Jerash Holdings (US), Inc.

Q4 2022 Earnings Conference Call

6/23/2022

spk03: Good morning and welcome to Juresh Holdings Fiscal 2022 Fourth Quarter and Full Year Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 2. I would now like to turn the conference over to Roger Pondell. Please go ahead.
spk01: Thank you, operator. Good morning, everyone, and welcome to Jurasch Holdings Fiscal 2022 Fourth Quarter and Full Year 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, its Chief Financial Officer, Gilbert Lee, and Eric Tang, who leads the company's operations in Jordan. Before 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 whatsoever. 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, and 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. Jurasch Holdings undertakes no obligation to update any forward-looking statements except as required by law. And with that, it is my pleasure to turn the call over to Sam Choi. Sam?
spk04: Thank you, Roger, and hello, everyone. Our fiscal 2022 fourth quarter and full-year sales demonstrated Jurasch's underlying foundational strengths and the attractiveness of its manufacturing capabilities to global brands. But while our top line was up sharply, gross profit for the fourth quarter was impacted by product mix that includes fewer than expected jackass orders, as U.S. retailers face the strains of a weaker economic environment due to inflation. On the positive side, we were able to quickly shift manufacturing to produce other premium brand sportswear items, such as pants and polos, although these items carry lower margins. Duresh is in the fortunate position of having strong customer relationships, along with the ability to attract new customers even during the current macroeconomic environment. Our operations in Jordan offer unique benefits of free trade agreements with the US and EU. Combined with our capability of producing highly complex apparels, the company is positioned as an attractive alternative manufacturing partner outside of Asia for global apparel brands. I'm happy to report that we have received orders from our first European-based high-end apparel brand. Other new customers are in the pipeline as we continue to focus on diversifying and expanding our customer bases. We are taking conservative approach with respect to our guidance, and Gilbert will discuss those details momentarily. From a growth and top-line perspective, our business outlook remains strong. Accordingly, we are continuing to explore plans to increase capacity. In April, we started extension in one of our existing factories to add approximately 1.3 million pieces to our capacity. This extension is expected to be completed by the end of 2022. We also have room for in-house renovation in other premises, that could increase an aggregate of 2 million pieces in preparation of continuous growth in customer demands. I'm now trying to call over to Eric Tang, who is based in Jordan, and then Gilbert Li will cover our financial results. Eric.
spk05: Thank you, Sam. Hello, everyone. Order volumes continue to be strong in the fiscal fourth quarter and into the new fiscal year from our current top global brand customers. Our manufacturing capacity is completely booked through December 2022. Further, we have received production inquiries from several new premium brand customers, which will allow us to further diversify our customer base. As Sam mentioned, We recently have received orders from Gerard's first European-based high-end apparel brand to produce jackets and other outerwear for a sportswear division. Production from our new lift facility that we acquired and took over in August last year has now fully transitioned to manufacture products for our own customers. We continuously train our employees and enhance efficiency from this facility to further expand our capacity for new customer order and new production categories. Construction of a new dormitory for our multi-national workforce is progressing on schedule, and it is expected to be completed by September 2022. The high-quality living space with comfort designs and the highest safety measures will help position us for growth and further our ESG goals. Please take a look at GERRARD's holding website to see updated videos for the dormitory and recent factory expansion. Lastly, we are proud that GERRARD was featured by the World Bank fraud this week for World Refugee Day on June 20, highlighting the company's ongoing efforts. to employ Syrian workers at its factories and providing transportation for these workers. This recognition serves as a prime example for the private business sector to help refugees settle into a new hosting country. With that, I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 outlook. Gilbert, please. Thank you, Eric.
spk06: Fiscal 2022 was a record performing year for JARASH, achieving revenue of $143.4 million, up 59% from fiscal 2021. Net income jumped 91% to $7.9 million, or $0.67 per share, from $4.1 million, or $0.37 per share in fiscal 2021. Revenue for our fiscal 2022 fourth quarter rose 30% to $30.9 million from $23.8 million in the same period last year. The increase was primarily due to higher shipments to our current customers, which we were able to accommodate due to increased capacity from our newest factories. Growth margin was lower by 445 basis points to 15.1% in the fiscal 2022 fourth quarter, compared with 19.6% in the same period last year. Growth margin was mainly impacted by fewer than expected jacket orders, which carry much higher margin. To a less extent, margins were impacted by higher material and ocean freight costs, during late 2021 and early 2022. But the good news is that ocean freight costs are now coming down since Shanghai reopened earlier this month. Operating expenses total $4.4 million in the fiscal 2022 fourth quarter, compared with $3.5 million in the same period last year. The increase was primarily due to increased headcounts and shipments, an increase in stock-based compensation, and recruitment for new migrant workers, as well as higher shipping costs. Operating income for our most recent fourth quarter was $275,000, compared with $1.1 million in the same period last year. Income tax expense was $405,000 due to higher provision for annualized consolidated global income. Net loss for the fiscal 2022 fourth quarter was $130,000, or $0.01 per share, after $312,000 of stock-based compensation expenses, compared with net income of $681,000, or $0.06 per share, a year ago. Jurasch's balance sheet and cash position remain strong, with cash of $25 million and net working capital of $56 million. at the end of March 2022. Inventory was $28 million and accounts receivable amounted to $11 million. Net cash provided by operating activities was approximately $9 million in fiscal 2022 compared with net cash used of $1.5 million in fiscal 2021. The net change reflects working capital activity primarily due to increase in net income and inventory and decrease in accounts receivable. In terms of our fiscal 2023 first quarter outlook, we're projecting revenue to be in the range of 33 million to 35 million. Accordingly, we are expecting gross margin returning to the fiscal 2021 levels at around 17 to 18% for the next few quarters. As Sam mentioned, we're taking a conservative approach to our guidance for the full year, given the inflationary environment that is affecting the U.S. retail markets and consumer sentiment, along with a product mix shift pointing towards apparel items that typically carry lower margins. While customer orders remain strong, We're anticipating that revenue growth will be marginal for the full fiscal 2023. We will continue to closely monitor developments over the next few months and plan to provide an update on our next call. Our board of directors approved a regular quarterly dividend of $0.05 per share to our common stockholders on June 3, 2022, to stockholders of record as of May 27. In addition, reflecting its confidence in the company's long-term performance, our board has authorized a share repurchase program of up to $3 million. The program will be in effect through the end of the company's current fiscal year, March 31, 2023. With that, we will now open up to call for questions. Operator, may we have the first question, please?
spk03: Certainly. And as a reminder to the audience, if you would like to join the queue at this time, you may press star 1 to enter the queue. Once again, that will be star 1 if you would like to ask a question at this time. And the first question is coming from Mike Baker from DA Davidson. Mike, your line is live. Please go ahead.
spk07: Okay. Hi. Thanks, guys. So a couple questions on the – well, I guess I'll ask on the margins and new customers. So can you talk about – percent of sales from new customers and what that should look like in 2023 and how that impacts your gross margins. I guess what I'm trying to get at is, is the gross margin pressure more about the mix away from jackets and towards pants and other apparel items, or is there also an impact from taking on more new customers, which I think is probably positive for the longer term, but as I understand it, new customers come on at lower prices. gross margins?
spk06: You're absolutely right, Mike. It's actually both. We're taking on new customers, but of course the percentage or the mix of new customers is not going to be big for this coming fiscal year anyway. We're putting new customers, it takes a while to get there into the ordering stream. we do have first orders from our European-based premium brand customers that we just successfully brought them on board, plus a few other global brand customers. But those are not going to be significant comparing to our existing customers. So even though, yeah, their margins are going to be lower, at the beginning, and gradually we will improve on the margins for these new customers once we get to learn how to make their products and get up to speed on efficiencies and pricing and so on. But the other impact is also coming from the mix of the products. A lot of our existing customers, especially VF and New Balance, they place a lot of orders in fiscal 2022. And especially VF, because of the North Face, most of their orders are on outerwear and on jackets. So that grew exponentially in 2022, comparing to 2021. That's how we achieved a 59% growth in sales and a significant amount in terms of gross margin. But that kind of cooled down, especially in the last fiscal quarter, the fourth quarter of 2022. So we had to switch our gear and filled up the capacity with lower margin products, with lower margin customers, mainly customers who are more local in nature, like in Jordan, and also customers who are in the mass merchandising area such as Costco and Walmart. And so that we anticipate to continue because the outlook in the upcoming year is kind of uncertain. So we don't know whether or when the recession will hit and how it will affect the ordering behavior of our customers, such as VF and New Balance. So we lower their participation or their mix in our projection and put more because we can always fill up our capacity. Well, not without effort. We can always find customers, but at a lower margin. So that's why we're projecting a lower margin And we experienced a lower margin in the fourth quarter, and we're just kind of extending that out in the fiscal 2023.
spk07: Yeah, okay. That makes sense. One other question, if I could. At the midpoint, your first quarter sales guidance, I think, is up 15%. You said full year up marginally. Does marginally mean – to me, that means up less than 15%, which I guess implies – slower growth for the next three quarters after the first quarter. Is that the right interpretation and I guess why?
spk06: Well, for the first fiscal quarter, Q1, we're projecting a growth of, I guess, 15%.
spk08: Yeah, $34 million is 15%, yeah.
spk06: Right. And then I think Q2 last year was exceptionally high. So we don't see much growth in Q2, and we are already at full capacity. Then Q3, we also anticipate Q3 will be strong. So that will have a... pretty significant growth comparing to Q3 of 2022. But we, after that, it will be really difficult to see on Q4. So I think overall, we're looking at a full year growth at about 14, 15%, just from this point of view. Okay.
spk07: Understood. Okay, thanks. One more if I could. You talked about some margin pressure from ocean freight, material costs, et cetera. What's your ability to pass that through to your customers through price increases or have them absorb those costs?
spk06: Well, for new orders, we normally could pass it on. as soon as we find out that the raw material costs, when we source the fabrics and the other materials that we know the pricing, that the raw material costs are coming up, then we can negotiate to increase our prices to our customers. But for orders that are already in the system, if we experience a certain change of prices, raw material costs, and those in trade, those are almost impossible to get the customers to, because they are already committed, or we are already committed to the price. So it would be a mixed bag. Sometimes we can get the customers to absorb the increased price, and sometimes we have to eat it.
spk07: Understood. Okay. I'll pass it on to someone else. Thank you.
spk03: Thank you. And your next question is coming from Mark Argento from Lake Street. Mark, your line is live. Please go ahead.
spk09: Hi, guys. Just a quick question on capacity. Maybe can you just remind us what capacity you're at right now in terms of the number of pieces? And then I think, Sam, in your opening remarks, you had mentioned that you're undertaking expansion. If you could, in a particular facility, could you just talk about what you have today, specifically in terms of piece capacity, what you think you can expand that to? Because, really, it sounds like, you know, this, you know, mix from quarter in, quarter out moves around, but really the gaining factor to growth here is the ability to source additional capacity. So I just wanted to drill down on that a little bit. Thanks.
spk06: Well, yeah, Mark. At the end of our last fiscal year, which is March 31st, we estimated our capacity for our annual capacity was about 14 million pieces. And we started extension of one of our existing factories. And that will add about, well, a little bit less than 10%, which is 1.3 million pieces to our capacity. Then we also have plans to also add production lines to our other factories, and that would give us another 2 million pieces. So altogether, maybe by the end of this fiscal year, we will have another 3.3 million pieces, which is about 20% of our increase in our current capacity.
spk08: Great.
spk09: And then so the fiscal year you just completed, is that the 14 million pieces? Is that what you said, or is that a year ago?
spk06: Yeah. No, that's the fiscal year that we just ended.
spk09: Okay. And then the business you acquired, you're kind of weaning off some of their existing customers and then bringing direct customers on, and it sounds like that's fully complete. What was the capacity, again, of that facility, and how much additional, we'll call it, Juresh capacity do you gain here this year by having it fully under manufacturing for your customers?
spk06: Okay, that's the MK factory that we purchased last year and we brought online in August. Eric, can you give an update on the capacity of that factory?
spk05: When we took up the MTA factory last October, at that time the total capacity for a whole year is around 3.5 million pieces. After we took up the factory, immediately we took up some expansion measures and we already added in another 100 workers from overseas and created another two production lines. Our annual capacity from AMK factory is jumping from 3.5 million pieces up to another additional 1 million, 4.5 million pieces a year.
spk09: And then when you are shifting from the legacy customers to the direct customers, Does that have a big impact in terms of margins? Was that running much lower margin on the existing or the previous customers? I'm just trying to understand the dynamic there and how that might work through into the numbers this year.
spk05: Because in the beginning, when we took up the MK factory, so we took up also a new production management and also workers which belongs to the old management. Okay, so we have to spend some time to train the workers, okay, to the level that they are capable to do garage-owned customers. So in the beginning two to three months, we only assigned to empty factory workers some subcontract orders we took from outside. Okay, we are not allocating any of our own FOB orders to the workers in order to play safe. But after two to three months training, They are okay. They are very good, and we deem that their efficiency and capability can be able to produce our own customer's order. So starting November, okay, last year in December, we start filling up with MKFactory our own orders.
spk08: Great. And then just my last question in terms of –
spk06: I'm sorry, Mark. I guess to answer your question at the beginning, because we were just using the MK factory to produce lower margin products, more simple items, items that we do for contract manufacturing. So those are typically much lower than the FOB orders that we normally produce for the North Face and New Balance. But since then, I guess since the end of the last calendar year, they are now able and have the skill and the efficiency to produce our higher margin FOB orders.
spk08: Great.
spk09: It's helpful. And then just my last kind of follow-up question is around, you know, build versus buy. You know, you were able to acquire some capacity, the MK, last year. It doesn't seem like there's a lot of additional of those types of facilities that are available for sale. These hadn't been. Maybe that changes in this environment. But when you think about build versus buy and, you know, you got $25 million in cash, How do you juxtapose or how do you think about getting more aggressive and adding capacity here? Do you just be opportunistic and try to acquire something that already exists, or do you put a shovel in the ground and actually greenfield, build a new facility here at some point?
spk06: Well, we did have a plan to build on the land that we have. that we have purchased two or three years ago and we will continue to finalize the engineering study and the design of that facility. But right now we're just kind of putting it off until we absolutely need it, until we can see how the market is going and whether we get some really solid commitment from either our existing customer or some larger new customers before we decide to start the construction. And the construction will only take about a year, or at least based on our design, that new factory will take up to a year to finish. Now, we always keep our eyes open for any purchase opportunity, acquisition opportunity that we can buy. Now, like you said, those kinds of opportunities are rare, but who knows in this market condition, maybe something will come up and we do have the cash to do it if we need to. But at this point, because of the uncertainty in the market and the economy, we just want to play it safe and be more conservative. until we can see more clearly.
spk08: All right. Thanks, guys. Thank you. Thank you. Thank you.
spk03: Your next question is coming from Rommel Dionisio from Aegis Capital. Rommel, your line is live. Please go ahead.
spk02: Thanks, and good morning. I think on a prior conference call, you discussed the possibility of looking for alternative sources of fabric in the Jordan area. And I wonder if you could just give us an update on how that initiative is going and if you've made some progress there. Thank you.
spk08: Sure.
spk06: Eric, you want to talk about the fabric sourcing?
spk05: Yes, maybe I can talk a little bit. Okay, so all along, okay, the garage sourcing team is located in Hong Kong and China. But our recent strategy is we are now setting up a new marketing, sourcing and development department in Jordan. So we have already employed some very experienced staff to fill up the key positions. The purpose of this department is to help the customer to source trims and fabrics okay in the middle east country like turkey egypt etc okay one of the main reasons why we are doing so it is under the request of most of the buyers okay because we have we have been facing a lot of problem about logistic problem from container living from china wikdam and taiwan korea to jordan and then okay it's created much longer lead time than before during the pandemic. And especially during a couple of months before when Shanghai started lockdown, we also faced problems with the logistics, the delay of containers, which also jeopardized the production of the garments, which need and affect the delivery schedule, which already is set up by the buyers. So if the sourcing of the trims and the flybacks Okay, it can be from, I mean, the neighboring countries like Turkey, Egypt. Okay, so the lead time from this kind of country to Jordan is much, much shorter, at least maybe by 50% or even 60% of the lead time. And it will become, I mean, much more controllable and easily accessible by the buyers. And another reason why we are doing so because Okay, some of, especially the cotton, everybody knows about the cotton problem about Xinjiang in China, and more and more buyers, or almost all the buyers are not buying from, or using the cotton from Xinjiang anymore. And also, many of the buyers, okay, would like to have some kind of alternative plan for trims and fry bags in the Middle East countries. So this is the reason why we have already started a new, completely new development, marketing, and sourcing department. And actually, our team, which consists of more than 10 members, already started this job since a couple of months ago. They already go and make study and visit many fiber mills and trim suppliers in Turkey and Egypt, and business already started. Okay, and recently we also have orders from buyers that we have also brought the trims and fabrics instead from China or Taiwan, which is before, and now, okay, the supplier in Turkey and Egypt became the replacement supplier. Okay, this is the latest situation, and I think this trend will go on And this department, I think the business will grow because of this new setup.
spk08: Okay. Thank you very much. That's very helpful. Thank you. Thank you. We have a follow-up question from Mike Baker from D.A. Davidson. Mike, your line is live. Please go ahead. Hello, Mike. Your line is now live. Please pose your follow-up question.
spk07: Thanks. Sorry about that. I wanted to follow up on the question or the point about potentially delaying some of your construction. And, you know, I guess the question, two-part question, but one, what are you seeing in terms of inventory in the U.S.? Is there an apparel or a jacket inventory glut? And are you seeing order cancellations? And is that what is leading you to maybe push out some of that construction?
spk06: Well, we do feel that our key customers, they do have abundance of inventory because they have reduced their orders. So, of course, they won't tell us that they have too much inventory, but we think that the inventory situation is only going to slow down the increase of purchasing. it's not going to cause them to cancel orders because we do have orders that fill up our capacity until the end of December. So we're not worried about kind of like when the pandemic hits that customers are canceling the order or pushing it out. We won't see anything like that.
spk07: Okay, one more if I could. I think in your 10K from last year, you guys disclosed that jackets were 25% of your mix, which had come down pretty substantially. Any idea what it was? I guess we'll wait and see the K, but what it was in 2022 and where we should expect that to be for 2023?
spk08: You mean the mix of jackets? Yes.
spk06: I don't remember what we said on the 10K about the mix of product categories, but maybe we can give an estimate. Eric, do you know what the mix of jacket was for 2022? You mean for 2023, is it? 2022 and also the expectation for 2023?
spk05: Our expectation for 2023 is, I mean, not only for the jacket order, for orders from current customers. Okay, I think they will reduce a little bit of the orders. Okay, not like last year when their kit I mean, asking us to increase capacity for them. I think one of the reasons we just mentioned, okay, is because I think they have at least adequate inventory, okay, to be able to, for provision, for providing to customers for a certain period of time. But I'm sure that I think moving forward after six to seven months, the customer will be starting No matter if it's jacket or polo shirt or pants, they will come up and start praising all the things like before.
spk08: Okay. Thanks for the caller. Thanks. Thank you.
spk03: This does conclude the Q&A session for today. I would now like to turn the call back to Mr. Choi for closing remarks.
spk04: Thank you, Operator. And thanks again to all of you for joining us today. We appreciate your support and interest in our company. And we look forward to speaking with you again soon on our fiscal 2023 first quarter call. Thank you, everyone.
spk03: Thank you.
spk04: Thank you. Thank you.
spk03: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time And have a wonderful day. Thank you for your participation.
Disclaimer

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