Jerash Holdings (US) (NASDAQ:JRSH) Q4 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for joining us for this JARASH Fiscal Year 2020 Results Conference Call. As a reminder, all participants are in electronic mode, but later you will have the opportunity to ask questions. To get us started with opening remarks and introductions, I am pleased to turn the floor to Matt Kreps with Darrow Associates Investor Relations. Welcome, Matt.

0:21 Thank you, Jim. Good morning, and welcome to the JARASH Holdings Fiscal Fourth Quarter and Full Year 2020 Results Conference Call. With me today is Sam Choi, our Chairman and Chief Executive Officer, Gilbert Lee, our Chief Financial Officer, and Eric Tang, who leads our operations in Jordan. Our results press release issued earlier today and an updated investor slide deck are available on our website, www.jarashholdings.com. Today's call is being recorded and will be available for playback. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. The operator will provide a detailed reminder of the Q&A instructions once management has completed their prepared remarks.

1:07 Before we begin, a quick reminder about forward-looking statements made during the course of this call. Statements made by Juresh management during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will, guidance, outlook, indicate, suggest, forecast, target, grow, seek, goal, and other similar statements of expectation identify forward-looking statements. Forward-looking statements are subject to risks, uncertainties, and important factors that can cause actual results to differ materially from those reflected in the forward-looking statements.

1:54 These risks and uncertainties are detailed with the U.S. Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect managers' belief only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to its forward-looking statement, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. I will now turn the call over to Sam. Please go ahead. Hi. Thank you, Matt.

2:36 Hello, everyone. I'm pleased to join all of you today for this call. Fiscal 2020 turned out to be a very strong year of growth for Juresh, with sales growing 9.5% to a record 93 million. Our key goal for the year was to diversify our customer base, with more than 7% of our revenue from new customers who are expected to further grow their business with Juresh in fiscal 2021. We also invested in additional capacity during fiscal 2020, acquiring with Paramount Manufacturing Access for approximately $1 million.

3:21 We actually made this increase our annual production capacity by more than 23%, or 1.5 million pieces, which has been almost fully booked with new orders since we started this facility with our trained workers. I'm very proud of our team's hard work and dedication to that process. We also opened a sewing workshop in El Hazard in Jordan through an exciting partnership with the Sudanian government. Juresh is a socially oriented company dedicated to not only profitability for our stockholders, but also creating quality employment for people in Jordan.

4:09 both permanent citizens and a global workforce that comes to Jordan on multi-year work contracts. The Al-Hassab project was decided to create local jobs for Sudanian women in an underserved rural area. This female-focused workshop is up and running with great success. One of their first projects was suing customers North Face Garment, so in Europe, to celebrate International Women's Day. These projects are particularly exciting to Doresh because they advance both good business and also good social responsibility.

4:56 BISCO 2020 was not without its challenges, though, including the global COVID-19 pandemic that closed our facility in the last two weeks The pandemic will have an impact on our fiscal 2021, but a number of orders deferred at the start of the pandemic have been reinstated, a good sign for the ranch. In fact, Jordan has proven to be a success story in its COVID response, and our factories are now 100% back to work, with a number of additional considerations to protect our workers as well. Before passing the call to Gilbert, I want to acknowledge our recent addition to our Board of Directors.

5:47 Bill Kohn has joined our Board as an Independent Director and Chair of our Audit Committee after Son Socha sat down. I want to thank Son for his service since our IPO and wish him well. Bill is a Harvard MBA and currently the CFO of MTBC Inc., a fast-growing NASA listed company based in New Jersey, close to where our US office is located. Bill has helped with more than 15 acquisitions since MTBC's 2014 IPO. This is an area where his knowledge and experience can be helpful to our future.

6:36 MTBC also has very loyal long-term customer and uses a global workforce at facilities based in Pakistan to offer its customer economic advantages, such much as direct long-term customer benefits of our high quality but lower cost workforce in Jordan. We believe in the experience and specific knowledge of several areas Thank you, Sam.

7:12 Hello, everyone. I'm pleased to join all of you today to discuss our financial results. Our results demonstrate continued progress on our growth initiatives. although we were impacted by the global COVID pandemic for the last two weeks of the fourth quarter. Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the fourth quarter of fiscal 2020, which ended March 31st, was $14.4 million, effectively flat year over year. We had to defer approximately $1.6 million in shipments scheduled late in the quarter when the country of Jordan announced a shelter-in-place order in mid-March to arrest the spread of COVID-19.

8:15 I am pleased to say that Jordan has handled the pandemic very well and reopened using a number of well-developed measures to facilitate a return to business while continuing to protect workers and citizens. Jirash is fully reopened and using enhanced screening and hygiene measures for the continued protection of our workforce. Fourth quarter gross margins were expected to reflect the startup cost for our El Haza workshop, a very exciting project as Sam mentioned. But the pandemic also had a significant margin impact due to the loss in productivity in the two-week shutdown.

9:02 As a result, gross margin was only 8.7% for the quarter. Operating expenses have declined, though, to $2 million for the quarter, as compared with $2.8 million in the previous fourth quarter, resulting in a late loss of just 7 cents per share. For the full year, we were able to achieve most of our financial objectives, even with the pandemic's impact, setting the stage for continued focus on operating improvements in the year ahead. Full-year revenue was a record $93 million, reflective of the $1.6 million in fourth quarter orders that shifted into fiscal 2021.

9:53 This was an increase of 9.5% year-over-year. Our growth included more than 7% of revenue from new customers and increased utilization of our factory during the fiscal second half, which is warmer season garment production and was previously underutilized. With the factory expansion efforts in the past year, we can now produce more than 8 million pieces per year. a 23% increase. We believe we are actually able to scale volumes above this number with our current facilities, but continue to focus on capacity expansion and adding new dormitory facilities for our workforce in the near future.

10:44 Growth margin for the year was 19.3% compared with 22.1% in the prior year. Approximately 110 basis points of the full-year decline was due to the pandemic closures in March and the remainder due to higher production volumes in the second half at lower margins and the startup cost at our new production centers. We continue to focus on balancing margin with overall production and profitability. Operating expenses for the year were $10.3 million, down 17% year-over-year. Operating income for the year was $7.6 million, an increase of 20% from 2019.

11:32 Gap net income for the year was $6.5 million, or 57 cents per diluted share, compared with 45 cents in 2019. During the year, we paid out dividends quarterly at an annualized rate of 20 cents per share to our common stock shareholders. Our balance sheets remain very strong with cash and restricted cash on March 31st at $26.9 million. Inventory was $22.6 million and AR was $5.3 million. We have working capital in excess of $48 million as of March 31st.

12:24 We continue to expect the business to generate cash flow from operations on an annualized basis. We also have untapped lines of credit available for up to an aggregate of $26 million. In fiscal 2020, we have begun to invest in additional expansion for the future. including $2.3 million we invested into the purchase of the Paramount manufacturing assets, and more recently, land properties to further expand our production facilities and workers' dormitories as part of our multi-year facility expansion plan. I want to talk about a few other aspects of our business as well.

13:13 We have seen some volatility around orders Thank you for your attention. As a result, many of those orders have been reinstated. At this time, we're not yet ready to provide an outlook for 2021 until we have greater clarity on orders, but remain focused on both maximizing revenue and controlling costs.

14:11 To that end, we have taken a number of steps to reduce costs throughout our organization. We mentioned the addition of new customers over the course of 2020, accounting for 7.2% of revenue and helping further diversify revenue concentration. This is an ongoing effort in 2021. As a large strategic supplier to those global brands, bringing on a new customer tends to be a long process for Darash. including sample orders and initial smaller volume orders, then securing larger orders. However, most of our customers tend to be loyal and find the value of our high-quality output and duty-free cost advantageous.

15:05 We are also adding products specific to current needs. During the pandemic, at the request of the Jordanian government, We produced some PPE supplies. Since then, we have produced and shipped masks to a new U.S. customer. We are in the process of exploring the opportunity of exporting our manufactured medical PPEs to the U.S. and Europe, and we should have a clearer outlook in the coming quarters. These new categories are good opportunities for Jerash. and we continue to build on our capabilities. In summary, Jirash produced a solid year of growth in both revenue and profitability for our stockholders in fiscal 2020.

15:57 At 57 cents per share in GAAP ETF, we believe this is a valuable and exciting business enterprise with opportunity for further growth. While there will certainly be impacts from the pandemic this year, our well-positioned balance sheets with no debt provide ample resources to fund continued expansion of our business through both organic and strategic opportunities. We look forward to the year ahead, and thank you for your continued interest in Jerash. We now welcome your questions. Ladies and gentlemen, joining today on the phones, if you would like to ask a question or need clarification on anything covered in today's meeting, simply press star and 1 on your telephone keypad. Pressing star and 1 will place your line into a queue, and we will take your questions one at a time.

16:54 Once again, ladies and gentlemen, that is star and 1 if you'd like to ask your question. Also, a friendly reminder that if you're joining us this morning on a speakerphone, please return to your handset prior to pressing star and 1 to be certain that your signal does reach our equipment. We'll take our first question from Mark Argento at Lake Street.

17:12 Hey, Sam. Hey, Gilbert. Just wanted to drill down a little bit more on, you know, when you're talking with your customers, you know, how are they shaping up kind of the demand equation? You know, obviously a lot of retail has been closed for quite a while in the U.S. and I'm assuming other parts of the world as well. Are you getting any indications on what their thinking is in terms of kind of inventory levels at retail? Will that impact longer term order patterns for the rest of this year? Any thoughts? That would be helpful. Thanks.

17:45 Yes. Yeah.

17:51 Gilbert, you want to say? Yeah. Sam, you want to answer? Mark, I can say that we constantly, or on a week-to-week basis, we communicate with our customers on a continuous basis to, because right now the situation is really fluid. Even in the U.S., states are and many more. Thank you. and many more. So we are kind of cautiously optimistic, but obviously we can't predict What is going to happen in 2021? And neither can our customers.

19:26 So I guess that really doesn't answer your question, but we will continue to maintain communications with our customers and they update us on a weekly basis. So right now we're looking at some decline in 2021. However, we are doing everything we can and also we have some new customers. So we don't think that this is going to be a disaster. But however, we think 2021 is still going to be a pretty good year if everything gets back to normal.

20:19 with a reasonable timeframe.

20:23 Do you have anything to add? Yes. Go ahead, Sam.

20:34 Yeah, and in fact, for the coming year, based on the confirmed order from our over 10 customers, and also based on some very conservative projections, I think we try at least at this moment, at least we can have 80%, I mean, compared with fiscal 2020 in terms of top line. And of course, if the coming few months, the pandemic situation in US, in Europe is getting better, I think the reinstatement of the orders will be more encouraging.

21:22 Then we will try to meet, to try to catch, I mean, the top line, just like fiscal 2020. And also, I would like to say, I mean, besides the garment we are making, in the last few months, in fact, we are also making some masks. And recently, we are also making some isolation gowns or medical gowns for the Jordan and also Israel countries. And we are also seeking the FDA approval for our export of the isolation gowns to the U.S. and to Europe. If we are successful on that, then we expect that will contribute to the top line in terms of sales of the isolation gowns as well.

22:15 Yeah.

22:18 And Sam, how quickly do you think you could get approval to start shipping product, the PPE product?

22:26 Okay. So, Eric, can you talk about the process of getting the FDA approval?

22:33 Yes. Okay, so actually we already started the process of getting various certifications for our medical products. Okay, so we have applied, okay, first of all, the Jordan FDA approval. Okay, so The Jordan FDA approval, okay, last month we have already got the temporary approval that we can ship or export, okay, our medical products to all the Gulf countries, which is the Middle East country. Okay, secondly, okay, we are in the process of applying the CE, which is a prerequisite for exporting our medical products for all the European countries.

23:21 Okay, according to the latest report from the consultant company, independent company who is doing the CE for us, it will take another one and a half months before we can get the official CE, okay, which allow our products to be shipped out to European country. And for the U.S. FDA, okay, so actually we just started our process, okay, to apply for the USA FDA certification. So it will be quite, I mean, a long procedure because U.S. FDA requirement is a little bit complicated. and also very strict. Okay, we have already, okay, because of the COVID-19, okay, the US FDA cannot be able to send representatives to come for inspection of our factory in Jordan. Instead, okay, they are asking Jordan FDA, okay, to, okay, visit the factory on behalf of the US FDA. So they already come to our factory for a couple of times for certain inspection. We have also, I mean, the... send our products to the FDA for the laboratory for testing.

24:38 So we are still waiting for the result of the lab test. And then after all the result has been come out, okay, we will get a registration for the US FDA and we will have the registration number for JLSH. And it approximately it will take another two months before we can get all the certified approval if everything is going smoothly.

25:04 Great. And will that be then medical, basically medical grade PPE then? Or what types of products will you guys manufacture?

25:14 About the medical products, okay, we are now producing or prepared to produce. We already started producing the surgical disposable face masks. Okay. And then we are also producing now which is the fashionable washable face masks. Okay. Some of them we are producing for particular brand for our buyers and some we are producing for other customers. Okay. According to their requirements. And also, we already started producing in our No. 5 factory in Ahasa, the blue medical gown, which is also for disposable purpose. Later, we are also planning to develop the copper ore, which is used by the operation room, and also the reinforced blue metal ground, which is a sterilized product, after we get all the certification.

26:12 These are the products we are producing now.

26:18 That sounds exciting. Thanks, guys, and good luck. Thank you very much. Once again, ladies and gentlemen in our audience, that is star and one. If you would like to ask a live question over your telephone line, and remember to return to your handset to be sure that your signal does reach our equipment. Next, we'll hear from RHK Capital and the line of Todd Felt.

26:40 Hey, guys, congratulations on a great fiscal year. Just had a question on the PT and mask. What are the margins going to be on that business compared to your garment business?

26:51 Okay, so this is Eric. Okay, I'm calling from Jordan. Can I answer your questions?

27:01 Sure, Eric.

27:02 So you are asking me for approximately the profit margin for our medical product. Okay, so we have actually... Different profit margin for different kinds of medical products. And it depends on which country we are exporting. In the Gulf area, in the Middle East country, we already know about the market price of each kind of product, the face mask, the medical gown, the cover-up. And we are making it in order to compete with the local factories supplying to the Gulf area. Our profit margins is about... Ten to fifteen percent. Okay. Okay. But, okay, we have checked. The market price in EU and also in US, okay, if we can successfully get the CE and FDA approval, okay, and we can export our products to USA and also to EU, the profit margin is much higher, okay, than those we are supplying to the Gulf countries.

28:05 The profit margin will be, for all the products, will be between 20% to 35%. Thank you. Thank you. And once again, ladies and gentlemen, that is star and one. If you would like to ask a question or need clarification on anything covered in today's update, we'll take just a few moments to give everyone a chance to signal us. Again, ladies and gentlemen, that is star and one. Next, we'll hear from the line of John Morris at Davidson.

28:41 Hi, thanks. So following up on that last question, In the margins, Eric, that you're giving, are those, whether it was the Middle East or the U.S., are those higher than what your current average, or not current, but as of last year, margins are? It sounds like they are significantly higher in the U.S. Yes, yes, definitely. Okay, okay. Switching gears, I just wanted to, I think the question for Gilbert probably Just a clarification, given the volatility, and I think Sam was saying like at this point, just clarify for me that you were thinking 2021 could be, when he said 80%, does he mean sales down 20% from last year, from last year, full year? Just a clarification on that.

29:41 Yes, John. Right now, to be honest, we really cannot have any solid basis to project what our 2021 top line is going to be. I think Sam is kind of looking at all the existing customers and the current cancellation or reinstatement of the orders that he estimates maybe it would be down 20% from 2020.

30:30 But that doesn't include any new customers or any like the PPE products that we are currently working on. So, I would say the 20% reduction would be kind of like the worst case scenario.

30:50 Yeah. Okay. Super helpful to give that context. I mean, it's a little bit of kind of a smaller detail here, just thinking about the June quarter, but just for a modeling purpose, I'm just trying to kind of understand, could You know, were you at all open? Were factories open? I know you had the dormitory labor force in place. I'm wondering whether or not the June quarter still registers sales. You know, were things open? Obviously, it would be down significantly from the run rate seen in fourth quarter.

31:29 Yeah, the June quarter, which is... All the factories are fully resumed their operations. I think starting from June 1, there will be All the local workers were allowed to go back to work. But way before then, at the beginning of May, we have already got all the dormitory workers, all the workers from...

32:24 Well, Jordan was only struck down to kind of like Not having the local people traveling in and out of the industrial zone. But most of our workers are in the industrial zone. So we were able to produce even when the country was officially shut down. So we were producing. In fact, we started producing back at the beginning of May. with a limited number of workers. So June quarter is not too bad, but definitely it had an impact.

33:12 Right. Because of the and because of, yeah.

33:16 Yeah. Okay, that's very helpful. You talked about the cost controls given the circumstances. that you're putting into place. As you look out over the course of the year, I'm wondering to what degree you're able to manage that SG&A. Can you give us some feel for whether SG&A dollars year over year would actually be down or flat or up at a slower rate of growth? On full year for 2021 in terms of kind of what you've been able to impact.

34:01 Well, we have we have custom headcounts, especially in the area of SG&A. So I mean, even though most of our headcounts are in production and manufacturing, but we did have some have some layoffs in our administrative area. And I think the majority of our people who are remaining, they did have a temporary reduction in their salary. So I would think 2021 SG&A, if not...

34:50 If not a reduction from 2020, it would be at the most flat from 2020. Okay.

34:59 Okay, great. Thank you all very much. Good luck going forward. Thank you. Thank you, John. And gentlemen, we'll allow another few moments for everyone in the audience to have a chance to signal us with star and one if you would like to ask a question. And again, ladies and gentlemen, be sure that you return to your handset if joining today on a speakerphone. We'll take a question from David Schneider. Please go ahead, sir. Your line is open.

35:29 Thank you. In your online presentation, it suggests that you're still looking for additional capacity. So is that the correct interpretation?

35:44 Yes, David. Thank you for the question. We are definitely actively looking for additional capacity. But due to the COVID-19, we are kind of, at the moment, putting that on hold, just wanting to see how the top line is coming back and how the demands from our existing customer as well as new customers are putting on us. So, I mean, it obviously doesn't make sense to build new capacity when there is no sales. But we're currently still actively looking either through building on our existing facilities, on land properties that we have purchased, as well as M&A opportunities. If there is...

36:42 This is Eric. Can I add something to the questions?

37:09 Because of the COVID-19, some of the existing factories which is doing orders for some American brands, some of them were already closed for a lot of reasons. So recently we have picked up one new customer, because this customer originally they placed a lot of orders to one factory in Jordan, but unfortunately this factory was closed before two months. So now, okay, they are trying to talk to us for capacity to ask us to provide, I mean, capacity to them for the rest of the year and also for 2021. So after several, the name of the customer is American Eagle.

37:54 Okay, I think we also make some announcement on this. So recently, we have already picked up one new order, the first order, which is 9,500 pieces of jackets from American Eagle. This is the first order we took from them. And they are still talking to us, asking for further capacity for the rest of the year. This is, I mean, so Gerrard may have some good opportunities, okay, even during the coronavirus 19 because of the shutdown of other facilities in Jordan.

38:33 Okay. Okay.

38:35 That's a very good point, Eric.

38:38 Yeah, I think that's all pointing, it's all a very good indication that there's this virus situation. Sam, do you wanna take that?

39:10 Yes, I think one phenomenon is between the USA and the China relationship. In fact, quite some China-based factories or manufacturers, they would like to shift their order from China to Jordan. And some of them even talk to us, they would like to lock up some of our capacity. for their orders to the USA. Instead of producing in China, they would like to shift their production base from China to Jordan for their export to USA and also to Europe as well. So we are discussing with them about that. Yeah, so in the coming few months or next year, we will reserve some capacity for their orders as well, yeah.

40:06 Yes. Okay, that's all. Thank you.

40:11 Thank you. Thank you, David. And ladies and gentlemen, another opportunity to press star and one if you would like to ask a live question over your telephone line to our leadership team. We'll take just a few seconds to give everyone a chance to signal with star and one. And it appears we have no signals from our group. I'll turn it back to Mr. Matt Kreps for any additional or closing remarks.

40:41 Thank you, Jim. And thank you, everyone, for participating on today's call. While 2020 produced both strong revenue and profit growth, Duresh remains focused on opportunities ahead in fiscal 2021. Duresh will be conducting multiple outreach and conference events in the coming months, including the Sidoti Virtual Investor Conference tomorrow. If you have additional questions or would like to arrange a meeting at an upcoming event including our events tomorrow, please contact me using the contact information on the bottom of our press release. Thank you for your participation and have a great rest of your day.