Good day, ladies and gentlemen, and welcome to your Jerash Fiscal First Quarter 2020 Results Call. [Operator Instructions] At this time, it's my pleasure to turn the floor over to Matt Kreps. Sir, the floor is yours. .

Thank you. Good morning, everyone. Welcome to the Jerash Holdings Fiscal First Quarter 2020 Results Call. With me today are Richard Shaw, Chief Financial Officer; Karl Brenza, Head of U.S. Operations. Today's call is being recorded and will be available for playback. [Operator Instructions].

Before we begin, a quick reminder about forward-looking statements made during the course of this call. Statements made by Jerash 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, growth, seeks, goal and other similar statements of expectation identify forward-looking statements.

Forward-looking statements are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed in Jerash's public filings 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 management's belief only as of the date hereof.

The company undertakes no obligation to publicly release the result of any revision to its forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. .

And with that, I will now turn the call over to Rich Shaw, CFO of Jerash Holdings. Please go ahead, Rich. .

Thank you, Matt. Hello, and thank you for joining us today. I am pleased to join all of you today to discuss our record first quarter revenue results and continued progress on key growth initiatives. .

Let me start with revenue, which increased 23% to a first quarter record $22.5 million in sales compared with $18.4 million in the prior year first quarter.

As you may recall from our 2018 reporting, first and second quarter are characterized by production of jackets and cooler weather garments, with our first half producing seasonably higher revenue as a result of favorable revenue-per-piece dynamics.

Additionally, you may recall that last year, our first half growth was gated due to operating at maximum factory capacity, whereas this year, we are benefiting from the capacity addition of our new Paramount facility, which we expect to fuel further growth in production capacity as we progress through the year.

This enables us to grow more aggressively in the first half, a much needed development as customers continue to ask for more.

[Audio Gap].

First quarter gross profit declined to 20% from 25.4% in the prior year first quarter.

The difference in gross margin reflects favorable customer and pricing dynamics in the prior year period that boosted gross margin, whereas this year's first quarter was reduced by higher average costs associated with the start-up process for the newly acquired Paramount facilities.

We estimate the impact of the ramping process for this new facility was in excess of 100 basis points on gross margin but that our gross margin metrics will improve as the Paramount facility production scales through the next few quarters.

This improvement will be driven by both higher piece volumes allocated to the Paramount facility driving down expected allocation cost per piece and by our new employees becoming more experienced and efficient with Jerash's manufacturing process, which we believe will lead to an overall increase in worker productivity and total output on our lines.

This expectation is supported in part by our forward order flows, which have our available production volumes fully booked until January 2020, and our historical experience of gross margin expansion in our existing facilities, which we expect to continue in fiscal 2020. .

In spite of the downward pressure on gross margins, we are very pleased with our overall progress in this area as top line sales are growing and we expect to see further improvement throughout the remainder of the year in order to meet our full year revenue outlook. .

SG&A expense in the first quarter was $2.6 million, down slightly from the fourth quarter. SG&A included additional costs to bring in our workforce for the new facility. .

Operating income in the first quarter was $1.9 million compared with an operating loss of $525,000 in the prior year first quarter, which did include a onetime stock-based compensation cost associated with our IPO. .

Taking all this into account, GAAP net income was $0.14 per diluted share for the quarter compared with a GAAP net loss of $0.08 per share in the prior year first quarter. .

Turning to the balance sheet. We remain well capitalized to fund our growth plans and increased working capital needs as well as to pay our expected quarterly dividends initiated last year. Cash and restricted cash at June 30 stood at $16.9 million versus $27.8 million at March 31 with the difference reflecting shifts in working capital allocation.

AR was $13.4 million compared with $4 million at March 31. Inventories were at $20.5 million versus $21.1 million at March 31. We also saw increased supplier advances and lower accounts payable. .

In line with these changes in the balance sheet, we used $8.5 million in cash flow from operations. As we progress through the first half of fiscal 2020, we anticipate cash collection will rapidly convert working capital back to cash and provide liquidity to fund further business expansion, if opportunities present.

We also have untapped lines of credit available for up to an aggregate of $23 million. .

As you can see, Jerash has reported strong sales growth and profitability to start fiscal 2020, and we look forward to further expected growth in the year ahead as we maximize production at our existing facilities and ramp up our fourth factory. We anticipate this model will scale efficiently.

[Audio Gap].

for the year ahead and support our plans for further capacity expansion as we bring in additional workers to fill our new plant's capacity opportunities. .

We continue to anticipate sales in excess of $100 million for the full year fiscal 2020, inclusive of gains in both the first half and second half production seasons. .

With that, I will turn the call to Karl for a discussion of our growth strategies. .

Great. Thanks, Rich. So clearly, the first quarter is a good indication that our revenue growth for programs are ramping up and provides an early indication of our expanding capacity as we continue to scale the Paramount facility through the rest of this calendar year.

Operationally, we are running at full capacity out of 3 main facilities and look forward to further scaling our production lines so we can continue accepting new orders from new customers as well as existing customers. .

Paramount is expected to add 1.5 million or more in annual -- pieces in annual capacity, and we believe there's an opportunity to scale the facility well above this initial level as we add equipment, grow our workforce and increase the experience level of our new employees.

At an acquisition cost of just $1 million, this facility was, without question, one of our most significant achievements of the last fiscal year. .

We believe the capacity in place right now will facilitate our revenue growth targeting to break the $100 million mark in fiscal 2020 versus our record of $85 million in revenue last year. .

In addition, one of our socially responsible initiatives, our satellite sewing facility being built in close cooperation with the government of Jordan to bring high-quality employment to a rural area, in addition -- is anticipated to open in October. .

We also recently announced an agreement to acquire additional land near our central facilities in Oman in order to build new dormitory housing, which will be needed as we continue to grow our capacity. .

On the profitability front, we posted $0.14 per share in GAAP EPS in the first quarter despite the impact of lower gross margins as we were ramping up our new facility. We're off to a strong start against the last year's full year GAAP EPS of $0.45.

Our focus ahead will be on both adding capacity and generating greater operating efficiency at the level we previously enjoyed as our workers became -- become more experienced and our production lines mature. The strategic expansion is vital to meeting customer demands. .

As you may recall, last year, our first half grew at approximately 6% primarily due to our capacity limitations. The Paramount expansion has helped us address this constraint with immediate benefit in the first half revenue and in the full fiscal year as we burn in these -- this facility. .

A number of new customers complete sample orders and test runs. We anticipate that larger orders will be placed during this year. .

We also believe we are well positioned for growth in the second half of the year, which focuses on the production of warmer weather garments. Last year, we saw a big jump in the second half revenue of more than 60% year-over-year, providing a level of scale Jerash had not previously enjoyed.

We are seeking to not only achieve this scale again this year but also to grow further through the utilization of our enhanced Paramount capacity to create additional scale in this season of our business. .

Overall, this is an exciting, transformative time for Jerash. We look forward to reporting continued progress on these expansion efforts. .

Finally, I would -- we continue to look at opportunities to enhance our growth still further through strategic opportunities.

In addition to ramping Paramount and the satellite facility, we are -- we continue to look for appropriate acquisition opportunities that combine our focus on disciplined evaluation criteria, strategic fit, vertical integration and geographic enhancement.

We have strict criteria and have looked at and passed on a number of transactions, but we also continue to have a strong balance sheet with cash and borrowing capacity to move swiftly and fund the right transaction when we find it.

As we have stated, we can't predict the exact time for when the company -- for when Jerash will find a company or asset that meets our criteria but we remain diligent in our efforts to enhance our growth through responsible strategic execution. .

In closing our prepared remarks, I want to reiterate that we had a strong first quarter in both revenue and GAAP profitability, and our focus going forward remains on growth, growth in top line, growth in bottom line, growth in our customer base, growth in our production efficiency and growth in our total capacity.

We look forward to reporting these efforts through the upcoming year. .

We now welcome any questions that you have. .

[Operator Instructions] We'll take our first question from Michael Kawamoto with D.A. Davidson. .

Just first off, I understand you said 100 basis point headwind from Jerash 4, but what did margins look like in your legacy facilities? Were they on plan and similar to last year? Or was there some pressure there as well?.

No. Great question, Michael. This is Rich. Thanks for the question. The legacy factories were on balance with last year. So not -- no change. It was really Paramount that put the drag on this. .

Okay.

And then should we begin to see year-over-year comparisons start to improve in 2Q?.

Great question. We -- I'd like to say yes, Michael, but I don't know that it's going to happen that fast. So we're already -- the core has to wait through the second quarter and Paramount is ramping up nicely, but I'd be hesitant to say that we're going to see margins in line with second quarter prior year.

I think we'll see improvement versus this Q, but I don't know that we're going to get back to the levels we saw second Q last year this quick. .

Yes. I mean I'll add that, Michael, yes, we do expect -- on a sequential basis versus Q1, we expect gross profit to improve. Will we get to -- back to the -- to where we were, it may take, as Rich mentioned, another -- a little bit more time.

But we will see -- we do expect to see improvement, and we do expect to see -- as we traditionally do, a nice, strong quarter in Q2. .

Yes. That's helpful. And then I guess looking at your K, it looks like VF grew faster than the overall company last year. Just curious how you're thinking about customer diversification from here and where you see them shaking out of the customer as a percent of revenue for FY '20. .

Yes. So Karl, we were talking about this just precall about all the new customers that we're bringing on. So we've got new customers, Michael, that we've brought on and that are doing sampling. Eddie Bauer is a new customer, G3, Nike has been through our factory.

So we continue to focus on customer diversification, New Balance and Reebok were new customers last year. And I think it's a matter of how quick can we ramp them up. .

As you know, VF is such -- or the North Face is so large that it will be tough to bring new customers on and see a significant change. Could we bring that -- they were like 78% last year, Michael, on the K. Can we bring that down a few points? Certainly. But it is, again, add a new customer that is going to change that dramatically.

At the end of Karl's remarks, he talked about M&A. That's -- we've talked previously, that's one of the things that really attracts us to M&A. Let's do a great transaction for the shareholders that will be accretive, but also I think that's a transaction that's really going to get us more diversified from a customer standpoint.

But we're making ground on it, but it's tough to move the needle when you've got a 75-plus percent customer. .

Yes. I mean overall that's correct. But it is important to note, Michael, that we are adding new customers like Eddie Bauer, Nike. They're all in our facilities doing test runs and even going on to larger orders, and we expect to see some new customers as the year progresses.

So especially -- I mean we now have the opportunity to do that because of the Paramount capacity that's been added, that's been very helpful in terms of new customers. .

That's helpful.

Is there -- do you have any idea on like a -- or an average on a time line from test to doing full orders? Or is it pretty unique to each customer?.

I think that's a... .

Yes. It's a pretty unique question. I mean it can be anywhere from -- we've experienced as quickly as a couple of months, but that's usually when we do a big favor for a customer. And they need us and we come in and do an order for them that another manufacturer was unable to do, and then they'll see our quality immediately and they'll place an order.

But more traditionally, it's a 6- to 12-month process going through getting comfortable with our facility, making sure the quality is there, and then we start to see a large order placed.

So we could -- as -- we're talking with some very large new customers, and there's certainly the possibility that we could see some sizable new orders coming later this year or beginning of next year -- or I would say early next year.

Does that sound about right, Rich?.

Yes. You -- perfect. That's a perfect answer, yes. .

Our next question comes from Dave King with ROTH Capital Partners. .

So I guess first off, digging into the gross margins a little bit.

Karl, did you say you expect gross profit to improve sequentially in Q2 or gross margin, or both?.

Both. .

Both, yes. .

Okay. Perfect.

And then in terms of the quarter, in terms of the 100 basis point impact that was there, was that all inefficiencies in terms of the ones that, Rich, you talked about? Or was there some outsized start-up cost in there as well? And I guess what I'm trying to figure out is, as you get those inefficiencies addressed, is the improvement magnitude only 100 basis points? Or it could be more than that?.

No. It's a great question, and it's -- it's funny, as I was looking at my remarks, it was -- it's twofold. So the 100 basis points really refers to -- I would -- I don't know that I'd use the word outsized, Dave, but that's a fair characterization.

We turn the lights on and all of a sudden, we've got overhead and 500 people, labor and then overhead, that we need to absorb. And we didn't produce enough products, really do a ramp up with the new staff, to fully absorb those. So that's what drove -- that's really what the 100 basis points refers to. .

If we look -- if we go back historically, and you've heard me say this, over a 4-year run, your margins went from, call it, 17.5% to mid-20s. And that really is a result of, I'll call it, burn-in, the employees becoming more efficient.

So our immediate impact, Dave, and what we'll see begin to remedy in the next couple of quarters here is our ability to fully absorb those costs. And then I think what we'll see in quarters thereafter is that the workers becoming more efficient as they're sort of indoctrinated into the Jerash process. .

Yes. It's obviously a big undertaking to train 500 new employees, which is what we've now bought into Paramount. We have another 500 coming in soon. So we are going to get to the 1,000 employee mark this year at Paramount.

But training them and really getting the lines running efficiently, it's a significant undertaking, but we're well on our way to making that happen. .

And the other important thing to note is, right now, just as we're training and getting these new employees ramped up, we're doing -- we're primarily using Paramount for Walmart, which is a low-margin customer, obviously.

So we expect, as these guys become more efficient in the next quarter or 2, that we can start using Paramount for higher-margin customers. So that's -- so we do expect to see increases in gross margin as we go forward. .

Okay.

And then in terms of what was going on at the legacy facilities, were you still having any outsized test orders, rush orders or local orders in the quarter?.

No. Like I said, in the first quarter, first couple of quarters, it's really outdoor, right? So it's primarily North Face. And we had the legacy facilities hummed along. They were at capacity.

They drove the margins that we expected -- there was a little bit of test, but that isn't going to impact on margins and those -- the first 3 factories functioned as we would've expected. .

Yes. But we did... .

Okay. I think -- go ahead, Karl. .

I mean we were having some tests done. I mean we are working with, as we mentioned, Nike and Eddie Bauer are 2 examples of some larger customers, and New Balance also. They're all doing -- they are continuing to do test runs, and we expect those companies to convert to much larger customers going forward, assuming the test runs go well.

And we've always had success with test runs, so we're optimistic. .

Karl is right, Dave. I mean Karl is right, but it didn't have an impact on margins. .

No. It didn't have much of an impact on top line or bottom line. I mean test runs are always very small, so it's really just getting the customers comfortable. .

Okay. That make sense. In terms of -- switching gears, in terms of SG&A, it sounds like some of the -- I think it's like $600,000 if you back out last year's stock-based comp -- in terms of the increase.

How much was related to kind of bringing workers over for this Paramount? I guess get -- I'm trying to get a sense of what's sort of the outsized level of increase.

And then how should we be thinking about SG&A on sort of a go-forward basis?.

Yes. So it's a couple of hundred thousand dollars of increased SG&A in this quarter, for the first quarter, really from onboarding, recruiting, going to other countries, the visa work for bringing those folks on.

And on a go-forward basis, I'm looking at my model, I mean we've got additional, I'll say, Paramount-related onboarding costs sort of at this level, Dave.

So I'd expect to see -- I mean we had $2.6 million this quarter, I would expect to see $2.5 million, which was our -- I think that's probably the level I would expect from an SG&A basis on a quarterly basis for the balance of the year. .

Yes. And certainly we had public company costs, which have now -- we -- you started to see the full impact of that. So the SG&A not -- it has grown, but it's stabilized. So we think what you see this quarter is going to be -- should be pretty consistent as the year goes on. .

Okay. Perfect. And then last one for me. I saw you bought an office building in Hong Kong, I think, subsequent to quarter end.

How many people do you expect to have in that location?.

So first of all, the Hong Kong office purchase, there's roughly 20 to 25 people in the Hong Kong office, just to give you -- answer that question.

The Hong Kong office is a related-party transaction, and so we are -- we can't really talk much about it because it's currently being reviewed by -- we have -- as you need to do, we formed a Special Committee with 3 outside directors to review the transaction and make a determination as to whether it's good for Jerash.

So the transaction has not happened yet, and it's going to be subject to the Special Committee approval, which they're going through right now. So it's still -- there's still a wait and see -- it's really a wait and see to see where the Special Committee comes out on that. .

[Operator Instructions] Our next question comes from Mark Argento with Lake Street Capital Markets. .

Just wanted to drill down a little bit on just the ability to add more capacity. It seems like you guys don't have a hard time filling up capacity. So the issue you have though obviously is that sometimes it comes in at lower margin, kind of higher-run, lower-margin type business, which it is what it is. If that's the market, that's the market.

The thinking here is, how do you expand your capacity more quickly than you have been able to, to date? It seems like there's plenty of business out there. You guys are proven -- you're proven operators.

Why not get a little more aggressive in terms of putting up more capacity? It seems like you're leaving money on the table, any thoughts there?.

Yes. So I'll give it to Karl. Yes, go ahead, Karl. .

Go ahead. .

So I guess -- I look at it a couple of different ways, Mark. Agreed 100%, we can't add capacity fast enough. And when we look at Paramount, Paramount is interesting. So our operators tell us that Paramount can add -- can produce 1.5 million to 1.8 million pieces, but depending on product mix, up to 3 million pieces.

So I think that gives us an interesting exercise, how best to utilize that to drive the best gross margin dollars, right? This sewing factory that comes on in October will add some capacity. Not a full factory, right? It's sewing, cutting has got to be done somewhere else. So internally, we take a look at that. We're focused on M&A.

I'll let -- pass the microphone here to Karl in a sec. But to your point, I mean at some point, we've begun to think through, does it make sense to build capacity ourselves, organically build a new factory? So we can't wait for M&A forever. So those are definitely internal conversations. .

But Karl, you've got additional color, I'm sure. .

Well, yes. I mean I pretty much agree with what Rich is saying, Mark.

We really look at capacity expansion in a couple of buckets, one is kind of Paramount-type transactions, local Jordanian factories that we can pick up for low cost, and -- obviously, there's a ramp-up period, so you really have to do those -- you can't like go and do 2 or 3 of those at once.

You really -- we need to get Paramount really running and humming with high efficiency this year, and then we'll be in a position, if we can, find another Paramount later this year. But we are actively looking for capacity in Jordan and other Paramount deals right now -- pipe deals, I should say. .

Secondly, we look at just building a facility. That's a more expensive proposition. We are building, as we said, the dormitory, which we expect to house roughly double the number of employees that we have right now in our current dormitory. So it's -- we are clearly building it. It's going to be brand spanking new and a really nice facility.

So that's an example of building something from scratch, which we will -- we are looking at on the factory side. .

And then finally, M&A, of course. We -- larger M&A, where we can pick up a company that has revenue and profits that we can -- hopefully, they have excess capacity available for us, and we can both pick up revenue -- new customers and excess capacity through a more sizable acquisition. So those are sort of the 3 areas we're looking at.

We're looking at all of them very closely, and we do want to get more capacity built into Jerash as -- during this year. We're looking this year to add so that we're in a position for, again, sizable incremental growth next year. .

Okay. That's helpful. And then just going back, just so I can better understand, so the margin, you got the 100 basis point hit to gross margin on scaling the new Paramount facility.

But the delta between, say, last year's 25% gross margin and the 20-ish percent, you got 100 bps, there's another 400 basis points there, and I'm just making sure I kind of bucketize in these correctly. So one is product mix, right, and then kind of, we'll call it, order size or order mix, short run so on and so forth.

Relative to last year, is it a -- was it a product mix -- difference in terms of product mix year-over-year or was that order mix driven, meaning the short run versus the long run? Just if you can do anything to kind of the peel the onion on that a little bit more, that would be helpful. .

Yes. Order mix, Mark, and again, not a -- you're -- I mean when you dive at that level, you're right, it's order mix. From a product mix standpoint, it was -- if you were on our factory this quarter versus this quarter last year, you'd see the same thing, it's the fleeces primarily, it's the jackets for the North Face.

So it's typically or mostly -- largely the same product. Again, Karl said Paramount had some Walmart product that may have been different, but sort of segregated that to Paramount. So no, if you peel it back, it was -- I'll call it order mix as opposed to product mix. .

And in the Paramount, the -- as we've mentioned before, the North Face margins, just -- they declined slightly, and the -- so the drag really was the Paramount facility. And so when that ramps up, we're optimistic that we'll get the 100 basis points -- maybe we're trying to be a bit conservative there.

We just want to make sure that we don't overpromise the ramp up, but there's clearly an opportunity to have margins move back to something more in the range of what we saw historically. .

And our next question comes from [ Todd Gray ] with RHK Capital. .

I was just looking at -- you had some foreign currency translation gains for this 3 months and the comparative 3 months last year.

As you ramp up and move forward and sign new customers and contracts, are those going to be mainly in US dollars? Are you going to do any currency hedging? Or what's your status there?.

It's a great question. It's primarily orders in US dollars. To date and historically, currency has not been a significant line item in our financials. But to your point, as we go forward and we look at working capital management, I'll call it, in total, that's certainly an area that we can focus on, [ Todd ]. .

Okay.

And going back to the Hong Kong purchase, with all the craziness that's going on there, is there a chance due to their currency being weaker or due to the events over there that the purchase price could change from the $8 million that you were evaluating for that Hong Kong office space?.

Well, again, this is being looked at by the Special Committee, and part of what any special committee does is to hire someone to do valuation analysis on the purchase price. So -- and of course, as that analysis gets done, the impact of the turmoil in Hong Kong will be part of the analysis.

So that certainly could -- but we're not privy to what the Special Committee is doing and looking at, but it would certainly be a factor that they would look at closely, so -- in making that decision. Yes, okay. .

And there appear to be no further questions at this time, so I'll turn it back over to Karl for any closing remarks. .

Great. Thank you for participating in today's call. We're excited about the first quarter revenue record and our initial factory expansion. However, without question, we believe the best is still yet to come given what we see in our pipeline.

We look forward to continue to execute on our capacity margin and profitability goals as we work to grow shareholder value. Growing shareholder value is always our first and foremost focus, and then continuing our efforts to identify and execute the right strategic opportunities is certainly a focus. .

We'll be conducting multiple outreach and conference events this year. One notable one, we will clearly be at will be the Sidoti Conference in New York City on September 25. I think we have may be at least one other conference we'd be announcing in September.

And we welcome the opportunity to meet at these events and also more than welcome to meet with Rich and I in person or via conference call. Please contact Matt Kreps at Darrow Associates, Matt is listed at the bottom of our press release, to arrange a phone call or in-person meeting, if you'd like. .

And thank you for your participation and have a great rest of your day. .

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day..