Jerash Holdings (US), Inc.

Greetings. Welcome to the Jurasch Holdings Fiscal 2023 Fourth Quarter and Full Year 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, Holly, and good morning, everyone. Welcome to Jurasch Holdings Fiscal 2023 Fourth Quarter and Year-End 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 CEO, Sam Choi. is Chief Financial Officer Gilbert Lee, and Eric Tang, who leads the company's operations in Jordan, and today is calling in from Indonesia. 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, 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, and Jurasch Holdings undertakes no obligation to update any forward-looking statements except, of course, as required by law. And with that, it is my pleasure to turn the call over to Sam Choi. Sam?

Thank you, Roger, and hello, everyone. The retail sector is facing challenging times following the pandemic, persistently rising interest rates, The inflationary impact and other factors all are having an impact on consumer spending. Apparel brands have not been immune to today's environment, which for Juresh translates to smaller orders and the product makes shift to lower margin goods and an impact on our fourth quarter results. Fourth quarter revenue also was negatively impacted by approximately three millions of orders that were deferred by customers to the current first fiscal quarter. Nevertheless, during this period, we are continuing to focus on our initiative to diversify Jira's customer base, both through our own marketing activities and through our recently signed joint venture with Prasanna Apparel Group. In March, we announced the Prasanna Agreement to form a joint venture, which is progressing well in this formative state. We have received positive feedback from Bosana's global customers with expressions of keen interest in geographically diversifying their production from Asia to Jordan to take advantages of duty-free agreements with the US and other countries. In fact, discussions already have begun for costing and pricing of a number of styles with three potential joint venture customers. And we anticipate initial orders for joint venture to start as early as the second half of the current fiscal year. Also, on the positive front, our fiscal 2023 initiative of diversifying to rest customer base is paying off, having gained additional new global brand customers We are making good progress, ramping up production for Timberland. And moving into our new fiscal year, we are continuing to produce high-margin products for our new European-based apparel brand. I will now turn the call over to Eric Chang to talk about our operations, and then to Gilbert. We will then discuss financial results.

Thank you, Sam. Hello, everyone.

The fiscal year and final quarter were both busy and challenging as we endured and responded to changing and challenging market conditions. And at the same time, trend for what we believe will be a productive future. All of that still coming from our large global brand customer, but the product has changed from the higher margin good such as jackets to lower-margin items. In part, the makeshift reflects the inflationary environment and changes in spending patterns at the consumer level. We were able to keep our facility running at full capacity also by adding supplementary production for other customers, many of which are local. As I mentioned on our last call, we are maintaining active communication and outstanding relationships with all our customers who appreciate the RAS responsive service and are working closely with them to anticipate their needs going forward. In fact, production for one of our newest global branded customers, Timberland, which is a part of the VL operation brand has now grown to be meaningful production demand from another long-term customer g3 has also been increasing which further diversifies our customers and product mix longer term that external market condition improves we believe we will be in an excellent position for growth in that regard We are cautiously moving forward with plans to develop the land we currently own to add more capacity, in part to accommodate anticipated new business from our Bozana joint venture. Positively, we continue to receive inquiries from other premium brands as global trends remain to diversify supply chains away from Asia, especially China. We are actively aware that in addition to adding new customers and expanding our role with existing customers, it is critical to maintain tight cost control. We also are continuing our program of identifying new and cost-effective sourcing of fiber and other materials from new partners in the Middle East and North Africa, which will benefit Jiraj and our customers. I will now turn the call over to Gilbert to discuss our financial results and the fiscal 2024 outlook. Gilbert, please. Thank you, Eric.

Revenue for our fiscal 2023 fourth quarter amounted to $23.8 million, which was down about 23% from $30.9 million for the same period last year. The decrease primarily reflected lower sales from two major U.S. customers based on the changed economic environment and brisk consumer spending versus last year. Revenue also was negatively impacted by shipments of approximately $3 million of contracted orders being deferred by customers to the current first fiscal quarter. Gross profit was $2.5 million in the fiscal 2023 fourth quarter, compared with $4.7 million in the same period last year. The gross margin was 10.3%, compared with 15.1% a year ago, driven principally by a lower proportion of U.S. orders and the broader product mix shift. Operating expenses for the fiscal 2023 fourth quarter totaled $4.3 million, slightly decreased from last year, primarily because of smaller stock-based compensation expenses. SG&A expenses were slightly lower due to sales decline and partially offset by increased travel costs for migrant workers. Operating loss for the most recent fourth quarter was $1.8 million compared with operating income of $126,000 for the same period last year. Total audit expenses were $86,000 in the fiscal 2023 fourth quarter compared with total audit income of $148,000 in the last year's fourth quarter and interest expenses were $268,000 versus $63,000 a year ago. Jurasch sustained a net loss of $2 million, or $0.16 per share, for the fiscal 2023 fourth quarter, compared with a net loss of $131,000, or $0.01 per share, in the same period last year. The company's balance sheet and cash position remained strong with $19.4 million of cash and net working capital of $42.8 million as of March 31st, 2023. Inventory at fiscal 2023 year end was 32.7 million and we had about $2.2 million in accounts receivable. Net cash provided by operating activities was $10.8 million for the fiscal year end March 31st, 2023, compared with $9 million in the prior year. Based on the vacancies of the external environment, we're taking a conservative approach to guidance and are projecting revenue for fiscal 2024 first quarter and the full year to be maintained at a similar level as in fiscal 2023, with gross margin goal for the full year, for the full fiscal 2024, to be around 15 to 16%. Our outlook is subject to final product mix of shipments, as well as order flow from the new customers introduced through our joint venture with Busana. As of the end of our fiscal fourth quarter, 239,500 shares had been repurchased at market rates at a total price of $1.2 million, excluding broker commissions. Under the share repurchase program authorized by the board in June 2022, the program expired on March 31st, 2023. Lastly, on May 23, 2023, our board of directors approved a quarterly dividend of $0.05 per share, payable on June 9, 2023, to stockholders of record as of June 2, 2023. Despite the current retail environment, we are still receiving inquiries from new customers. which we are hopeful will turn into new business. And we look forward to an influx of new customers through our joint venture. At the same time, as Eric mentioned, we are closely monitoring and balancing our costs with the long-term growth planning for the not-too-distant future. With that, we will now open up the call for questions. Operator, may we have the first question, please?

Certainly. 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 remove your question from the 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, thanks guys. A couple questions. First, I'm just curious, why the deferral of $3 million? It doesn't sound like that's an economic issue if they're taking the product, but why did your customer decide to push it out three months?

Well, I believe it was just a timing thing. A lot of times at the end of the month or at the end of the quarter, a lot of things can change, even though the orders may be scheduled to ship out by the end of the month. But sometimes because of the freight forwarders scheduling, some of the containers may not make the cutoff. It happens a lot of times. We just need to do a better job in forecasting.

Okay.

Do you have anything to add, Eric?

Because just now my connection is not very good as I'm in Indonesia.

Oh, okay. So the question was, how come there was a $3 million deferral

uh of shipment at the end of last quarter and i said uh is mostly because of the timing uh and the freight forwarders scheduling of the uh of the shipments yeah actually i would like to explain because when we are doing our forecast even okay not as early as uh i mean uh february so we still include one order of 400,000 pieces, Costco. Okay, so it will generate a couple million revenue by the end of the last quarter. But at the last moment, which is our last quarter, first week, okay, we were told by Costco that the inventory level is still high. They would like to defer this shipment to the next quarter or two months later. So that's why, okay, we are keeping this order

ready government in our warehouse for Costco this is the main reason okay okay thanks Eric that makes sense if I could ask another couple bigger picture questions one you know it's something a lot of promising things going on in terms of new customers new customers that that you already have signed up that are ramping or potentially potentially new customers that are showing interest plus what's going on with the JV. So all that sounds good, yet the revenues are declining. So I guess, is that just a timing thing? Can you sort of square that with the idea that you have all this new demand, yet it's not translating into sales yet? When can we expect that to occur, all that potential to show up in actual revenues on the P&L?

Well, Mike, I think very early on this fiscal year, we were talking about this year is going to be tough. The economy, global economy is kind of everybody is fear of inflation, inflation as well as the fear of recession coming. Now, we don't know whether we're actually in the recession or not, but everybody thinks it's coming. So, People have stopped buying, especially buying the more high-priced products. So people are still buying, but they're buying the less expensive products. And that was basically what VF has been telling us or has been telling the world, that there's sales in the higher premium products such as TNF, the North Face, is going to be either flat or declining, but the lower-priced products on Timberland and Benz, they are growing. So that happens or that translates to our business, too. We knew this year was difficult, but we also knew that we are onboarding quite a few new customers, such as Hugo Boss, such as Timberland. Timberland was already on board, but we're growing Timberlands tremendously. The volume gets into millions of pieces. And the other Skechers is actually not as much as we anticipated. But what was the other? Oh, G3. G3 actually doubled their volume with us. So we see a lot of positive things, but a lot of the garment manufacturers in Jordan or in anywhere else, Southeast Asia or whatever, they are seeing 30 to 40% decline in the volume. But we have always take the strategy as we knew more business is coming, the growth is coming. especially with signing this joint venture with Rosanna. But it takes time. It takes time for us to get the new customers on board. It takes at least a year based on our experience with Timberland and Hugo Boss. It takes a long time to get them to approve the samples, check all the costs, and do the factory certification and all that. So a lot of good things are happening. A lot of new customers are coming. We're doing pricing exercise for the Buzana customers, and those are huge customers. But we know it's going to take us at least six months to a year to get real impact. But we don't want to reduce our capacity. But on the contrary, we want to expand our capacity which we spent quite a few million dollars in fiscal 2024 to expand our real estate, our factories, to allow more lines to be added. And we don't want to send a lot of our workers home to the home country, which a lot of the other factories are doing, because we know it will be difficult to get them back when the business... when the business return. So that's why the timing, what we're looking at is still, now that we are done with 2023, but looking at 2024, we know we can get the sales to be at the similar level. But the growth is not going to come until later on in 2024. it will not be realized with the new Louisiana JD business as well as some of the new customers that we are onboarding. Does that make sense?

Yeah, thanks for all that.

I would like to add some new information to explain to the investor about our 2024 business. What Gilbert is saying is absolutely very accurate. Because we are doing maybe a lot of business with them before for the North Face. We have already told us that in 2024, the trend is also they are reducing some of the North Face business to all apparel because of the spending pattern of the people in the United States. So I asked, do we still need to keep the same capacity like before? He said, certainly. Garage is a very good factory. I don't like to lose garage capacity. It is for the future. So he's saying that although North Face business is reduced, I'm going to give you, as Gilbert mentioned, more Timberland business. In 2023 fiscal year, all the year, because it's the first year we are doing Timberland, we have around 600,000 pieces all the year. But the confirmed order and projection Timberland already gave Jiraj for 2024 is over 1.3 million, which is two to three times more than before. At the same time, one of the reputable banks in Germany, which Gilbert just mentioned the name, also has tripled their business for high-end jackets and synthetic jackets with Jiraj. And the business volume, okay, from 2023, which is 2.5 million, maybe go up to 7 to 8 million. And also, a very important thing is Busana Group. I'm here in Indonesia because Busana Group is one of the biggest apparel in Indonesia. They have a very, very strong marketing team. They are doing brands all over the world for more than 50 years. So we have signed the joint venture agreement. The purpose is, uh, at least 50% of the customer. Okay. Once who then moved the business to Jordan, which is a duty free country and to save the duty before all the production is in China, also in Indonesia. So we got the opportunity, which will Santa is doing a marketing for garage, John venture to do more business in fiscal 2024. in the past week i have visited more than 10 factories also and go meeting with the brands they are coming from u.s i can very confident that we will have good business with buzana currently there are more than 11 brands who are very interested to give business to garage joint venture with buzana it's a matter of time and already within this 11 september we have already doing costing exercise for them for over 120 styles. And from this 120 styles, there are three buyers, several days before, already bargained with our final price. And expected order, maybe, like Gilbert mentioned, I don't know whether it will happen in the second quarter, but I'm confident that first quarter, definitely, it will happen. The Busan are also thinking of high business volume in Jordan together with the joint venture in Jiraj. So for me, okay, I'm confident for Jiraj for 2024. Thank you.

That's great. Great color on trends. So with all that, one more question. Where are you with capacity utilization? I think you said you're still running at full capacity and so do you need to build more capacity and do you need to invest CapEx or any additional cost to build the capacity for all that demand that's coming?

Well, we have never stopped.

We don't need to increase our CapEx. This is what Busana thinks because according to Busana's investigation, so 40% of garage order in 2023 as mentioned in the earnings script, are doing subcontracts, and some of them are from local. Just we are earning some money to break the line even. If we are going to deliver this 40% capacity, we do FOB order together with Bosana, which will be a huge number of business. Bosana look at this point, and then because they understand that the joint venture may not need to increase so much on the capacity. and then can start using the 40% subcontract capacity to do FOP order.

Right, but we are also, we have always been preparing and planning to expand our capacity. This past fiscal year, we already did that internally by expanding one building to allow more to allow for more production lines. So if we need additional capacity, we have that. And then we also have another piece of land that we are preparing to build as soon as the business with Bozana comes in. And it may take a year or maybe a year and a half to get that done. And definitely by that time, we will need additional capital to finance it. And we have been looking at the bank with other financing possibilities and Rosanna, if we do it with them, they would definitely also contribute according to the joint venture agreement. So yeah, to answer your question, we definitely are looking at a capacity expansion, but it is all It is all dependent on the timing.

Excellent. Thank you. I appreciate the call.

Thank you. Sure. Thank you for your calling.

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

A lot of my questions have already been asked or covered in your commentary, but I just wanted to better understand the I know that the $3 million worth of revenue that got pushed out, was that higher margin revenue that got pushed out? I think last quarter you guys were talking, you thought you'd be kind of in that mid-teens range on a gross margin basis, just wanted to reconcile that a little bit.

Well, like Eric said, the $3 million order, that was pushed out with Costco orders. And we do that Costco business with an importer. So the margin on that order is not great. And like Eric said, throughout probably the latter half of fiscal 2023, we've been kicking on a lot of this kind of subcontract and lower margin orders just so that we have fully utilized our capacity.

And also about this $3 million value, which is in more 400,000 pieces. Okay. In the last moment, Costco asked us to put out, okay, to one or two months. So before this earnings course, we also, our merchandiser also contact them to try to get some clear picture of how they are going to do with this 400,000 pieces. They said next month, they are going to, I mean, send the final inspection team for first 100,000 pieces. They may not be shipping the whole quantity in one shipment, but definitely they will need the garment. They will split the shipment.

Great. And then just quickly, in terms of Busano, when that business comes online, targeted gross margins for... those types of products? Are those higher-end type products, or where can we expect to see those coming at?

Oh, Boozana. Okay, also, okay, it's doing a lot of different kinds of products. Not like Jirashi, we are doing mainly for the jackets and the polo. Okay, they are doing maybe more than 20, 30 kinds of styles, including different kinds of jackets, different kinds of shirts, and also different kinds of polo, and even they are doing with Macy's a big number of ladies' dresses, which the FOB price is difficult. So meanwhile, they are also studying the opportunities of shifting some of this older or new kind of style to garage. And recently, our factory manager already started producing samples of the style Gerrard did not do before, and Buzana is going to send to the end buyers where the Gerrard is qualified. Just like Gilbert mentioned, our pre-cryptable band in Germany, we are also doing the same. In the beginning, they give us a small number to see if Gerrard is qualified for this kind of synthetic jacket. After a couple of months, they feel comfortable that Gerrard is qualified, now they are selling big numbers for 2024. This should be the same as other new customers coming from Busana.

I think Mark's question was more about what kind of margin are we expecting from the new business that comes through with Busana.

Is that right, Mark?

Yeah, I was just curious what kind of, you know, is it going to be kind of mid-teens? And I know typically, obviously, when you do the VF, the North Face product, higher price point product, you guys are able to get a little better margin than, say, when you're doing T-shirts for Costco. So I was just curious what your expectations were for, you know, the gross margin profile, the revenue, the business that you might book with Busana.

Well, I think it is still up in the air because we're still doing the pricing exercise with them. And those are the products, like Eric said, maybe some of them we haven't done before. So we don't really know or we don't have a good grasp of what the cost is going to be. So at this point, it is really difficult to say what we expect the gross margin is going to be. However, I believe the strategy for business is that they will place the higher price, higher value kind of products because they want to take the full advantage or the customers want to take the full advantage of the duty-free or free trade agreement shipping out of Jordan to U.S. and Europe.

in order to save as much as the the terrorists as possible yes actually busana also told me that this is their bias intention because of the duty saving they are not going to transfer all the like cotton order which they the buyers can enjoy nine percent duty saving instead they are going to send i mean uh orders with synthetic fibers which the buyer can earn more than 33% of the duty savings. And they will also give the joint venture a better price when they move the order to join.

Exactly. Great. That's helpful. Thank you. Thank you very much for your call.

Once again, if there are any questions, please press star 1.

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

Hi, good morning. A lot of coverage and a lot of my questions already answered, but just one quick one for me, higher level. A lot of troubles, not just for you guys, but for a lot of your competitors, I'm sure. So I would appreciate any color you might have in terms of the competitive environment and how it's changed the past few months since we last spoke about it. I've been seeing any shakeout closures. or more so just operators, low-income staff levels, as you had mentioned previously. Thank you.

You mean in Jordan, in terms of our competitors?

Jordan, China, and otherwise.

Okay. Eric, you want to answer this question about the business environment in Jordan, what our competitors are? are facing, or maybe even in China or Southeast Asia area? Yes.

Nowadays, there are a couple of reasons why most of the buyers are launching to Jordan and exit from Southeast Asia, particularly China. First of all, the China machine operators, all of them are earning, I think, at least $1,000 a month already. So even in Vietnam, okay, they are earning $500. Okay, so in Jordan, because 70% of our workforce are from migrants, from Bangladesh, from India, from Sri Lanka, multi-nationalities. So they are earning around $300 at the basic salary, including overtime. Of course, we are providing them with accommodation, access, and food, everything. Okay, but in general, our course is still competitive. And bear in mind that when a customer is transferring orders from other countries, non-duty countries, to Jordan, okay, they can earn as much as 33% of the duty savings. For example, one reputable jacket brand, the FOB price is $50. So 33% moving from China, Indonesia, to Jordan, buyer can save 15 dollar for the duty saving so it is a big money because otherwise the buyer has to pay if it's produced in china or vietnam or other asia countries so the buyer is pushing to send us to uh diversify to to transfer the orders to jordan so that not only it will benefit the joint venture it will also benefit the the buyer also

But what about the situation among our competitors in Jordan? So obviously they're paying comparable or similar wages to their workers. And because of the economic downturn, because of losing customers, losing orders, I heard that Classic, is laying off about 10,000 workers. So these are the kind of competitive environments, even within Jordan, that our competitors are facing. Gerrard is already doing much better because our business didn't really go down. Our sales was only down like 2%, 3% from last year. We maintain the same business even though we couldn't keep the high margin business. But we substitute the high margin business by taking in a lot more lower margin but high volume business to keep our workers busy. But our competitors, some of them even close their shops. Some of them lay off a lot of people. So that's really what is going on in the world of garment manufacturing. So I guess maybe, Eric, you can talk a little bit more about that as well as what you see in Southeast Asia and China, what all the other garment factories are doing. Because what I see here in the U.S. is that a lot of those garment factories, they are going all out to try to find business.

Yes. Actually, all the apparels in the world, no matter if it's in China, Southeast Asia, Central America, Jordan, because of the market is very weak in U.S. and Europe. This is the reason why they reduced a lot of orders. So by reducing a lot of orders, for example, it will affect their production capacity. If they don't have orders, they have to absorb. If they are not going to reduce the workforce, they are going to absorb a lot of costs. For example, one of the biggest factories in Jordan is called Classic Apparel. Before, they had 30,000 workers. And they are concentrated on Walmart and JCPenney. But because Walmart and JCPenney already closed many of their retail shops, and their amount of order has been reduced to 35%. So this is a very significant number to these factories. So this factory, everybody in Jordan understands they already sending 9,000 workers going back to the country, even though the contract is not finished. So this is what they're doing. Correct. Because the rush we are, we tend not to do so because I'm still, we are still confident that the market, okay. Even though it will pick up slowly, we need another one year. I mean, to face the critical situation. But with SANA joint venture coming, I'm sure that they can fill up most of our contract order capacity. So this is the reason why Giraffe does not intend to reduce significantly our workforce.

I appreciate that really detailed call on the environment. I'll go ahead and jump on to you. Thank you, Aaron.

We have reached the end of the question and answer session, and I will now turn the call over to Sam Choi, CEO, for closing remarks.

Thank you, Operator, and thanks to all of you for joining us today and for your continued support. Uresh has a solid foundation from the company's leading industry position, its quality, loyal customer relationships, and strong balance sheet. Those attributes gave us great confidence in the company's future and that we will get through the current period in a position of strength. We look forward to speaking with you again soon and reporting on our progress. Thank you.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.