Jerash Holdings (US), Inc.

Greetings, and welcome to the Drash Holdings Financial Results for Fiscal 2022 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Roger Pondell, Investor Relations for Drash Holdings, Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Jurasch Holdings fiscal 2022 first quarter conference call. I'm Roger Pondell with Pondell Wilkinson, Jurasch Holdings investor relations firm. It will be my pleasure momentarily to introduce the company's chairman and chief executive officer, Sam Choi, his chief financial officer, Gilbert Lee, and Eric Tang, who leads the company's operations direct from Jordan. Before I turn the call over to Sam, I want to remind all 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 factor section of the company's most recent Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements, and Jurasch Holdings undertakes no obligation to update any forward-looking statements except as required by law. And with that, it's my pleasure to turn the call over to Sam Choi. Sam?

Thank you, Roger, and hello, everyone. Our fiscal 2022 first quarter results demonstrate excellent progress. Revenue was at a record level for the first quarter, reflecting robust shipments to our largest customers as a result of strong demand amid the reopening of the US economy. Gross profit also represents a record for the first quarter, primarily due to higher revenue and gross margin performance. Our gross margin continued to run in the high teens, reflecting increased shipment volumes and improved product mix in the first quarter. Our robust momentum is continuing further into fiscal 2022, with orders for the first nine months of the year that we believe will lead to a revenue run rate for a year that would exceed our prior record. As a result, we have increased our revenue outlook for the full year, which Gilbert will discuss shortly. We continue to advance plans to increase capacity in our existing facilities and secure additional capacity to meet our customers' demands. both by building new facilities and through leases and acquisitions. We recently announced the signing of definitive agreements to acquire both the operator of a 71,000 square feet manufacturing facility in Amman, Jordan, and the related physical premises. We expect to close this acquisition soon. Eric will provide more details in a moment. I'll now turn the calls over to Eric Tang, who is based in Jordan, and then to Gilbert Li, who will cover our financial results.

Eric. Thank you, Sam. Hello, everyone. Our factories in Jordan are extremely busy, and we continue to add capacity as quickly as we can. All the volumes are up substantially, and customers have returned to more typical ordering patterns. As anticipated, our product mix improved in the first quarter, leading to orders with higher average selling prices and margins than we saw in the last fiscal year. Moreover, this positive momentum is continuing. Capacity is completely booked through the end of January 2022. based on orders from our four largest global brand customers alone. Bookings remain heavily weighted toward jacket and other outerwear products that have higher ASP and margins. As Sam mentioned, we recently signed agreements to expand our manufacturing capacity in Jordan. This particular acquisition is in two stages. First, we signed an agreement to acquire the operating company of a 71,000 square foot apparel manufacturing plant. Under the terms of the first agreement, Gerrard assumes the manufacturing licenses and existing physical operations including all machinery equipment, 500 workers and employees, and the dormitory. We have taken over production at the new facility as of August the 1st, and we have begun manufacturing products for our customers. However, because the seller has yet to complete production for its primary orders, we are allowing them to temporarily maintain one production line, which in turn has delayed formal closing of the first part of the acquisition until September. Second, we signed a separate agreement to acquire the land and the building that house the apparel manufacturing operations. We expect this part of the deal to close in November 2021. The new facility is expected to enable Jiraj to produce approximately 2.5 million to 3.5 million additional garments per year, adding approximately 20% to our current annual capacity. In addition, The facility gives us the ability to scale up even further. Customers already are placing orders that are expected to fully book the new factory through January 2022. As mentioned last quarter, we began the construction of a high-quality living space for expanding multinational workforce. With the higher safety and comfort designs, that will help position us for growth and further our ESG goals. Finally, we recently announced plans to double worker capacity at our facility in Ahasa as part of a special humanitarian project with the Jordanian government that began in 2018. We are very proud of our progress on this project. Despite the unprecedented disruption caused by the pandemic, The facility currently employs 300 people there, and we plan to increase this to 600 by end of 2021. With that, I will turn the call over to Gilbert Lee to discuss our financial results and fiscal 2022 outlook. Gilbert, please.

Thank you, Eric, and good morning, everyone. Our fiscal 2022 first quarter revenue rose substantially to $30 million from 19 million in the same period last year, an increase of nearly 60%. The increase was primarily due to higher shipments to our largest customers in the quarter. The higher sales volume reflects stronger demand as the U.S. economy continues to recover from the pandemic. Gross margin expanded 250 basis points to 18.8% in the fiscal 2022 first quarter, compared with 16.3% in the same period last year. Gross margin expansion in the quarter reflects a higher proportion of export orders, which typically carry higher profit margins, as well as increased production and sales volumes. Operating expenses total $3.3 million in the fiscal 2022 first quarter, compared with 1.9 million in the same period last year. The increase primarily reflect high packhouse additions to support our growth, higher shipping costs that were in proportion with increased sales volumes, and expenses related to COVID-19 precaution and recruitment of new migrant workers. Operating income was $2.3 million, in the fiscal 2022 first quarter, compared with $1.2 million in the same period last year. Comprehensive income attributable to Jurasch's common stockholders was $2.0 million, or $0.17 per share, in the first quarter, compared with approximately $813,000, or $0.07 per share, in the same period last year. Our balance sheet remains strong, with cash and restricted cash of $9 million and net working capital of $51 million at June 30, 2021. Inventory was $31 million and accounts receivable was $20 million. Net cash used in operating activities was $11 million in the fiscal 2022 first quarter, compared with $8 million in the same period last year. The net change was primarily due to working capital activity. Inventories increased in the first quarter, primarily reflecting seasonal activity and strong demand. Accounts receivable also increased in the first quarter due to strong demand, particularly in the month of June. To date, we have collected more than 80% of receivables at the end of June. We continue to expect the business to generate cash from operating activities on an annual basis. We also have been granted supply chain financing programs by our major customers and an untapped $3 million line of credit available. In terms of our fiscal 2022 outlook, we are increasing our revenue guidance to be in the range of $115 million to $120 million. As strong demand continues and our capacity expands, we also anticipate revenue in the fiscal 2022 second quarter to exceed $40 million. Orders continue to be heavily weighted toward high margin jackets and other outerwear products. We expect this pattern to support growth margins in the high teens for the full fiscal 2022 year. I would also like to point out that operating expenses are expected to be higher in fiscal 2022, reflecting our growth and the pandemic's impact on last year's first half. We also anticipate stock-based compensation to be at a higher level for the rest of fiscal 2022 compared with the same period last year. While customer orders remain strong, it is important to note that potential risk from the Delta variant of COVID-19 could constrain our ability to add workers needed to run our factories at full capacity. To a certain extent, we already have reflected this risk in our updated outlook. We'll continue to monitor pandemic developments over the next few months and give you an update on the next quarter's earnings call. Our fiscal 2022 first quarter results represent a strong start to the year. This robust momentum is leading to what we believe will be a record year for the company. We look forward to keeping you apprised of our progress as the year unfolds. Lastly, our board of directors approved a regular quarterly dividend of $0.05 per share to our common shareholders. payable on August 24, 2021 to stockholders of record as of August 17, 2021. And with that, we will now open up the call for questions. Operator, may we have the first question, please?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Mark Argento with Lake Street Capital. Please proceed with your question.

Hi, guys. Good morning, and nice quarter. I just wanted to... Maybe peel the onion a little bit on the guidance, which was very strong. I had anticipated with the 20% plus capacity expansion through the acquisition that that would take maybe a little bit longer to come online. Maybe you could talk about what you're seeing that gives you the comfort and confidence to guide as strong as you have here in terms of onboarding that additional capacity. And then secondly, maybe you could just talk about your overall order book and are you guys, do you have more orders than you do capacity at this point? And is there anything additional you could do in terms of maybe leasing some additional space as well? Thanks. Thank you, Mark.

First of all, I think we are trying to be conservative because there are still a lot of uncertainties. all over the world with the pandemic still going on in various parts of Asia, in particular with the Delta variants. We're right now facing some challenges in bringing in additional migrant workers from Asia. even though we're working very closely with the Jordanian government and we see some very promising opportunities. However, we don't want to overextend ourselves. We do have orders from our major customers that far exceed the projection. But we just want to make sure that we have the ability to produce and to ship throughout this fiscal year. But we are confident with our capacity and with our ability that we will be able to fulfill this $120 million in revenue.

In terms of the mix of the incremental revenue, is it going to be more outerwear? Maybe give us a little bit of an idea of how you think about the mix. Is it going to look mostly the same, just another incremental $15 to $20 million in revenue, or is it going to change materially?

Well, I think the additional revenue or the increase in the revenue is going to be highly concentrated in outerwear because that's our intention. Even though the new facility, the new workers, they probably need some time to be trained to manufacture our products, especially those for our premium customers. Those are rather complex products. we started out the new factory by producing some of the lower margin or more simple products such as T-shirts and polo shirts. And just to use that to get them acclimated to our processes. And once that is done, and we anticipate that maybe after this, fiscal quarter, we should be able to convert them into producing the outerwear, the jackets. And also, we're working on expanding our satellite facility in Alhazard into making jackets. So we're hiring more people in Alhazard.

training them and Converting that facility into producing some higher margin high ASP product And then just last question for me the new facility that you guys are purchasing or have purchased is that in the same complex as As your current facilities, you know, of course the Haas outside but within within Amman area there in the current campus?

Yes, the new facility that we purchased is in Amman. Eric, is it in the same industrial park?

Yes, the location, it is situated in the same industrial city which the garage main factory is situated. And for walking distance, from Gerard's main factories to this new facility is only around five minutes by walking.

Great. All right, guys, appreciate it. Congrats on a strong quarter. Thank you very much.

Thank you. Thank you, Mark. Yeah, and also thank you for all the long-time support of the company.

Our next question comes from the line of Rommel Dionisio with Aegis Capital. Please proceed with your question.

Good morning. Thanks for taking my question. On, you know, we hear so much about increased freight expense around the world as well as raw materials. Maybe raw materials is a little less applicable to you, but I wonder if you could just talk about the impact, potential impact that you're seeing on gross margins, if you're seeing any delays, especially on the shipment front we definitely hear about some challenges in the world of global freight. Thank you.

Thank you, Remo. Well, there are some challenges, especially on the incoming freight, on the incoming shipment from Asia for raw material and supplies. However, because we're working with global brand customers, they are very understanding. And if there is any delay from raw material, they wouldn't penalize us or they wouldn't complain. They understand. And if they increase in raw material costs or the inbound freight, most of the time they will reflect in the order

on the prices to accommodate for that can you confirm that Eric yes recently after okay we face a lot of some or some problem so I cannot say a lot of problems but some problems in the incoming containers especially from Southeast Asia countries like Vietnam like Taiwan such countries because they have been locked down recently. So, unfortunately, okay, some of the ordered fabrics, okay, from North Face, okay, they are also from this country. The fabric mill they order is also from this country. But, okay, this fabric mill, which is situated in Vietnam and Taiwan, are the nominated supplier by the brand. So, okay, once we place the order, okay, they have the responsibility to ship to Georgia on time in order that we can deliver on time. So nowadays, because of the lockdown, the shipment came in too late for one month or two months, and the brand understands very much it is not the responsibility of a manufacturing being rushed. This is the responsibility of the fabric mill. Okay, and so the brand is very willing to grant us extension of the delivery okay, for one or two months according to the delay of the container. And sometimes, okay, some of the garments, they may need to be rich U.S. soil by end of November because they have a big Christmas sale at that time. So they will ask us to air freight some of the garments to U.S., okay, on the cost of the brand. This is the situation.

Thank you, Eric. Thanks.

Thank you. Thank you, Eric and Gilbert. And maybe just to follow up, Gilbert, I think in the prior question you talked about the potential challenges if, you know, Delta variant in terms of importing labor. But you obviously have a significant labor base in Jordan, you know, domestic labor as well. And I wonder if we could just refresh our memories on the availability of that. Is there, you know, plenty in the event that, you know, you have difficulties importing labor from some of the Asian countries, to what extent, you know, you can just simply rely on domestic labor within Jordan itself? Thanks.

Yeah, we're actually trying to hire more domestic labor or local laborers in Jordan. So on one hand, we're working on importing more labor from or more workers from Jordan. from Asian countries such as India and Bangladesh. But we all know that those two countries right now are kind of in the lockdown. And we don't know how successful that will be. But at the same time, we're comparing to other manufacturers in Jordan. We already have a significant advantage because we already have quite a bit of foreign workers working for us. and we have very good reputation, and we have very good relationship with the government, and they are helping us, or they're trying as much as they could to help us get those workers qualified and imported into Jordan. However, the pandemic, nobody can control it. So we do put a little bit of conservatism in our projection just because of that. But at the same time, we are working very hard to recruit local workers, Jordanians, even Syrian refugees who are residing in refugee camps, and we provide those workers because they don't have transportation and they live about an hour away from our factory in refugees camps and they couldn't leave the camp to live in our dormitory because they were not allowed. So we provide them transportation every day with buses to transport them to our facility to work and bring them back home. So those are the kind of things that we are working on to make sure that we have sufficient workers to satisfy our demand or increase in production volume.

Okay, that's very helpful and congratulations on the quarter. Thank you.

Thank you very much.

Our next question comes from Michael Wu, a private investor. Please proceed with your question.

Hi. I just want to ask a question about the North Face order. Do you have any estimate of the full year order from North Face?

Hello? Yes. We do have orders from the North Face for the whole year. And the order amount, really actually exceeds our capacity or our projection because they place orders. We may or may not be able to fulfill all the orders, but the North Face have been working with us for six or seven years, and almost every year they would place orders more than we could supply them. And they are very understanding. They know and they keep increasing the demand for us to produce. It's just that even though we keep increasing our capacity, our productivity, there is always increasing demand from the North Face. But we do have an opportunity rolling 12 month orders from the North Face from New Balance from, from a few of the other global brand customers.

Can you just give me just mobile rough idea? So I mean, last year is around, I mean, down for like, more than 15% with, you know, physical 2020. So is that like, fairly to assume that you were recovered to, I mean, 2020 level, or at least, or maybe even exit?

I'm sorry, you said last year, which is fiscal 2021?

Yes, yeah, it was done, right, from 2020. Yeah, yeah, yeah.

Yeah, and obviously, because of the global pandemic, everybody's sales were down. And we were only down 15% from the previous fiscal year, which was $93 million. And last year, we were at $90 million. Because in the second half of the last fiscal year, we basically fully recovered from the pandemic. The first half, it was down quite a bit. But the second half, we were almost at the same level as the previous fiscal year. So that rebound, I'm sorry?

Sorry, I'm asking about only about the North Face order. It's not about the whole company. So the 2020, the amount you from North Face is around $72 million, right? So last year is 56. So I was asking maybe the North Face order would be recovered to 2020 or, you know, what do you have any idea?

I don't have the numbers in front of me, but I could tell you the North Face order.

Sorry, Gilbert, can I answer this question?

Yes, please.

Because, okay, you are asking about the North Face order, the figure. Okay, the North Face orders, we are increasing almost every month at the request of the customers. Okay. Okay. As of today, okay, in dollar value, okay, we have already confirmed orders with North Face more than $75 million. That's great.

Yeah, that's exactly what I want to know. Thank you so much.

Okay, so I think the figures will still going up, okay, as we only started two quarters.

Okay, so maybe we'll be, you guys will maybe even get more orders, right?

yes yes sure okay so that's great uh second one is um how about the uh how about new balance any update and any trend like from uh from the order from them the new balance compares with the fiscal 2021 we are okay this year we are also i mean the uh increase they are the customer is also increasing the order around uh 20 percent compared with last year.

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of Barry Pasternak, a private investor. Please proceed with your question.

Hey, guys. Congratulations on the quarter, the guidance, and the inquisition. I was wondering on the How much of a temporary gross margin impact should we expect this fiscal year from digesting the acquisition or on the revenue coming from the acquisition from the factory?

For the new acquisition, we expect... Yeah, will there be... Yeah, I'm sorry.

Go ahead.

The new capacity, you're talking about the facility that we just acquired in August, right? So this one... there's already 500 workers and obviously within the first six months we need to get the workers kind of trained and converted into manufacturing our products previously they were manufacturing jeans for their customers but now we're turning them into manufacturing our kinds of garments uh, which is, uh, apparel, uh, for, uh, sports, uh, sporting apparels and also, uh, outerwear jackets. So it will take some time for them to, to get, uh, to, to get trained and get acclimated with, uh, with our system. So we expect, uh, the first six months to be, um, to be a little bit, uh, kind of, uh, maybe not as possible, not as profitable, but, uh, we'll train them first on some of the orders that they are less expensive, less complicated, and over time they'll be able to do the same kind of products and at the same productivity and efficiency as all our other factories and all our other workers. So I would say the first six months, it will have somewhat of a negative impact to our overall gross margin. But we'll just have to see. And we did because of the mix that we put into this factory. But putting all our other factories into manufacturing the higher premium, higher gross margin products, we think the impact would not be very significant.

So, in other words, the impact on the total company, yes, in other words, the impact on the total company gross margin will be at least partly offset by, you know, higher margin product being produced in the existing factories. And so there shouldn't be, would you say more than like a 50 basis point? I mean 50 basis point or less gross margin impact during these six months from the acquisition would, would that be a fair?

I would say it would be anywhere between 50 to a hundred basis point. Okay. And the overall, because right now we have 5,000 workers in total in Jordan. Uh, and 500 workers in the new facility. So if we mix all the products together, I think the impact probably would not be more than 100 basis points.

Okay, great. And on the four largest customers you referenced earlier, are those all existing customers from last year, or is there a new customer in there?

Yes, they are all existing customers from last year, which New Balance and American Eagles were new customers last year.

Okay. And is there also a new customer this year that you've started shipping to that is not in the top four but has the potential to be, say, by next year?

Eric, do we have any new customer in our projection?

We have one new customer in our projection, and this is a very big name. This is Adidas. So we have confirmed one trial order with Adidas, and this order is around 35,000 pieces. So that is very small, right? Yeah, because this is a trial order. Okay, after that, the customer will give serious consideration to place the bulk order to garage next year.

Okay. Okay, great. Thank you.

Thank you.

We have no further questions at this time. Mr. Choi, I would now like to turn the floor back over to you for closing comments.

Okay, thank you, operator. And thanks again to everyone for joining us today and for your support and interest in our company. We look forward to speaking with you again soon on our fiscal 2022 second quarter earnings call. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Thank you.

Thank you.