Jerash (US) - Q1 2025

Transcript

Operator (participant)

Greetings. Welcome to the Jerash Holdings Fiscal 2025 first 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 hand the conference over to your host, Roger Pondel, Investor Relations for Jerash Holdings. You may begin.

Roger Pondel (Head of Investor Relations)

Thank you, Holly, and good morning, everyone. Welcome to Jerash Holdings Fiscal '25 first quarter and full year conference call. I'm Roger Pondel with PondelWilkinson, Jerash Holdings investor relations firm. It will be my pleasure momentarily to introduce the company's chairman and Chief Executive Officer, Sam Choi; his 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, 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 Jerash 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?

Sam Choi (Chairman and CEO)

Thank you, Roger. Revenue for first quarter of fiscal 2025 increased nearly 18% over last year's first quarter, attaining an all-time high. I'm pleased to report that we are continuing to receive an increasing number of purchase orders for export shipments to global customers in the U.S. and Europe. Gross margin was affected again by the ongoing turmoil in the Red Sea, which continued to disrupt ocean trade routes and drove up ocean freight rates and inland trucking.

We also incurred additional manufacturing costs associated with challenges in production scheduling and catch-up deliveries to our customers, due to delays carrying over from last quarter, primarily related to the logistic issues. Nevertheless, gross margin for the first quarter improved by more than 400 basis points over the preceding quarter, ended March 31.

Although some of the higher costs continuing into the second quarter in fiscal 2025, we anticipate a return to a more stable operating environment in the second half of this fiscal year. To help address the logistics situation, we are seeking to add more vendors from Turkey and Egypt to source raw materials, which should help eliminate some related costs and shorten transportation time.

All in all, we are encouraged by the positive momentum as we proceed into fiscal 2025. Purchase orders from our long-term global customers are coming in at a pace we have not seen in the past 2 years. As well, we are receiving additional trial orders from other major brands through Busana Apparel Group, our joint venture partner. Our initiative and strategy of diversifying our customer base is paying off.

We believe it will position us well for growth as the economic environment improves. We are grateful that business and day-to-day life in Jordan remains stable and safe. However, due to the uncertainty in the surrounding countries, contingency plans have been put in place to ensure minimal disruption to our operations in the event of an escalating political situation in the region. Eric Tang, who is in charge of our operations in Jordan, will share more about that shortly, and I'll now turn the call over to him. Hi, Eric.

Eric Tang (Head of Operations)

Thank you, Sam. As we mentioned during the last quarter's call, the supply chain disruptions affected our ability to receive adequate supply of materials from Asia, which in turn delayed production. Approximately 16%-18% of orders from last quarter were delayed and shipped in the fiscal 2025 first quarter.

To catch up on delivery schedules to our customers, we had to ramp up production with overtime, and in some cases, we had to air freight certain shipments, incurring significant added cost. We expect overtime to moderate, starting in mid-August, and hopefully no additional air freight shipments going forward.... Despite the unstable environment in the Middle East, our customers continue to have confidence in Jerash to be their trusted, responsive, and responsible manufacturing partner. Thus far into our new fiscal year, we are experiencing good growth.

Our manufacturing facilities are all operating at full capacity, with orders fully booked well into December 2024. Currently, we are experiencing inflows from major customers following a period of constraint at the retail level. Expanding our customer base, and we are delighted that we are starting to realize the benefits of this strategy. Today, we are producing garments to a number of new branded customers, and we are continuing to expand our product mix with new product categories.

Our objective remains on balancing production capacity utilization throughout the year to minimize revenue seasonality. Marketing efforts with Busana Apparel Group are continuing, and we are receiving additional trial orders from four global brands through this joint venture. We expect additional new business opportunities will arise in the future.

Orders from our two European-based high-end apparel brands, including Armani, are steadily increasing, and we are receiving additional trial orders for Armani's other premium clothing lines. We are excited about the new products and look forward to expanding the brands further, which we anticipate will enhance our margins. As Sam mentioned before, contingency plans are in place with our partners in Indonesia and other locations to minimize disruptions to our operations in the event of an escalated flare-up in the region. We have discussed such plans with our customers as well. I will now turn the call over to Gilbert to discuss our financial results. Gilbert, please.

Gilbert Lee (CFO)

Thank you, Eric. Revenue for our fiscal 2025 first quarter increased 17.8% to $40.9 million from $34.7 million for the same quarter last year. This record first quarter revenue reflected an increase in shipments to Jerash's major U.S. customers and growth with new customers in other regions that the company onboarded during the past 2 years.

It also included approximately $3 million-$4 million of orders that were delayed from the previous quarter due to reasons mentioned earlier by Sam and Eric. Gross profit was $4.6 million for the fiscal 2025 first quarter, compared with $5.6 million in the same quarter last year.

Gross margin decreased to 11.3% from 16.0% in the same period last year, primarily due to the higher raw material import costs caused by the Red Sea shipping disruption, as well as additional manufacturing costs associated with catching up on delivery schedules to customers. The increased logistics and labor costs had a combined negative impact of 440 basis points on gross margin in this quarter.

Operating expenses for the fiscal 2025 first quarter was $5.5 million, compared with $4.5 million for the same quarter last year. SG&A expenses increased 18% to $5.0 million in this first quarter, compared with $4.2 million in same quarter last year. This increase included an additional air freight cost of approximately $300,000 to catch up deliveries to customers.

Stock-based compensation expenses for the fiscal 2025 first quarter were $469 thousand, compared with $241 thousand for the same quarter last year. Other increases in operating expenses included higher sampling support costs and payroll expenses. Operating loss totaled $829 thousand in the fiscal 2025 first quarter versus operating income of $1.1 million in the same period last year.

Total other expenses were $426 thousand in the fiscal 2025 first quarter, compared with $299 thousand in the same quarter last year. The increase primarily reflected higher interest expenses from the supply chain financing program of certain major customers.

Net loss was $1.4 million or $0.11 per share in the fiscal 2025 first quarter, compared with net income of $495,000 or $0.04 per share in the same period last year. As of June 30, 2024, Jerash had cash and restricted cash of $13 million and net working capital of $34.5 million. Inventory was $20.7 million, and accounts receivables was $9.4 million.

Net cash used in operating activities was approximately $2.2 million for the quarter ended June 30, 2024, compared with net cash provided by operating activities of $25,000 for the same period last year. As Sam and Eric mentioned earlier, we see ordering patterns increasing with larger quantities into fiscal 2025, and factories are fully booked through December.

Revenue for the second quarter is expected to increase by 11%-13% from the prior year quarter, and full year 2025 revenue is anticipated to grow by 20%-25%. Our gross margin goal for the 2025 fiscal year is expected to be approximately 12%-14%, subject to logistics and shipping charges and product mix. On August 5, 2024, Jerash's board of directors approved a regular quarterly dividend of $0.05 per share on its common stock, payable on August 23, 2024, to stockholders of record as of August 16, 2024. With that, we will now open up the call for questions, and I will turn the call back to the operator.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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. Once again, that is star one to ask a question. One moment please, while we poll for questions. Your first question for today is from Mark Argento with Lake Street.

Mark Argento (Analyst)

Yeah. Hi, good morning, guys. First question I had was on the revenue guidance. It looks like you... I just want to make sure I understand this right. It looks like you took it up fairly meaningfully from 15%-18% for the full year, now to 20%-25%. Was there, like, a couple of specific new wins in there? Or maybe you could, you know, break that apart a little bit for us, so understand where all that additional revenue is coming from.

Gilbert Lee (CFO)

Well, thank you, Mark. Our revenue increase for this fiscal year is going to be more on the second half of the year versus versus the last fiscal year. As you remember, our seasonality is always going to be more heavy on the first half, and then the second half, when we're producing more of the summer or summer weather clothings, the revenue will be somewhat lower. But this year, the first quarter, first quarter, we already achieved a a record quarter for the first quarter, and second quarter is continued coming in strong.

We're anticipating that the third and the fourth quarter to be almost on par with the first half of the year, because we see strong orders coming in, especially now that we're actually fully booked through the third quarter, through December of 2024. Orders are still coming in for the spring, for the quarter one, or our last fiscal quarter, which is January to March of 2025.

Even though those orders are not confirmed or booked yet, but we see the strength of the turnaround. We forecast the second half to be almost as high as the first half of this year. We will see a much higher percentage growth in the second half, comparing to last year's second half. Does that make sense?

Mark Argento (Analyst)

Yeah.

Gilbert Lee (CFO)

That means, in the first two quarters, we're seeing growth in the teens, but then the second half of the year, we're seeing stronger growth comparatively.

Mark Argento (Analyst)

Do you attribute that - are those, you know, kinda catch-up orders with existing customers, or is that kinda new customers coming on and incrementally adding to the order flow?

Gilbert Lee (CFO)

It's more the latter. It's more new customers coming in that we're anticipating, especially in the past couple of years, we did a lot of trial orders, sampling, and those customers are now starting to place regular orders, and they indicated that they will increase their ordering.

Mark Argento (Analyst)

Got it.

Gilbert Lee (CFO)

But the first half is more for catching up. So up until now, up until August, we're still trying to get rid of some of the back orders that was delayed, well, in the spring.

Mark Argento (Analyst)

Right. The gross margin came in below what we were looking for in the quarter. We obviously knew that. You're still, you know, trying to play a little bit of catch up, and the supply chain disruptions adding to the expense there. Do you feel like.

You guys have your head around that now? What, what kind of gross margin expectations, you know, do you have for Q2? And then I think the full year, you maybe bumped that down a little bit. I'm guessing that's, you know, from what happened in Q1 or from the Q1 results. But, you know, should we see sequential improvement, you know, and do you guys fully have your hands around, you know, the, the supply chain issues at this point?

Gilbert Lee (CFO)

Well, we are seeing that. Well, obviously, first quarter and second quarter, we're still having pretty significant higher manufacturing costs because of labor costs and also because of the inbound freight that we have to pay higher on the bringing in the raw materials. But we're looking at maybe after August, the situation will become stabilized.

And also we're implementing a lot of cost cutting and cost reduction kind of projects to lower our overhead, lower our SG&A. We're trying to reduce costs. But hopefully, I think the second half of the year, even though it is still not going to be high teens, but it will stabilize. It's not going to be like the first and second quarter.

Mark Argento (Analyst)

The last question. I, you know, is there any provisions where you can work with your customers, where they bear some of the incremental expense if you're air freighting or if, you know, because of the disruptions? I mean, you know, it feels a little unfair that you guys end up having to take the brunt of all of that relative to, you know, some of your customers who might be able to share in some of that expense. Are you sharing in those expenses, or is there any kind of provision for you guys to be able to be made whole on some of that?

Gilbert Lee (CFO)

Well, each order that we have with our customers, they will compensate. They understand our situation, and in most cases, they will add a little bit on the margin that they allow us to have. But they wouldn't directly compensate for the additional cost that we incurred, especially on inbound freight.

Those are the situation that nobody anticipated, but they will understand that we're paying more, and they will also allow us, as much as possible, not having to air freight the shipments to them if they can accept a longer delivery time. So just to answer your question, there's no direct compensation for contingent additional cost for manufacturing. But for the orders going forward, they will allow for a little bit of catching up margin.

Mark Argento (Analyst)

Great, and last-

Yeah, maybe, I think-

Yeah.

Gilbert Lee (CFO)

Yeah, maybe. Regarding the inbound freight charges, some of our major customers, they are willing to absorb some of, I mean, for the future order, or in fact, what I mean future order, even since the last several months, when we quote our FOB price to them, we let them know our increased inbound freight charges. And some major customers, they are willing to, willing to absorb some of the increase of the inbound freight charges already. Yeah.

Mark Argento (Analyst)

Yeah, that's helpful. Then one last one, Gilbert.

On the supply chain financing, are you guys actively utilizing that? What, where, you know, where are you in terms of, you know, leaning in on, on that? I know historically, that's been kind of expensive.

Gilbert Lee (CFO)

Yeah, especially when the interest rate is still pretty high, and that financing cost is tied to SOFR. So, we try not to use it as much as we can, but as the ordering and as the sales increase, sometimes we just have to tap into that and to make sure that we have enough cash flow to purchase raw material, to pay for freight, and so on. So, yeah, the interest expenses were a little bit high in the last quarter, but we're watching it every time and make sure that we don't incur too much unnecessary interest costs.

Mark Argento (Analyst)

Great. Appreciate the, color, guys. Good luck.

Gilbert Lee (CFO)

Sure. Thank you.

Operator (participant)

Once again, if you would like to ask a question, please press star one. 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.

Sam Choi (Chairman and CEO)

Yeah. Thank you, operator, and thanks to all of you for joining us today and for your continuous support. We look forward to speaking with you this quarter. Thank you, everyone.

Operator (participant)

This concludes today-

Gilbert Lee (CFO)

Thank you. Okay.

Operator (participant)

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

Sam Choi (Chairman and CEO)

Thank you.

Gilbert Lee (CFO)

Thank you.