4 million in the same period last year.
Total other expenses were 111000 in the physical 2023 third quarter compared with 80000 in the same quarter last year.
Interest expenses were $249000 versus 73000, a year ago.
Net income for the most recent third quarter was $900000 or seven cents per diluted share versus $1 7 million or 13 cents per diluted share in the same period last year.
Comprehensive income attributable to duress holdings common stockholders.
$929000 in the fiscal 2023 third quarter versus $1 7 million last year.
Jurassic <unk> balance sheet and cash position remained strong with cash of $26 2 million and net working capital of $47 1 million at December 31 2022.
Inventory was $26 $7 million and accounts receivables amounted to $5 5 million net cash provided by operating activities was $9 9 million for the nine months ended December 31, 2022, compared with $14 6 million.
In the prior year.
The net change reflects working capital activities attributable to the reduced debt net income <unk>.
<unk> in the advances to suppliers.
That's really offset by smaller decreases in accounts payable and accrued expenses.
We continue to take a conservative approach to guidance given that the general retail markets are still recovering from the inflationary pressures and weaker economic conditions.
For the current fourth quarter revenue is expected to be in the range of $26 million to $28 million.
Compared with $30 9 million last year women, we are maintaining our margin goal for the full fiscal year to be in the range of 16% to 18%.
We continue to focus on growing our customer base and pursuing other opportunities to enhance our competitive advantage and offerings.
We're proud to be able to navigate through this challenging environment.
And that we can achieve essentially the same level of business for the full 2023 fiscal year as we did in fiscal 2022, which experienced the highest growth rate in the company's history.
Our strategy of maintaining full capacity and expanding some production space at some of our existing facilities now will allow us to be ready to accommodate anticipated growth in fiscal 2024 from newer and long term customers as well as from our proposed.
Joint venture.
We will continue to closely monitor developments over the next few months and will provide an update on our progress on our next call.
On February three.
Our board of directors approved a quarterly dividend of <unk> <unk> per share payable February 21st to stockholders of record as of February 14, 2023.
As of the end of our fiscal third quarter, approximately 156600 <unk> shares have been repurchased at an average price of approximately $4 90 per share under the share repurchase program authorized by the board in June 2022.
The program expires on March 31, 2023.
With that we will now open up the call for questions. Operator May we have the first question. Please.
At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Your first question for today is coming from Mike Baker at D. A Davidson.
Okay, Hi, guys. Thanks.
So a couple of questions can.
Can you talk about the state of your larger customers in and the inventory situation and in the U S versus what it was three months ago some of the big customers.
Customers, maybe not all your customers, but some of the big apparel sporting goods retailers in the U S. Like VF Corp, under armour Columbia de inventory is actually getting larger growing not not decelerating as many would have expected. So is this situation better or worse than it was three months ago for for your larger customers.
Eric do you want to take this.
Yes.
Talk to someone.
Some of our major buyers like the rehab cop the new balance okay.
I was saying that they also have recorded some growth in the past couple of months in the field, okay, but they are still not too optimistic about the coming several months. So they are still trying to absolve than trying to reduce the level of the inventory.
Why despite the fact that.
The growth in the sales they are still not placing too many new orders, okay until the inventory level is down to a level, which is the thing more safe and acceptable to them. This is the latest.
Information I get from my bias.
Okay. Okay. Thanks, and so maybe it maybe as a follow up on that you are I think Alberta had mentioned.
Growth in 'twenty 'twenty, four and you used the word growth.
Understanding you're not giving 2024.
Guidance right now but.
You know that express is a level of confidence that you will grow next year.
Can you tell us what gives you that confidence.
Well right now, we're I mean with our existing customers like TNF and new balance.
They are being very cautious in our issuing new orders for us normally in a normal year. They would have already kind of filled up our capacity in the first half of the.
The next fiscal year by now.
Because we would have to start planning for the for the winter season for the fall season, and and so on.
However, this year or are there still being cautious and the orders are smaller than previous so we're still waiting on them. That's why we're not comfortable in providing guidance for.
For the next next fiscal year or the first half, but we are confident that with our efforts in this past fiscal year fiscal 2023, when we have the.
When we have some breathing room to to onboard some new customers.
Such as the <unk>.
The very high high quality premium European brand, which we all know who they are but we cannot say.
They're the order is already starting we have passed everything.
They came to our factory in order.
All the quality people have already certified as a proof of our factories to start producing.
So the shipman, well actually begin pre Shen and also with our with our joint venture debt. Currently I mean, maybe we will talk about the joint venture later, but the.
The good news is we are progressing very very well and we anticipate a joint venture agreement will be signed.
Last quarter, we signed the Mou, but over this past quarter, we have been working with our with boosts and Theyre in developing the joint venture agreement and everything is basically agreed upon with just making some final a final changes in the wording and so on.
So we anticipate that will be signed very soon and then we will start working together banana will in fact, they have already started doing the marketing.
They are coming to the U S in there.
Next.
A couple of weeks to start going to other customers and theyre going to represent.
Giraffes and they will move to those orders to dress solely of we're very cognizant that the impact from this joint venture is going to help us.
Even though.
We may not have substantial growth or may be maintaining the same level of business with our existing customers with additional opportunity from the joint venture will help will help us move duress forward.
So that's why we're cautious but we're optimistic and are in the next fiscal year now, but I cannot give you a guidance.
Point.
All we can say is that.
Currently we are.
We're looking at the first half of the year being.
And we're confident that we will maintain the same level of business.
Maybe a little bit of growth depends on the timing of the of the new businesses coming in.
Okay, one more.
More if I could and related to that so the fourth quarter.
Guidance that you've given.
Two questions on that one.
Screw yourself, 17% and we're at $43 million why the implied guidance for the fourth quarter sales is down 10% to 16 why would that reverse so much and then the gross margin I understand you just kept the full year number but could you tighten that up a little bit because basically a vaccine to my math at least for the fourth quarter anyway.
Between 12% and the gross profit line gross margin, 1% to 22%. So you know if you could help tighten that around a little bit from the fourth quarter sure.
Trying to explain first of all understand that the third quarter, we had record revenues and that is primarily because we supplement it.
Lack of orders or the reduction in orders from our major customers. That's why the gross margin for the third quarter dropped down to 13, 5% alright, compared to 18, 8% in the previous year third quarter.
Sales increased sales increased by 17% in third quarter quarter to quarter.
Year to year for the third quarter, but margin basically dropping a lot, but that was because of the.
Local orders our orders to a third party. So that's why margin was very low now fourth quarter would be a little bit of a different picture.
We were doing more or higher proportion of the off the applebee order to north face and new balance.
We're going to do less of the lower margin orders.
So G M or the gross margin percentage of the fourth quarter. This current quarter that we're in is going to go back up to between 16% to 18%.
So that will keep that will give us the full year around 17%.
Sales would be down in terms of dollar amount comparing to last year.
Okay understood. So in the press release, it says full year guidance of 16 to 18 on the on the gross margin, but you're saying that that is also good guidance for the fourth best also for the fourth quarter exactly understood Yep. Okay.
Okay. Thank you very much.
Sure. Thank you.
Your next question is coming from Mark Argento at Lake Street.
Yeah.
Yeah, Hi, good morning, guys, just a follow up on the Bousada.
Relationship I know last quarter, when you talked about it.
Still working out some of the details and it sounds like maybe you have.
Better understanding in the agreement when when you think about the economics of the deal you.
Can you talk a little bit about what would be accretive to gross margins or how will this flow through.
Your P&L once you start booking revenue.
Oh.
Well the joint venture is going to be a separate company.
It's just a new company that we set up in Hong Kong.
Companies already register we just need to wait until the joint venture agreement is signed.
And this company will be formed by two shareholders of two partners one as Joe asked holdings and the other is within our power group, So Jurassic World will own 51% and presented will own 49%.
We will consolidate boost.
<unk>.
Revenue.
Gross margin or the profit hoops and and then.
49% will go to <unk>. So that's how the sales and the profit will flow to our to our consolidated.
Okay. That's helpful and then.
Eric.
Paired remarks mentioned that does or expanding capacity or adding capacity for that relationship can you talk a little bit about.
Where do you stand right now in terms of production capacity and what Youre looking to add.
Mhm.
Eric.
Good luck.
Answer this question.
Yeah.
About capacity agreements our cut was regarding our current capacity.
We will be we are all running in full capacity.
Till July and at least I'm also expecting that.
We will continue to running full capacity until maybe a September to October okay. It will start coming in off the boats or was that in the oldest okay, Paul but with that though because.
The factories are located in Asia. It is the reason why they have a joint venture with us because they have requested by the buyers to move the oldest out from Asia.
And then to the duty free country and collection from the by its Jordan Jordan is because of the duty safely issue. So.
So we will be expecting.
The inflow of folks on the order starting maybe between July and August Okay, we will continuous for the capacity.
I think we also make announcement that okay. We are going already started our in house expansion for them in <unk>. So we are expecting the in house capacity, we can increase small production lines, okay, a bit by the end of July . Okay. So this is a spend by X.
Truck capacity, okay, Paul, but with that and.
They have more orders to inject into Josh I mean, the joint venture company.
And so you take an existing facilities and are they going onto those or maybe could you just give us a little more color on how youre, adding the capacity.
Yes, the building or the existing yeah, yeah. Please.
The building actually we I mean for the fourth.
Yeah for the extension, we were basically added an extension to the existing building.
So I think we added one more floor and then the building with spend that are horizontally also so that will I believe we.
Estimate that it will increase our capacity by about 15% for that particular factory.
And by adding more of course, adding more machineries and are adding more people.
And you expect that to be complete by July .
Is that right.
Yeah, right now, where we're still working on it we anticipate it will be done by July I mean earlier we.
I think we started this in 2022.
Sure.
Really just because of the because of the market condition or is this kind of thinking of time and not really pushing to get it done earlier, but right. Now we are almost done we're just finishing up and we anticipate this could be put into use by by July .
And just one follow up in terms of the capital required to do the expansion of the relatively nominal or what have you.
What are you kind of thinking from a capex perspective.
For the Capex are I think this is just just slightly above $1 million or $1, one or one three.
Alright, thanks, guys.
Mhm.
Thanks.
Your next question for today is coming from Aaron Grey.
Alliance Global partners.
Hi, good morning, and thank you for the questions.
So first question for me I guess in terms of the supplemental sales that you guys had with the lower margin.
Or was that more a function for the quarter I just wanted to get some revenue in there.
Underutilization given the larger clients you know, we're having smaller orders.
It sounds like is that going to continue for the next quarter, but and you guys do have full capacity from July to September . So can you just help us understand maybe that youre going to have that full utilization maybe why it was just maybe a one time thing to where you want more local to get that revenue even at the lower margin, it's not going to be a potential need going forward. Thank you.
Sure and.
Yeah. This is just for this third quarter that there's substantial amount of local order and order at a lower margin because we want to keep running.
And utilizing all our capacity I mean first of all we we can or allocated or more absorb our fixed cost of the of the factories that we have and then we also don't want to lay off or reduce our workers because we need.
Eat those workers when the when the business turns around when the market turns around.
Unlike auto factories in Jordan many of those have already reduced their staff laying off people and some smaller factories, even went out of business.
Everybody is suffering even in Georgia. So we out we decided and our strategy is we have to prepare for the business to come back in and for even future growth because where we're talking about a joint venture we're talking about new customers that we're onboarding. So we don't we.
Want to cut into the bone.
So we wanted to keep everybody busy.
And that's why we we by now and we brought in a lot of these complementary businesses and these are people that we have done business with before and and they are very happy to to send us the business.
Now in this current quarter Q3 Q4 of 2023.
We are kind of easy.
The business with our existing customers new balance in the northeast actually.
We're quite busy this quarter and then Oh, we're going to be busy in the first quarter of 2024, which is the April to June quarter.
Put using for these two.
Our largest customers also so that the amount of the supplementary orders or what we call. The CN motors is going to reduce it's not going to be.
Hi proportion in this current call this current quarter, but if we need to to use up the capacity. We will accept these kind of orders. So it's all of.
The mix of the business so that the mix of the orders.
And that will affect the gross margin and also the the top line.
Top line sales.
Does that answer your question no. It does absolutely that was actually really helpful. And then actually and then turning to the flip side of that as you continue to kind of ramp up some of these new ones.
Timberland Skechers and some of the athleisure as well as those Mcgrath and potentially you know advancing into bigger and larger orders.
Can you just give us any update maybe on the timing of that are you know and whether or not then if you are at full capacity now.
For the next couple of months and then how you potentially kind of ramp up those lines as well along with the current ones for your two largest customers, particularly in a scenario of when the business turns around then you're back at full with the legacy and you've also ramped up these new brands. Thank you.
The ramp up of these new brands I mean first of all we have I.
I think we started our.
According.
Hugo boss about almost a year ago and now we're at.
Correct me, if I'm wrong, Eric I think we're going to start shipping the first orders for Hugo boss I'm, maybe in March is that correct.
And then there will be a ramp up yes.
There will be a ramp up period.
And I think after the first few tests orders due diligence continue to bring us new styles and also Hugo boss is a longtime customer of presenter in fact, Louisiana helped us quite.
Quite a bit.
To to onboard Hugo boss, even though we first contact with Hugo boss about a year ago, but then it came in and they assisted us on a lot of the technical.
Area and how to how to do business with Hugo boss, but eventually a Hugo boss will be part of the joint venture.
When we when we started doing business with with boson, so and besides Hugo boss. There are lot of other premium brands that was than it has been a.
Working with and those will come in but of course, it will take time for them to for them to do the sampling.
Due to the test and make sure all the quality is is too there are up to the standard and.
So I.
I don't know that it could be a the timing could be could be tricky.
It also has to do with our capacity and Oh man power, but.
By that time booths, and there will be will.
Will be onboard and they will be assisting us.
So we feel very optimistic.
Optimistic cautiously optimistic about this this coming year.
Okay, great. Thank you very much I'll jump back in the queue.
Thanks.
Your next question for today is coming from Ramallah Cancio with aegis capital.
Yes, good morning.
I knew I Wonder if you could just expand on your initiative to source additional Rick from local partners in the Middle East I know you touched on this in prior quarters, but.
There are many moving parts in gross margin and obviously the customer mix had a shift.
Resulting in a shift in gross margins, but you don't have the additional sourcing from local partners have a beneficial impact in the quarter and what your outlook is for that.
Those initiatives going forward. Thank you.
Yeah, sure, where where we started the sourcing and the middle East.
East and North Africa region.
Probably more than a year ago.
Remember that it was December when I first went to Egypt and <unk>.
Turkey to start sourcing efforts.
But now we already are.
Our purchasing fabrics from both Turkey and Egypt.
For Egypt thing is primarily for the timberland.
Products and Turkey, I think it's also timberland too but that.
The sites are.
Giving us a much.
Less dependency on the on the Asia fabric sourcing, especially China, especially doing independent damage.
Lot of shutdowns in and interruptions.
I think it is more strategic and more long term.
Without going to the Mena region to source.
We wouldn't be.
We wouldn't be doing.
The timberland business.
At least not so soon.
That really helped us in getting this new customer timberland.
And then it opens up other.
Are there opportunities to auto European.
Customers or potential customers so.
The cost for our for the raw material and may not be.
Uh huh.
You may not have a big difference because comparing to China, the middle East fabrics and the supplies are the prices are higher however, we saved the we saved the freight costs and.
The most important thing is to the state.
It's shortening of the logistics time.
From a shipping from Asia than comparing to shipping from the middle East. So that is the biggest benefit for us.
The quicker turn around and we don't have to carry so much inventory.
I mean, we're a material inventory and so on.
But yeah, the pros and cons, but I think they're more more pros and cons and it opens up a lot more opportunities for us to grow our customer base.
Okay, and just as a follow up but I think you've mentioned that.
Situation for some of your competitive fact.
Factories and in Jordan is that causing any sort of <unk>.
In fact on your Labor base are you able to source more domestic workers within Jordan or how does that sort of affecting you or your everyday operations from a labor perspective. Thanks.
Eric do you want to take this question about sourcing local workers, maybe some opportunities.
Yeah.
Now it is mentioned that some small factories, okay already clothing down and some of the factories because of the order situation. They also reduce the number of workers. So it will become more easy for her.
The rush to source, especially the local workers, Okay, who will who is very easily okay to ship from one factory to another and for the foreign workers. Okay. Okay of course, okay. If the factory scaling down they need to finish the contract and go back to the country, but they can.
There is some more.
Chances more opportunities for them to come to work and draw them for to rush mhm.
Great. Thank you very much.
Thank you. That's the reason why we want to we want to hold on as much as possible to our existing workers because they apparently they're familiar with our operations and they are very experienced.
It is a big cost if you want to go out and find new workers.
There is a local workers or important workers.
Okay. Thank you.
Thank you.
We have reached the end of the question and answer session and I will now turn the call over to Sam Choi for closing remarks.
Thank you operator.
We are optimistic about <unk> prospects and the Pope rest of our strategic initiatives.
We look forward to speaking with you again soon and we appreciate your continuing support thank.
Thank you.
Thank you.
This concludes today's conference.
And you may disconnect your lines at this time, thank you for your participation.
Thank you. Thank you everyone. Thank you very much.
I have a nice day.