Jerash Holdings (US), Inc.

Greetings, welcome to Drash 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 if anyone should require operator assistance during the conference, please press star zero on your telephone keypad please note this conference is being recorded. I will now turn the conference over to your host, Roger Pondell, Investor Relations for Jurasch Holdings. You may begin.

Thank you, Operator, and good morning, everyone. Welcome to Jurasch Holdings Fiscal 2023 Third 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. 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, including those set forth in the risk factors 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 those 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 third quarter performance demonstrated the company's ability to navigate through continued challenging market conditions. the broad retail market sector. Although orders received from our major global brand customers continue to be smaller compared with last fiscal year, our team in Jordan was able to keep our facilities running at full capacity by adding supplementary production for other customers. Accordingly, we achieved record third-quarter revenue. Nevertheless, We continue to see fiscal 2023 as a transitional and opportunistic year for Juresh, while we make progress on our initiative to diversify our customer base and product mix. Since last conference call, we have successfully begun to ramp up production on orders from Timberland and Skechers, which are newer Group of Brand customers. Additionally, Test runs for our previously announced first European-based high-end apparel brand were well received, with initial shipments to begin at the end of March. Our plans to form a joint venture with Busena Apparel Group are proceeding well. We anticipate launching the venture early in our new fiscal year, giving Juresh additional opportunities to serve Busena's group of brand customers that have expressed interest in shifting their 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 flasher wear and technical clothing segment. Since Busana is well-known for its high-quality woven apparel production, in technical garments, active sport wear, and formal wear. Before I turn the call over to Eric, who is based 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 Teng to talk about our operations, and Gilbert will then discuss the quarter's financial results. Thank you, Sam.

Hello, everyone.

Okay. Thank you, Sam, and hello, everyone. As Sam mentioned, with the challenging retail environment, orders placed by our top global brand customers have been smaller. while retailers continue to work through economic and inflationary 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 as global trends remain to diversify supply chains away from Asia, especially China. On the new customer front, we produce and ship initial orders for Timberland and Sketches in the third quarter and are scheduling additional production for both. In the current quarter, we recently began production for our first European-based 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, initial new customer orders are in relatively small quantities with generally lower margins to start. During this timeframe, we are able to maintain our full staff and our facilities fully booked by adding supplementary production of products for buyers other than our major customers in the U.S. We are also expanding the capacity at some of our factories to gear up for our joint venture with Bosana that Sam mentioned earlier. Lastly, please know that our sourcing of fibric and other materials from new partners in the Middle East and North Africa is continuing and is 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 of the U.S. with lower margin products. The gross margin was 13.5% in the fiscal 2023 third quarter compared with 18.8% in the same quarter last year. 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 total $4.5 million in the fiscal 2023 third quarter, mainly from SG&A, compared with essentially the same amount in last year's third quarter, including SG&A expenses of $4.2 million and stock-based compensation expenses of $319,000. Operating income totaled $1.3 million in the fiscal 2023 third quarter versus $2.4 million in the same period last year. Total audit expenses were $111,000 in the fiscal 2023 third quarter compared with $80,000 in the same quarter last year. Interest expenses were $249,000, versus 73,000 a year ago. Net income for the most recent third quarter was $900,000 or 7 cents per diluted share versus 1.7 million or 13 cents per diluted share in the same period last year. Comprehensive income attributable to Jurasholdings common stockholders totaled $929,000 in the fiscal 2023 third quarter versus 1.7 million last year. Tarasha's balance sheet and cash position remain strong with cash of 26.2 million and net working capital of 47.1 million at December 31st, 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 reduced net income, increases in advances to suppliers, partially 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 inflationary pressures and weaker economic conditions. For the current fourth quarter, revenue is expected to be in the range of $26 to $28 million, compared with $30.9 million last year. We are maintaining our margin goal for the full fiscal year to be in the range of 16 to 18 percent 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 the next call. On February 3, our Board of Directors approved a quarterly dividend of $0.05 per share payable February 21 to stockholders of record as of February 14, 2023. As of the end of our fiscal third quarter, approximately 156,600 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to be removed from the question queue. For participants using speaker equipment, it 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 DA Davidson.

Okay. Hi, guys. Thanks. So a couple questions. Can you talk about the state of your larger customers and the inventory situation in the U.S. versus what it was three months ago? Some of the big customers, maybe not your customers, but some of the big apparel customers, sporting goods retailers in the U.S. like VF Corp, Under Armour, Columbia. The inventory is actually getting larger, growing, not decelerating as many would have expected. So is the situation better or worse than it was three months ago for your larger customers?

Eric, do you want to take this? Yes.

I talked to... Some of our major buyers, like the VF Corp, the New Balance, they are saying that they also have recorded some growth in the past couple of months in the sales. But they are still not too optimistic about the coming several months. So they are still trying to absorb and trying to reduce the level of the inventory. That's why despite the fact that there's a growth in the sales, they are still not tracing too many new orders, okay, until the inventory level is down to a level which is, they think, more safe and acceptable to them. This is the latest information I get from my buyers. Thank you.

Okay, thanks. And so maybe as a follow-up on that, I think Gilbert had mentioned growth in 2024. You used the word growth. Now, I understand that you're not giving 2024 – right now, but, you know, that expresses a level of confidence that you will grow next year. Can you tell us, you know, 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 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 next fiscal year by now because we have to start planning for the winter season, for the fall season, and so on. However, this year, they're 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 the 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 some breathing room to onboard some new customers, such as the very high-quality premium European brand, which we all know who they are, but we cannot say. Their order is already starting. We have passed everything. They came to our factory and all the quality people have already certified us or approved our factories to start producing. So the shipment will actually begin pretty soon. And also with our joint venture, that currently, I mean, maybe we'll talk about the joint venture later, but 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 Busana in developing the joint venture agreement, and everything is basically agreed upon. We're just making some final changes in the wording and so on. So we anticipate that will be signed very soon and then we will start working together. In fact, they have already started doing the marketing. They're coming to the U.S. in the next couple of weeks to start going to all their customers and they're going to represent Jirash and they will move the those orders to Jirash. So we are very confident that the impact from this joint venture is going to help us even though we may not have substantial growth or maybe maintaining the same level of business with our existing customers. This additional opportunity from the joint venture will help us move Jirash forward. So that's why we're cautious, but we are optimistic. in the next fiscal year. Now, but I cannot give you a guidance at this point. All we can say is that currently we are looking at the first half of the year being at, we're confident that we will maintain the same level of business, maybe a little bit of growth, depends on the timing of the new business coming in.

Okay, one more if I could relate to that. So the fourth quarter guidance which you've given, two questions on that. One, you just grew your sales 17% and we're at $43 million. Why the implied – well, the 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 it backs into – my math at least, for the fourth quarter, anywhere between 12% on the gross profit line, gross margin line, to 22%. So, you know, if you could help tighten that range a little bit for the fourth quarter.

Sure. Let me try and explain. First of all, understand that the third quarter we had record revenues, and that is primarily because we supplemented the lack of orders or the reduction in orders from our major customers. That's why the gross margin for third quarter dropped down to 13.5%, all right, compared to 18.8% in the previous year third quarter. Sales increased. Sales increased by 17% in third quarter, quarter to quarter, I mean year to year for the third quarter. But margin basically dropped a lot. But that was because of the local orders, orders to third parties, So that's why margin was very low. Now, fourth quarter would be a little bit of a different picture. We're doing more or higher proportion of the FOB order to North Face and New Balance, but we are going to do less of the lower margin orders. So GM, or the gross margin percentage of the fourth quarter, this current quarter that we are in, it's going to go back up to, uh, between 16 to 18%. All right. So that will keep, that will give us the full year around 17%. Uh, but sales would be down in terms of dollar amount comparing to last year.

Okay. Uh, understood. So in the press release, so it says full year guidance, 16 to 18, uh, on the, on the, um, Close margin, but you're saying that is also good guidance for the fourth quarter?

That's also for the fourth quarter, exactly. Understood.

Yep. Okay, thank you very much.

Sure. Thank you.

Your next question is coming from Mark Argento at Lake Street.

Yeah, hi, good morning, guys. Just a follow-up on the Busana relationship. I know last quarter when you talked about it, You're still working out some of the details. It sounds like maybe you have better understanding of the agreement. When you think about the economics of the deal, can you talk a little bit about will it be accretive to gross margins or how will this flow through your P&L once you start booking revenue?

Well, the joint venture is going to be a separate company. It's It's just a new company that we set up in Hong Kong. The company is already registered. We just need to wait until the joint venture agreement is signed. This company will be formed by two shareholders or two partners. One is Jirash Holdings and the other is Busana Apparel Group. Jirash will own 51% and Busana will own 49%. we will consolidate uh business uh revenue uh gross margin all the profits and uh and then 49 will go to uh so that's how the the sales and the profit will flow to uh to our consolidated right that's helpful and then um

I think it was Eric in prepared remarks mentioned that you guys are expanding capacity or adding capacity for that relationship. Can you talk a little bit about where you stand right now in terms of production capacity and what you're looking to add?

Eric? Gilbert, shall I answer this question? Yeah, please. Regarding our current capacity, Okay, we will be, we are running in full capacity until July. And it is, I'm also expecting that we will continue to running full capacity until maybe September to October. Okay, with the coming in of the Bozana orders. Okay, for Bozana, because all their factories are located in Asia, it is The reason why they have a joint venture with us is because they are requested by the buyers to move the orders out from Asia, okay, and then to the duty-free country. And the selection from the buyer is Jordan. Jordan is because of the duty-saving issues. So we will be expecting the inflow of Bosana order starting maybe between July and August. Okay, we will continue. For the capacity, we... I think we also make announcement that, okay, we are going, already started our in-house expansion in garage one. So we are expecting the in-house capacity, we can increase four production lines, okay, by the end of July. Okay, so this is a standby extra capacity, okay, for Boothana, if they have more orders to inject into garage, I mean the joint venture company.

And so you're taking existing facilities and adding onto those, or maybe could you just give us a little more color on how you're adding the capacity? Yeah, the building... For the existing... Yeah, please.

The building actually... I mean for the... For the extension. We basically added an extension to the existing building. So I think we added one more floor And then the building was expanded horizontally also. So that will, I believe we estimated it will increase our capacity by about 15% for that particular factory. By adding more, of course, adding more machineries and adding more people.

And you expect that to be complete by July? Or is that done already?

Right. Yeah, right. No, we're still working on it. We anticipate it will be done by July. I mean, earlier, I think we started this in 2022. We're just, because of the market condition, we're just kind of taking the time and not really pushing to get it done earlier. But right now, we're almost done. We're just finishing up and we anticipate to this could be put into use by July.

And just one follow-up. In terms of capital required to do the expansion, is it relatively nominal, or what are you kind of thinking from a CapEx perspective?

For the CapEx, I think this is just slightly above $1 million, 1.1 or 1.3. Great. Thanks, guys.

Thanks.

Your next question for today is coming from Aaron Gray at Alliance Global Partners.

Hi, good morning, and thank you for the questions. So first question for me, just in terms of the supplemental sales that you guys had with the lower margin, was that more a function for the quarter, just a way to get some revenue in due to some underutilization given the larger clients were having smaller orders? It sounds like it's not going to continue for the next quarter, and you guys do have full capacity from July to September. So can you just help us understand maybe that you're going to have that full utilization, maybe why it was just maybe a one-time thing to where you went 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, Aaron.

Yeah, this is just for this third quarter that there's substantial amount of local order and order at a low margin because we want to keep running and utilizing all our capacity. I mean, first of all, we can more allocate or more absorb our fixed cost of the factories that we have. And then we also don't want to lay off or reduce our workers because we need those workers when the, when the business turns around, when the market turns around. Unlike other factories in Jordan, many of those have already reduced their staff, laying off people and some smaller factories, even when our business, everybody is suffering even in Jordan. So we are, we decided and our strategy is we have to prepare for the business to come back and for even future growth because we're talking about a joint venture, we're talking about new customers that we're onboarding. So we don't want to cut into the bone. So we want to keep everybody busy and that's why we went out and we brought in a lot of this supplementary business. And these are people that we have done business with before, and they are very happy to send us the business. Now, in this current quarter, Q4 of 2023, we are kind of busy with the business with our existing customers, like New Balance in the North Face, actually, we're quite busy this quarter. And then we're going to be busy in the first quarter of 2024, which is the April to June quarter, producing for these two largest customers also. So the amount of the supplementary orders, or what we call the CM orders, is going to reduce. It's not going to be as high proportion as in this current quarter. But if we need to use up the capacity, we will accept these kind of orders. So it's all the mix of the business, the mix of the orders, and that will affect the gross margin and also the top-line sales. Does that answer your question?

No, it does. Absolutely. That was actually really helpful. And then actually, 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 athletes as well, as those progress and potentially advance into bigger and larger orders, can you just give us any update maybe on the timing of that 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 this scenario? of when the business turns around and 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, I think we started courting Hugo Boss about almost a year ago. And now we're, correct me if I'm wrong, Eric, I think we're going to start shipping the first orders for Hugo Boss maybe in March. Is that correct? And then there will be a ramp up. Yeah, there will be a ramp up period. And I think after the first few test orders, they will just continue to bring us new styles. And also Hugo Boss is a longtime customer of Busana. In fact, Busana helped us quite a bit to onboard Hugo Boss. Even though we first contacted with Hugo Boss about a year ago, but Busana came in and they assisted us on a lot of the technical area and how to do business with Hugo Boss. But eventually, Hugo Boss will be part of the joint venture when we start doing business with Busana. So, and besides Hugo Boss, there are a lot of other premium brands that Buzena has been working with, and those will come in. But, of course, it will take time for them to do the sampling, to do the test, and make sure all the quality is up to their standard. So, I don't know. It could be the timing could be tricky. It also has to do with our capacity and our manpower. But by that time, Busana will be on board and they will be assisting us. So we feel very optimistic, cautiously optimistic about 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 Romel Dioncio with Aegis Capital.

Yes, good morning. You know, I wonder if you could just expand on your initiative to source additional fabric from local partners in the Middle East. I know you touched on this in prior quarters, but there were many moving parts in gross margin. Obviously, the customer mix had a shift resulting in a shift in gross margins, but Did the additional sourcing from local partners have a beneficial impact in the quarter and what your outlook is for those initiatives going forward? Thank you.

Yeah, sure. We started the sourcing in the Middle East and North Africa region probably more than a year ago. I remember that it was December when I first went to Egypt and Turkey. to start the sourcing efforts. But now we already are purchasing fabrics from both Turkey and Egypt. For Egypt, I think it's primarily for the Timberland products. And Turkey, I think it's also Timberland too. But that, besides giving us a much better less dependency on the Asia fabric sourcing, especially China, especially during the pandemic, there were a lot of shutdowns and interruptions. I think it is more strategic and more long-term. I think without going to the MENA region to source, 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 opportunities to other European customers or potential customers. So the cost for the raw material may not be may not have a big difference because comparing to China, the Middle East fabrics and the supplies, the prices are higher. However, we save the freight costs. And the most important thing is the shortening of the logistics time from shipping from Asia than comparing to shipping from the Middle East. So that is the biggest benefit for us is the the quicker turnaround, and we don't have to carry so much inventory, I mean raw material inventory and so on. But yeah, there are pros and cons, but I think there are more pros than cons, and it opens up a lot more opportunities for us to grow our customer base.

Okay, and just as a follow-up, I think you mentioned that, you know, it's a difficult situation for some of your competitive factories in Jordan. Is that causing any sort of impact on your labor base? Are you able to source more domestic workers within Jordan, or how is that sort of affecting your everyday operations from a labor perspective? Thanks.

Eric, do you want to take this question about sourcing local workers, maybe some opportunities?

Yeah, just now it is mentioned that some small factories are already closing down, and some of the big factories, because of the order situation, they also reduced the number of workers. So it will become more easy for garage to source, especially the local workers. Okay. Who will, who is very easily okay to shift from one factory to another and for the foreign workers. Okay. Okay. Of course. Okay. If the factory is getting down, they need to finish the contract and go back to the country, but they can, I mean, there's a more, chances, more opportunities for them to come to work in Jordan for Tarash.

Great. Thank you very much. Thank you.

That's the reason why we want to hold on as much as possible to our existing workers because they are familiar with our operations and they are very experienced. It is a big cost if you want to go out and find new workers. whether it's local workers or import 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 the rest prospects. and the progress of our strategic initiative. We look forward to speaking with you again soon and appreciate your continuing support. 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. Have a