Jerash Holdings (US), Inc.

Q1 2023 Earnings Conference Call

8/11/2022

spk06: Good day, ladies and gentlemen, and welcome to Jurasch Holdings Fiscal 2023 First Quarter Financial Results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Roger Pondell, Investor Relations for Jurasch Holdings. Sir, the floor is yours.
spk05: Thank you, Operator. Good morning, everyone, and welcome to Jurasch Holdings Fiscal 2023 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, its Chief Financial Officer, Gilbert Lee, and Eric Tang, who leads the company's operations in Jordan. But before I turn the call over to Sam, I want to remind everyone today that the 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 of the company's most recent Form 10-K and Form 10-Q, is 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. 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?
spk08: Mr. Choi, please go ahead. Mr. Choi, please check your mute button. Please go ahead.
spk12: Okay, sorry. Okay, thank you. Thank you, Roger, and hello, everyone. Our fiscal 2023 first quarter again reflected Gerrard Holdings' reputation as a top-quality garment manufacturer in Jordan and a competitive advantage to attract new global brand customers. We are happy to report that the company achieved record first quarter revenue of $33.4 million. As retailers throughout the world face headwinds, including inflationary pressure and higher inventory levels, we are also feeling the impact. Receiving smaller purchase order quantities and an order mix shift towards products that command generally lower average selling prices, such as shorts, crew neck, and pull-over shares. Despite the challenging economic environment, however, we see fiscal 2023 to be a transitional and opportunistic year from a business operation perspective, enabling the rest to continue its goal of diversifying and expanding customer base. As previously announced, for example, we act sketches to our growing roster of high-profile global apparel brands earlier in the quarter, and we are to produce its initial orders of women's polos in our fiscal third quarter. Additionally, test orders for our first European-based high-end apparel brand are progressing well, and we are hopeful that this new customer will enable Jerez to be more visible among other European-based apparel brands. We are taking a conservative approach to our guidance, particularly in comparison with fiscal 2022, which experienced record high demand with the post-COVID reopenings. Gilbert will discuss those details momentarily, and we will leave plenty of time for questions. First, I will now turn the call over to Eric Tan, who is based in Jordan, and then Gilbert will cover our financial results. Eric.
spk10: Thank you, Sam. Hello, everyone. With the challenging external environment and the generally anticipated economic downturn by retailers, recent orders placed by our top global brand customers have been smaller, particularly for fleece jackets compared with orders received last year. We continue to proactively communicate with our existing customers to reconfirm their orders and shipment schedules. We believe this trend will continue through fiscal 2023 as retailers sell through their exact inventories and work through economic and inflation recovery, which would impact both all the fulfillment and delivery schedules. Fortunately, Gerard's competitive advantage and ability to attract new customers is keeping us busy. Our manufacturing capacity remains essential fully booked through December 2022. The global trend continues to diversify supply chains away from Asia. especially China, to a more stable and duty-free country, such as Jordan. As good news, we have received production inquiries from several new premium brand customers, which will allow us to further diversify our customer base. On the new customer front, we will start production for Timberland and Sketches in the third quarter. although initial orders are for lower margin products and smaller quantities. Besides Timberland, there are two other VF brands that we are in the process of bringing on board. As Sam mentioned, we are optimistic about working with our new customers, and we are confident that over time, these new global brands will grow in a meaningful way. The new dormitory for our multinational workforce is on schedule to be completed by the end of next month. The high quality, energy efficient living space with comfort designs and highly safety measures will help position us for future growth, as well as further our ESG goals on improving operation efficiencies to conserve electricity and water usage. We plan to move approximately 1,500 of our multinational workers to this new dormitory at the end of 2022. Lastly, we are in talks with the United Nations and Jordan government to ask an additional 100 to 150 Syrian refugees to work at our factories, as we continue to focus on our social responsibility efforts. serving as a way you entrusted employer to help refugees settle into the new hosting country. With that, I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 outlook. Gilbert, please.
spk11: Thank you, Eric. Revenue for our fiscal 2023 first quarter rose 12% to $33.4 million. from $29.9 million in the same period last year. Gross margin expanded 100 basis points to 19.8% for the fiscal 2023 first quarter, from 18.8% in the same period last year, reflecting lower average cost basis from larger production scale after integration of MK Garments in October 2021, and to a lesser extent, margin improvements for products sold to local customers. Operating expenses totaled $4.4 million in the fiscal 2023 first quarter versus $3.3 million in the same period last year. The increase was primarily due to higher headcount from the acquisition of MK Garments, an increase of approximately $294,000 in stock-based compensation, and expenses related to recruitment of new migrant workers and the associated travel expenses, since COVID restrictions have limited our foreign worker recruitment for the past two years. In addition, we have established our Middle East and North Africa, the MENA region sorting team, and expanded our merchandising and sampling operations in Jordan over the past few months. This strategic move will enable us to diversify our material and supply sourcing to reduce the dependency in Asia, as well as to shorten material lead time. Through strengthening our merchandising and sample development in Jordan, we will be able to facilitate critical response to customer inquiries and open up opportunities to other European-based customers. as well as global brand customers with EU market presence. This increase in SG&A expense will pay off considerably in the long run. More near term, we anticipate saving approximately half a million dollars in annual rent expense with the new dormitory starting next calendar year. Operating income total $2.2 million in the fiscal 2023 first quarter versus $2.3 million in the same period last year. Income tax expenses for the most recent fiscal first quarter was $560,000 compared with $418,000 in the same period last year with the increase in part reflecting a higher test rate in Jordan as well as higher expenses in our China and U.S. entities that cannot be used to offset income in Jordan for tax purposes. Net income for the fiscal 2023 first quarter was $1.7 million, or $0.14 per share, compared with $1.9 million, or $0.17 per share, in the same period last year. Jiraj's balance sheet and cash position remain strong. with cash of $21.5 million and net working capital of $55.6 million on June 30, 2022. Inventory was $29 million and accounts receivable amounted to $11 million. Net cash used in operating activities was approximately $473,000 in fiscal 2023 first quarter, compared with $11.5 million in the same period last year. The net change reflects working capital activities, primarily due to the decreases in inventory and accounts receivable. As Sam mentioned, we are taking a conservative approach to our guidance. Given the inflationary environment that is affecting retail markets and consumer sentiment, along with a product mix shift to apparel items with lower margins and lower ASP. Fiscal 2023 second quarter revenue outlook is expected to be in the range of $41 to $43 million, compared with $45.7 million last year. We are also expecting margin to be lower to 16 to 18% on average for the full year. While customer order volume in total remains healthy, We anticipate that revenue growth will be moderate for the full fiscal 2023, considering customers are placing smaller purchase orders and the product makes a shift. Again, we view fiscal 2023 to be transitional and opportunistic for Jirash, as last year we were unable to accommodate new customer orders when capacity demands from our top global customers were at such exceptionally high level. That said, we are now continuing to focus on growing our customer base to expand our production and improve productivity for the recently added new customer orders. 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 August 24, to stockholders of record as of August 17. Reflecting the Board and management's confidence in the long-term future of Juras Holdings, on June 13, 2022, the Board authorized a $3 million share repurchase program, which will be in effect through March 31, 2023. To date, approximately 23,557 shares have been repurchased at an average price of $5.76 per share, and we will remain active in the market in the months ahead. With that, we will now open up the call for questions. Operator, may we have the first question, please?
spk06: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star 1 if you have a question at this time, and please hold while we pull for questions. First question is coming from Michael Baker from DA Davidson. Michael, your line is live.
spk09: Okay, hi, thanks. Hi, guys. A couple questions for me. Back in early June, you had said to expect, you sort of went through a quarterly cadence and then said full year sales around 15%. You just said, I think the term was moderate sales growth for the year. Moderate sales growth seems to... less than 15% to me. Is that a fair characterization for your full year sales outlook?
spk11: Well, right now we're looking at the full year of 2023 to be basically flat comparing to 2022. But there are hopes that we will be able to... come back stronger in the second half. But right now, looking at the first half, as you know, we grew only 12% in the first quarter. We anticipate second quarter to be slightly lower than the second quarter of last year. Looking at the orders that we have already and then projections from our existing customers, the third and the fourth quarter together, We'll be about even with our last fiscal year. But we're not going to really guide the whole year because there are a lot of uncertainties. And with the global market being in this situation, with the war going on in Europe, and then inflationary, so it is just very difficult to say. but we're working hard with our new customers, and then we may bring on board a few more new customers. So at this time, we're just going to say that this upcoming year is not going to be very clear.
spk09: Okay, so... Correct me if I'm wrong, it does sound like a little bit of a more cautious outlook than just a few months ago. Let me know if I'm wrong about that. But as a follow-up, we know there's this inventory glut in apparel in the U.S., and that's causing some of this slowdown. I'm wondering if you've been able to see any kind – are the retailers working through that at all? Is that glut – similar, worse, better than it was two months ago and any sign of progress in working through that? Thanks.
spk11: Right now, what we are seeing is it is a little bit worse than two months ago. But to us, it is an opportunity to utilize our capacity and we are building additional capacity. And comparing to last year, we do have more capacity. So we're going to use that to absorb and to bring on board new customers that we have been trying to bring in in the past year or two. So on that end, it is a good opportunity for us.
spk09: Yeah, sure. No, that's definitely a good silver lining in this situation. One more, if I could. Again, last quarter you talked about full capacity through December. Still saying full capacity through December. Am I reading too much into that? That feels a little negative to me. In other words, the capacity, you haven't been able to book out any more than you were two months ago, or am I interpreting that wrong?
spk11: Well, right now we're still confident that we will be running at full capacity through December. However, the mix will change, the product mix will change. We're going to bring in more local workers, I mean local orders, and we're going to use any extra capacity to fulfill orders that are from customers with lower ASP and with lower margins. So, yeah, in terms of volume, we will use up all the capacity, but it is just that the ASP and the margin will suffer. That's why we're not going to guide anything beyond this current quarter because Things are changing, but we're going to keep running our capacity at full speed.
spk09: Understood. And one more, I guess, point, maybe question, just a reminder. So in terms of using this as an opportunity, historically, those new businesses do typically come on with lower runs and lower margins, which is what you're seeing now. But over time, presumably, that's an opportunity for that to build. And so take advantage of having a little bit more capacity for new customers now. You come in at low margin, low run businesses, but over time that grows. Is that the right way to think about this opportunity?
spk11: Yeah, absolutely. Just for instance, three years ago when we brought New Balance to our family, to our mix, at that time they were just sending us lower ASP and lower margin products. And then in the first three to six months, we had to learn how to run the products. And all those were smaller. So at that time, our margin took a hit. But now they are growing very strongly, and we're making the margin with New Balance has been improving over the past year or two.
spk09: Awesome. Thank you. I appreciate all the time. Absolutely. Thank you.
spk06: Thank you. And the next question is coming from Mark Argento from Lake Street. Mark, your line is live.
spk00: Hey, guys. Appreciate the time. And, yeah, hey, just a couple quick questions. First off on, you know, obviously kind of cyclically a little bit of a soft period right now, just given the glut of inventory on the channel post-COVID and just kind of having to work itself through, which I'm sure it would. But when you think about the opportunity longer term to add capacity, does this create an opportunity for you, i.e., I'm sure probably some of your competitors in market, in Jordan in particular, are probably feeling the pinch a little bit as well. Any thoughts on cranking up the M&A strategy again? Seems like this macro trend towards moving away from Asia to other manufacturing venues is one that sticks around a lot longer than you know, just the cyclical ups and downs that you're experiencing right now. But I just want to get your thoughts on more permanent, you know, substantial capacity opportunities out there.
spk11: You're 100% right, Mark. Our competitors or people that we know in Jordan, other factories, they are feeling the same. And Eric told me a few days ago that... that some factories, well, none of the factories are running at full capacity except us. And some are even running at 30% down from full capacity. So everybody is feeling the pain. And if there is opportunity to do some M&A like the one that we did last year for MK, we'll definitely jump on that because we have the cash. And if it brings new customers, if they're already doing business with some of the similar customers that we have, that would even be better. So, yeah, we're open to any opportunity for M&A, especially in the Jordan or in the MENA region. Eric, Sam, do you have anything to add to this?
spk10: Yeah, I totally agree with what you are saying. Okay. Although, as a matter of fact, I mean, I was approached by more than 10, 15 factories, apparels here in Jordan. They are all facing, I mean, the problem of buyers cutting down their orders about 25, 35%, and they also need support from garage. In fact, garage also face the same problem that One or two of our major customers also reduced the order. But at the same time, when other brands understand that garage has immediate vacant capacity, always garage is the top priority. So they immediately approach us, and then we successfully take some orders from them. and fulfill the capacity. Although the profit margin might not be as good as the jacket we are doing, but at least we have a reasonable profit margin and we can fill up all our capacity by up to the end of December.
spk12: Yeah, and same choice here as well. I think the economic outlook in the coming one or two years may not be good, but as we just discussed, there will be opportunity for duress as well because some branding customers, they, in the past, didn't source any garment from duty-free country like Jordan. And our strength is duty-free as well as quality product. So, in fact, we have very positive discussion with some reputable brand name. They didn't source from Jordan in the past and now they would consider seriously to source from Jordan instead of some political unstable countries. And I hope we can have a very, I mean, opportunistic chance to do business with them and those reputable brand name and I do believe their margin will be much higher than other normal customers so I hope I hope in maybe in the fiscal 2024 or first quarter of 2024 we can start business with them after their procedures of factory certification, et cetera, et cetera, then we can diversify our customer with higher margin and capture more pieces from the rest of the world.
spk11: Yeah. Yeah, you're right, Sam. Actually, one thing that I would like to stress is that we have put in place our... MENA sourcing team in Jordan. Previously, we really focused on sourcing from Asia, and our Hong Kong and China sourcing team have been really just taking the lead in terms of sourcing. But now we have put a team together in Jordan to source from the Middle East and North Africa region. So we have already started sourcing our materials from Turkey, from Egypt, and that is going to give us a significant competitive advantage going forward. And in addition, we have also strengthened our merchandising and sample development capability in Jordan. And that will give us a lot of opportunity to work with any new customers any new brands, because we are right there to do the product development and to do the pricing with them. So with just these two, I believe we're going to be very successful in bringing in new customers.
spk01: Great. That's helpful. Just one housekeeping item. Did you mention, Gilbert, did you guys buy some stock back in the quarter? Could you just refresh that for me?
spk11: Yeah, we started our repurchase program, I think, back in July. Yeah, I think we started buying in July, and so far we have purchased about 24,000 shares. Well, we had to stop because of the quiet period, but as soon as we filed the thank you, we will begin buying again.
spk01: Thanks, guys. Good luck.
spk08: Sure.
spk01: Thank you.
spk06: Thank you. And the next question is coming from Peter Sidoti from Sidoti and Company. Peter, your line is live.
spk03: Hi. Just one quick question. For the rest of the year, do you see yourself generating cash, using cash? How do you see the cash flow flowing through the end of the year?
spk11: Well, we'll be very careful with our cash flow situation. We always generate sufficient operating cash flow, and we anticipate this upcoming, well, at least for the rest of the fiscal year, we will be profitable. And we always have sufficient credit facilities, and now we're working with the two largest customers that we have the financing program with them that anytime if we need cash faster, they will pay us faster. Now, we do have to spend some capital money on buying, let's say, the building and the land for the MK factory. And that is about two, I think we still owe them $2.2 million to close out the deal. We're going to buy the office building that we have in Hong Kong, and that is about $5 million. So just those two, and also we have to finish up the dormitory construction. So we do anticipate spending quite a bit of money in terms of capital expansion, but we But other than that, I think we should have sufficient cash flow for this upcoming year.
spk03: I'm sorry. You're purchasing a building in Hong Kong for $5 million?
spk11: It's not an entire building. It's just an office space that we have been using for the past I don't know how many years. But in order to take advantage of the, I guess, after COVID, the real estate price has dropped, and we also want to save the rent. So that's why the board decided to purchase the property.
spk03: Thank you.
spk11: Mm-hmm.
spk06: Thank you. And the next question is coming from Yazan Abdeen. Yazan is a private investor. Yazan, your line is live.
spk04: Hi, thank you guys for the update. I just have one quick question regarding the operating expenses and the increase in that. I saw that you mentioned that part of it is due to increased headcount from the MK acquisition along with some other expenses involved. Can you highlight what is a one-time expense out of that and what will be recurring?
spk11: Well, I think the one-time expense is more on bringing more overseas workers. I think since a year ago when COVID just stopped, our headcount was like 4,500, 4,200, and now we're close to 5,800 people. So over this year, I think we brought in about 1,000 workers. Is that accurate, Eric? Yes, yes, you're right. Yeah, so bringing in 1,000 workers takes a lot of money. We have to apply for the visas. We have to get permits from the Jordanian government. We have to fly them in. And we also absorbed the MK factory 500 workers. And I think it is now up to 650. And it has room to go up to 800. So all this including recruiting and HR related expenses is probably just one time. But we're looking at ways to reduce our SG&A because we're looking at not so much growth in this coming year. So we're going to stop bringing in additional foreign workers for the time being. We still have permits to bring them in, but we're just going to hold on to that. As well as if there are workers, because they constantly, there are workers whose contracts are up and they have to go back. And we're going to, for the time being, not replacing those workers. So just through attrition, reduce the headcount. And while that doesn't really affect SG&A that much because the workers are more on the cost of goods sold, the line of cost of goods sold and the margin, but at least we're not going to spend as much money in terms of recruiting. And the SG&A increase over the past year, part of it, Well, there is a separate line item for stock-based compensation, and that is over a million dollars. Yeah, and sales has also increased over comparing to last year. And sales, the selling costs, which includes the freight, the outbound freight, shipping the products to the ports, that has increased not just in volume, but also, uh, as you know, oil prices has gone up. So the, those transportation costs has, uh, has gone up also. Yeah.
spk04: So out of the, um, so the increase year over year for the operating expenses was about 1.1 million. If you, if you exclude the stock based compensation, That leaves about $800,000. So how much of that do you think is one time?
spk08: I don't have the details in front of me, but I would believe about $300,000 or $400,000 is one time.
spk04: Okay, thank you. And just finally, with regard to the acquisition of the office in Hong Kong, you mentioned it's about $5 million. How much in rent are you paying for that? So how much rent saving will come out of the acquisition?
spk08: I don't remember exactly.
spk11: exactly how much rent we're paying for the Hong Kong office. I think it's like $600,000 a year. Is that right, Sam?
spk12: Okay. In fact, the reason, I mean, why we purchased the property is we have been using that with some declaration expenses has been spent on that. So definitely we won't move out. with a new office, more decoration or expenses with that. And also, for the purchase of the property of our own office, taking into account the depreciation of the office over 20 or 25 years, and existing rent is around close to 30 with the increase in rent. From the landlord, it will be close to... US$13,000 per month. That will be around US$360,000 per year. So after the calculation, in fact, there will be some savings taken into the depreciation into account because depreciation will be 20 to 30 years for them. Yeah, and so that's why we purchase the property. And also taking the COVID situation, the property price, we believe, is below market a bit. And if we use the office for long, definitely, I mean, the office value will be increasing. Yeah, so that's why we purchase that. So, I mean, after we purchase it, in terms of profit and loss impact, there will be a little bit of savings. I do believe, yeah.
spk04: Okay, thank you.
spk06: Yeah. Thank you. And the next question is coming from Michael Vu, who is also a private investor. Michael, your line is live.
spk02: Hi, thanks for taking my question. The first question is about your jacket order. So could you just give me more color on that, like what amount reduce the order on jacket and color on that?
spk08: Eric, can you answer this one?
spk11: The reduction in jacket orders?
spk10: All along, our major customer is giving us a monthly jacket order around 800,000 pieces. We already related this message just now that they have reduced around 200,000 pieces to 250,000 pieces a month because of the excess inventory. That means we have to find replacement order in order to fill up our weekends capacity. And we have successfully doing so during the past couple of months. And that's why we are still booked through, our capacity is still booked through the end of December.
spk02: So is this just like a quarter thing or is that for the whole year? Like this is monthly, like up to which month for reduction? Okay.
spk10: Actually, the bias indicates that when they will resume the extra 200,000 or 250,000 pieces. But it depends on the market situation, especially the sale during this year, during the Christmas and New Year. So they will keep us posted as they told us.
spk02: Okay, great. Thank you very much. Can you discuss what the... what is the New Balance and North Face sales on this quarter?
spk08: Gilbert, do you have this figure? Let me look. The percentage, right? Yeah, per dollar amount, like I mean.
spk02: Last year, you have $10 million, $10 million, something like that.
spk11: Well, North Face, this quarter, is about $21 million. And New Balance is about $8.5 million.
spk02: Okay, great. Thank you very much. Yeah, that's really great. Okay, thank you. That's all my questions. Thank you.
spk06: Thank you. And that's all the time we have for questions today. I would now like to hand the call back to Sam Choi for closing remarks.
spk12: Okay. Thank you, operator. And thanks again to all of you for joining us today. Our prospects remain healthy as we traverse the current environment. We appreciate your support and interest in our company, and we look forward to speaking with you again soon.
spk06: on our fiscal 2023 second quarter call thank you very much thank you ladies and gentlemen this does conclude today's conference you may disconnect your lines at this time and have a wonderful day thank you for your participation
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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