Greetings, and welcome to Jerash First Quarter Fiscal 2021 Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. I'd like to remind you that this conference is being recorded.

It is now my pleasure to introduce Matt Kreps, Managing Director at Darrow Associates, Investor Relations. Mr. Kreps, you may begin..

Thanks, Karen. Good morning and welcome everyone to the Jerash Holdings fiscal first quarter 2021 results conference call. With me today is Gilbert Lee, our Chief Financial Officer; and Eric Tang, who leads our operations in Jordan.

Our results press release issued earlier today is available on the Investor Relations section of our website at www.jerashholdings.com.

You can also see a link titled Face Mask Production in the top level navigation at the site and that introduces some of our new PPE products, including a video of production of these products in our factories in Jordan. Today's call is being made -- is being recorded and will be available for playback. All participants will be in a listen-only mode.

[Operator Instructions] The operator will provide a detailed reminder of the Q&A instructions once management has completed their prepared remarks today. But 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, peak, 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 including our most recently filed Form 10-Q and Form 10-K. 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 results 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 would now like to turn the call over to Eric Tang. Please go ahead..

Gilbert, are you going to continue?.

No, Eric. You'll start first..

So hello, everyone. Okay. I'm pleased to join all of you today for this call. So the fiscal quarter for Jerash ended June 30 and included the most challenging point of the global COVID-19 pandemic for the U.S. our largest end market.

Like many, we began the quarter with a high degree of uncertainty exactly how this would impact our revenue activities and for how long. Well, the good news is that – okay, the reply to this question for Jerash is far better than we anticipated. Okay. Revenue in fact has declined just about 17% over the year.

This is in large partly due to the two factors. The first factor is our efforts in winning new business last year pay off now with a large increase in orders from new customers in the first quarter, which accounted for about 16% of our total revenue.

And this included customers like the New Balance and DICK'S Sporting Goods plus increased activity on new orders from G-III. Second factor is we were able to confirm a larger part of our orders with existing customers and particularly our largest customer VF North Corporation the North Face brand.

Our business with North Face was down in the quarter about 35% over year – okay, and this will be disclosed in our 10-Q filing, but it is expected to move narrow significantly in the coming quarters based on the current progress of order confirmation. So we believe, this is due to these two factors.

First, Jerash our factory is well known for its highly reliable manufacturing for quality and on-time delivery. Secondly, the financial benefit of a duty-free import from our factories in Jordan is a tremendous cost saving at the time, when our customers are looking to reduce cost. This is – this reason is very attractive. Okay.

This is the reason why many buyers are looking for duty-free country production. The North Face is a great brand with great products and a great customer for Jerash. As with all our customers, we have worked closely to adjust orders and delivery timing, including pushing back some models where necessary.

This has shifted some orders not just into the second quarter but also into our third quarter. Our factory ability not only to work closely with our customers to maximize our business opportunity, but also to remain profitable through this pandemic illustrate the strength of our team and dedication to doing whatever is needed to get the job done.

I want to thank very much for Jerash team for their hard work and dedication through this time and I know that we are all looking forward to get the rest of business to normal very soon. So that provides a good bridge to our outlook as well. Our second quarter ended September 30, was a record quarter last year at $30.6 million.

Right now, our factories are booked to a similar ratio as before with a decline of about 80%. However, we have a few orders that may accelerate and reduce this distance and we continue to work closely with customers to manage delivery time line.

Either way, we will have good sequential growth over the first quarter and also expect to grow gross margin as we continue to increase volume through the factory. So I'm going to pass to Albert – Gilbert. But before that, I want to update you on the current situation in Jordan.

Jordan acted very fast and decisively early in the pandemic to issue curfews and shelter-in-place order, as you know this affected the last two weeks of our March quarter but it was also enabled Jordan to do a very effective job containing COVID and return to manufacturing in our facility more quickly using our dormitory workforce who could be effectively quarantined and kept safe.

We also implemented a number of additional cleaning regimens and workplace protocols to better protect the safety of our workers and we continue to do so. We are also making shift steps to enter the PPE market and commence first shipment to customers and more orders coming in. Okay. In a short, while Gilbert will address that in more detail.

Please Gilbert..

Thank you, Eric. Hello, everyone. I'm pleased to join all of you today to discuss our financial results, which were much stronger than expected for the fiscal first quarter ended June 30.

Our results demonstrate the benefit of our new customer development initiatives as well as the resiliency of our business, due to its important economic advantage to our customers' cost of goods and overall profitability. Let's cover some of the details from our financials and business performance for a few minutes.

Revenue in the first quarter of fiscal 2021 was $18.7 million and about 16% of our revenue in the first quarter was related to new customers won in last year. These new customers continue to increase order volumes with Jerash.

This helps to further our goal of diversifying our customer base and we are very excited to continue building relationships with new logos. Revenue from legacy customers was down year-over-year, mainly due to the impact of the COVID pandemic, but reflected a higher number of orders reinstated as customers prioritize Jerash for their production.

In total revenue was down approximately 17% year-over-year, but far less than what we are seeing across the industry.

Our customers have also seen good success in their efforts to shift to online sales and to open -- and to reopen brick-and-mortar stores in markets affected by COVID-driven closures, a trend that appears to be generally increasing as we continue to move ahead.

We are pleased to see this continued positive progress and that our customers are finding success in reaching their end customers which helps drive greater demand for our factories and increase production orders. Turning to gross margins. Gross margin declined due to lower factory volumes to 16.3% compared with 20% in the prior year quarter.

Gross margin also reflected changes in product mix and customer mix due to the pandemic and the increased volume from new customers. Operating expenses continued to decline in the quarter to $1.9 million, a decrease of 27.9% as compared with $2.6 million in the previous first quarter.

The decline in OpEx reflects cost saving programs we implemented as well as a reduction in start-up costs for Paramount that were incurred last year. As a result, net income was $0.07 per share. We recently announced continuation of our dividend payment of $0.05 per share to our common stock shareholders.

We continue to evaluate the dividend each quarter and continue to generate positive cash flows from operations to fund both our strategic objectives and dividend needs. Our balance sheet remained very strong with cash and restricted cash at June 30 of $18.5 million versus $26.9 million at March 31.

Our cash flow in the June quarter actually improved by $2.5 million, compared with the same quarter in prior year. Due to the seasonality, we generally use more cash in the fiscal first quarter building inventory and increasing receivables.

Inventory was $18.1 million, which includes goods produced but deferred for shipment until later part of fiscal 2021. Accounts receivable increased to $15.9 million due to the later weighting of shipments in the quarter and extended payment terms granted to some of our customers.

Approximately, 81% of the June receivables have been collected up to today. Perhaps the best measure of our overall balance sheet improvement is working capital that increased $600,000 sequentially to $48.7 million at June 30 compared with $48.1 million as of March 31 2020.

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. We expect Jerash's performance to remain solid in the coming quarters, as we continue to work closely with our customers.

Based on orders to date for the quarter ending September 30, we expect revenue of about $25 million or 34% sequential growth over the fiscal first quarter. This could be increased by shipments scheduled late in the quarter or additional PPE activity, but we believe it is prudent to remain conservative in the current environment.

I want to talk about a few other aspects of our business as well, most importantly, our entry into the PPE market. Last quarter, we announced that Jerash produced some PPE supplies at the request of the Jordanian government. We subsequently produced and shipped masks to a new U.S.

customer and we are growing this aspect of our business to include other PPE supplies like surgical gowns and other products. We're expanding our sales opportunity through qualification to ship to the EU and the U.S. and partnering with factories that have existing certifications and capabilities to accelerate this opportunity.

These new categories are good opportunities for Jerash and we continue to build on our capabilities.

To facilitate this expansion of our addressable market and our PPE market development efforts, Jerash incorporated a new entity, Jerash The First Medical Supplies Manufacturing Company Limited, which has received temporary approval from Jordan’s Food and Drug Administration for the manufacturing and export of products including non-surgical masks and gowns.

We have already produced and shipped some of the subcontracting orders of surgical masks and medical gowns for customers in Jordan, the Middle East and Europe beginning in July 2020. Jerash intends to pursue additional certifications and partnerships for this subsidiary and is presently engaged in efforts to do so including U.S. FDA.

We are also continuing to work hard on increasing orders with both new and existing customers, particularly in helping our customers lower the cost of goods compared with less favorable manufacturing areas such as China, where costs are actually higher than Jordan and import tariffs could reach to low 30% range on higher dollar products, while Jerash could export to the U.S.

with zero tariffs. We're also expanding our geographical production capability for shipments to other regions like Asia Pacific and Europe, particularly for customers like VF and New Balance, who have multi-regional sales network.

The initiative is achieved by working with overseas subcontracting partners in locations such as Indonesia and Cambodia, who have the certifications required by customers. Finally, we are actively looking for acquisitions and partnerships to expand our business and put our capital to work.

This includes both garments and PPE acquisition candidates, but we remain careful and diligent on both pricing and risks in the current environment. Upon finding the right candidate for strategic actions, we look forward to moving ahead. We now welcome your questions..

Ladies and gentlemen, the floor is now open for question. [Operator Instructions] We'll take our first question from Mark Argento with Lake Street Capital. Please go ahead..

Hi. Good morning, guys. Just a few quick ones. Can you estimate right now kind of what kind of percentage of capacity you're running at? And do you anticipate back at full capacity utilization in Q2, Q3? Maybe walk us through that a little bit..

Hey, Mark. How are you? Thank you for the question. About what percentage of capacity our factories are running at, maybe Eric could better answer this question, because he actually runs the -- yes..

Okay. According to our order status currently, okay, starting from today until to the end 31st of December, okay, we are fully booked. That means, okay, Jerash is running at 100% of its own capacity, and we are also a little bit overbooked of about 10%.

I'm trying to find some subcontractor, okay, to make -- to manufacture the orders for the over-book..

Okay. And just a follow-up there.

So, is it a mix thing when you have some of your outerwear looks like that order book from those customers has maybe been a little bit impeded, and then you have, PPE ramping up? So, has there been a mix shift within the capacity utilization?.

Well, there's definitely a lot of changes going on within our manufacturing factories. Yeah, we're spending some of the capacities on making PPE products. That was why we started up a new facility a new subsidiary basically dedicating to do just that. We're also using some of our existing capacity in Jordan to make some PPE products.

So -- and also for new customers, some of them are for outerwear, but some of them are also for other product mix such as T-shirts and sporting pants and polo shirts. So there are some changes going on. It's hard to say how many million pieces that we are producing and comparing to our existing capacity..

In the longer-term, I know the business model is still a little bit being developed.

But on the PPE product lines, do you anticipate margins -- margin profile similar to the overall business better or worse? What are your thoughts on what that product line could look like from a margin perspective?.

Well, we anticipate the PPE product to be at least the gross margin that we have been experiencing with the garment and apparel products and that's our goal if not getting a better margin, because we do have raw material as well as manufacturing cost advantage doing it in Jordan.

So -- but at this point, we are still developing this particular product line and this business model. So it is hard for us to estimate what kind of margin we're going to get.

It has to depend on where the products are shipped to, to what type of customers, if it is shipped to Europe or the Middle East and comparing to shipping to the United States where we are trying to develop direct customer relationships. But sometimes we might have to sell to some middlemen some distributors.

So it all depends on what volume are sent to what customers. Generally, we want to first cover our factory profitability first and then we will look at whether we are being competitive in whatever markets that we are competing in.

But we are very confident that because of our competitive advantage producing those products in Jordan, we feel that we should be -- it should be a very profitable business..

Gilbert, can we -- can I add in something?.

Sure, of course..

Yes. Well, I want to answer Mark's question. It's okay. Now, Jerash has just started a few months for the PPE product. We are handling the PPE products in different categories. For very big numbers of supply usually we are invited or participate with another company in a tender. Usually it is a government tender.

Like for the past two months Jerash has participated in tender for Saudi Arabia market and also the market in Jordan. For this kind of tender, which involves big number of quantities average -- because in order that we make the price competitive we have to be -- I mean, around 10% of our gross profit.

But for tailor made for some customers just like the washable face masks we are doing for a particular brand our profit margin can be -- go up to 20%. This is the difference..

Thanks Eric for clarifying that..

Okay. Thanks..

We'll take our next question from Howard Halpern with Taglich Brothers. Please go ahead..

Good morning, gentlemen. I am little bit new to the story.

So I'd like to -- you to provide a little perspective on how, has the sales process changed in -- over the past two quarters, compared to prior years?.

Hi, Howard. Welcome.

So your question is how the sales process changed, over last two quarters?.

Yeah, with probably less contact with customers and more -- is it the process being longer, maybe a little more complicated? How has it evolved, I guess, in the COVID environment?.

Well, definitely because we cannot travel to meet customers which, Eric used to do quite a bit in the past coming to the United States meeting with our existing customers, or new customers, but because of the travel ban, those cannot be done.

However, our Hong Kong sales and marketing teams, the merchandisers, they constantly are in direct contact with the buyers, in Hong Kong. And they will develop the orders, the development of samples, and merchandising, and all the negotiation, and purchasing.

So I don't think it really impacts us that much, other than not having be able to just visiting customers. So -- but I hope that, it will change or get back to normal real soon..

Okay. Do you have a general -- this is on the PPE side. Do you have a general feel of what the market size or market potential is for -- if you just take the Mid East and then Europe, I know the U.S. is quite large.

But if you could just give us a sense of, the Middle East and Europe and what the potential there is?.

I don't have the Middle East and Europe, market size. But based on some reports that I've read about the global PPE particularly in the health care sector, it is about $16 billion globally. U.S. is a little bit -- is smaller. I think U.S. is only about one-point-some billion dollars.

So I think overall, Europe, Asia is probably the majority of the global market..

Okay.

And the process to get qualifications is that -- should that only take -- should that take a couple of months? Or it's hard to say, when you'll get general qualifications or certifications and approvals to sell into certain markets?.

Well, for the -- for Europe and for the Middle East, we already have the approval to sell. Europe is basically the CE Mark. And we are in the process of getting the CE. And we anticipate to, get the approval, within two months, from now..

Okay..

But we're also already producing and shipping to a large customer in France, through a relationship that we have or a partnership that we have with another company that has already got the CE approval. So that part is already ongoing. Jordan, we already got the Jordan FDA approval. So we are able to sell in the Middle East.

For the United States, obviously it's the U.S. FDA. We have already registered our facility with the U.S. FDA. So that is already done. We will be able to ship to the United States.

But for certain like more protective type of PPE that are used in surgeries that are used in medical facilities, hospitals some of those require a higher level of approval which is called the 510(k) notification. And we are in the process of getting that from the U.S. FDA and this will require some time probably a few months up to half a year. .

Okay. And one final one for me in Jordan.

What type of production potential or increase do you -- I mean do you have the room to increase your capacity within Jordan build another factory or expand the current factory?.

Yes. We're constantly looking at that, but let me ask Eric to answer that question more specifically.

Eric?.

Yes. Okay. In Jordan, we have five factories, including one the so-called satellite factory newly set up. So our four main factory already fully booked, okay. And for the new factory, we call it Jerash number five factory, which we consider it as a satellite factory, okay. We have a capacity of 1000 workers.

Now we have only around 300 workers working inside the factory. So when orders are increasing, we still have the capacity to be able to grow for another 400 machines that can be -- that means the order -- we can also grow at least 10% to 15% of our global order. .

Okay. Keep up the great work, guys. Thanks..

Thank you, Howard..

Thank you very much..

We'll take our next question from Katy Hallberg with D.A. Davidson. Please go ahead. .

Hi, guys. Thank you so much for some of the clarity on the PPE. I was a little bit more curious on what the order book looks like for the winter. I mean are you guys getting a lot of orders for outerwear and especially compared to last year? Thank you..

Thank you, Katy. So we -- our outerwear business is primarily with VF or the North Face. And what I know is VF is constantly working with our merchandisers in Hong Kong to update their orders update the delivery time. And so far what we have gotten is the reinstatement of at least 80% of their original order for this coming year.

So that would be the I guess the winter season. But we also have new customers and that we are developing for outerwear. Eric, can you... .

Yes. Okay. Let me give some I mean the figures. Our biggest customer we have which is the North Face for the spring order up from now on until next February, I think we have almost I think the same number of quantities like last year, maybe it's only less than 5% difference.

And for New Balance, we have more orders than -- I'm expecting more orders than last year because New Balance is our new customer. And New Balance, last week their sourcing team told us that they are shifting most of their orders from another country called Haiti to Jordan to Jerash.

It is because before Haiti is producing maybe over one million pieces a year for New Balance, but because of recent on-time performance and quality issue they have decided to start shifting the orders to Jerash to Jordan starting next month. So we are expecting that the New Balance order will be more than last year.

And also, this year, we just started with a new customer. We have already took these three purchase order from a new customer called American Eagle. So the total number of pieces we have taken from American Eagle is 16,000 pieces. I'm expecting more orders will come in the later half of the year.

And also Jerash is also picking up more orders on the PPE. And then month by month our -- I think the volume of our demand for PPE manufacturing is -- will be higher and higher. So this is the latest situation of our capacity..

Thank you.

Does that answer your question, Katy?.

Yes. That definitely gives me a lot more clarity. Thank you so much.

And then, I guess just in general, how long are you guys expecting to produce PPE? I mean is this something that you intend to permanently keep within your offering? Or is this more kind of a shorter time horizon like two to three years?.

Now, this is going to be a long-term strategic development. We were definitely entering this particular market. That's why we started up a new facility and a new entity just to dedicate on this particular business..

Okay, wonderful. Thank you so much..

Thank you..

We'll take our next question from Brian Cobsic [ph], Private Investor. Please go ahead..

Hey guys. I know you guys are in a highly competitive industry over there. I just wanted to get an idea about, what the competition looks like over in Jordan. Are they producing PPE? And are they kind of ramping things back up? Or are they slowing down and you're picking up what they're not able to pick up? Thanks..

Thank you, Brian. Yes. We are in a competitive industry, but we are much better off than our competitors in Jordan. I heard that there are a number of factories that are actually shutting down or losing business that just cannot survive. So, maybe Eric you can give some updated information about what's going on in Jordan..

Okay. Because of the COVID virus, a lot of -- because most of the factories is manufacturing -- is exporting to nearly 100% to the U.S. market because of the JOFTA Free Trade Agreement between U.S. and Jordan. So, starting in February, when the COVID-19 spreads in U.S., many of the buyers have reduced the orders significantly.

So -- and this is the reason that some of the factory are facing a cancellation of orders from even 80% down to 30%. So for some factory, who cannot be able to catch up with supplement orders to clear up their capacity, they are closing down. Currently, at least five to six factory already shut down in Jordan. This is the latest situation.

But Jerash, as we explained before, our major buyers -- also we have facing reduction of orders, but it's only around less than 20%. And we have been able also to catch up with new customers and that replaced some of the capacity being I mean cut down by current customers.

And also with the emergence of our PPE products and the demand is relatively higher day by day and this also can be able to supplement all our weakened capacity, which is a result of the cut down of orders by our regional brand buyers. This is our situation..

Thanks..

Okay. Thank you..

That will conclude our question-and-answer session for today. I'll now turn the floor back over to Mr. Kreps for closing remarks..

Thank you, Karen and thank you everyone for participating in today's call. Jerash is off to a strong start in fiscal 2021 and our outlook anticipates sequential improvement in both revenue and gross margin.

Jerash will be conducting multiple outreach and conference events in the coming months, including the LD Virtual Conference event on September 3, which anyone can join to listen to our presentation. And we'll be hosting one-on-one meetings with the management team for investors participating in that event.

If you have additional questions or would like to arrange a meeting at an upcoming conference event, please contact me directly using the contact information at the bottom of our press release. Thank you for your participation. Stay safe and have a great day..

Ladies and gentlemen, 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..