Good morning and welcome to the Jerash Holdings' Fiscal 2022 Second Quarter Financial Results. At this time, all participants are in a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor to your host Roger Pondel, Investor Relations for Jerash Holdings. Sir, the floor is yours.

Thank you, Kathryn, and good morning, everyone. Welcome to the Jerash Holdings fiscal 2022 second quarter earnings call. I'm Roger Pondel with PondelWilkinson, Jerash Holdings' Investor Relations firm. It will be my pleasure momentarily to introduce you to the company's Chief Financial Officer, Gilbert Lee; and Eric Tang, who leads the company's operations in Jordan. Sam Choi, the company’s CEO unfortunately is not able to join us today because of the prior business commitment. Before I turn the call over to Gilbert, 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 factor section of the company's most recent Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission, 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 Gilbert Lee. Gilbert Lee?

Thank you, Roger, and hello everyone. Our fiscal 2022 second quarter results demonstrated continued strong progress. Revenue was at a record level for the second quarter, reflecting robust shipments to our largest customers as a result of strong demand and expanded capacity. Gross profits also represented a record for the second quarter, primarily due to higher revenue and gross margin performance. Our gross margin expanded to 22%, reflecting increased shipping volumes and an improved product mix in the second quarter. The robust momentum is continuing further into fiscal 2022 with orders for the year-to-date that we believe will lead to a revenue run rate for the year that will exceed our prior record. As a result, we have increased our revenue outlook for the full year. We continue to advance plans to increase capacity in our existing facilities and secure additional capacity to meet our customers needs, both by building new facilities and through leases and acquisitions. We recently completed the acquisition of operator of a 71,000 square-foot manufacturing facility in Amman, Jordan. Our agreements to acquire the related physical premises is expected to close by early next year. Eric will provide more details in a moment. I will now turn the call over to Eric Tang, who is based in Jordan. And after I will cover the financial results in further detail. Eric?

Thank you, Gilbert, and hello to everyone. Our factories in Jordan are extremely busy and we continue to add capacity as quickly as we can. Order volumes are up substantially and our product mix improved in the second quarter. This led to orders with higher average selling prices and margins than what we saw in the last fiscal year. Capacity is completely booked through the end of May 2022 based on orders from our largest global brand customers. As Gilbert mentioned we recently completed the acquisition of a new manufacturing facility in Jordan. Under the terms of the agreement Jerash assumed a manufacturing licenses and existing fiscal operations including all machinery equipment, 500 workers and the dormitory. We took over production of the new facility in August, and we are now manufacturing products for our own customer. Our separate agreement to acquire the land and building that house the apparel manufacturing operations is expected to close in the next month or two. The new facility is expected to enable Jerash to produce approximately 2.5 million to 3.5 million additional garments per year. That is approximately 20% to our current annual capacity is increased. In addition, the facilities give us the ability to scale up even further. construction of a new dormitory for our multinational workforce is progressing well, which is expected to be completed by the third quarter of calendar year 2022. The high-quality living space with comfort designs and highest [AST] [ph] measures will help position us for growth and further our ESG goals. With that, I will turn the call back to Gilbert to discuss our financial results and fiscal 2022 outlook. Gilbert, please.

Thank you, Eric. Our fiscal 2022 Second quarter revenue rose substantially to $46 million from $27 million in the same period last year, an increase of nearly 70%. The increase was primarily due to higher shipments to our largest customers in the quarter. The highest sales volume reflects stronger demand as well as increased capacity. Gross margin expanded 40 basis points to 22.1% in the fiscal 2022 second quarter, compared with 21.7% in the same period last year. Gross margin expansion in the quarter reflects a higher proportion of export orders which typically carry higher gross margins as well as increased production and sales volume. Operating expenses totaled $4.5 million in the fiscal 2022 second quarter, compared with 2.9 million in the same period last year. The increase is primarily reflected headcount additions to support our growth, higher shipping costs that were in proportion with increased sales volumes and expenses related to COVID-19 precaution and recruitment of new migrant workers. Operating income rose to $5.6 million in the fiscal 2022 second quarter from 3.0 million in the same period last year. Comprehensive income attributable to Jerash's common stockholders increased to 4.4 million, or $0.39 per share in the second quarter from 2.6 million or $0.23 per share in the same period last year. Our balance sheet remained strong, with cash of $26 million and net working capital of $54 million at September 30, 2021. Inventory was $21 million, and accounts receivable was $13 million. Net cash provided by operating activities was $22 million in the fiscal 2022 second quarter, compared with $9 million in the same period last year. The net change was primarily due to working capital activity. Inventories and accounts receivables decreased to normal levels in the second quarter following strong increases in the first quarter. We expect…

Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Your first question is coming from Michael Baker with D.A. Davidson.

Just a couple for me. One, so very strong results and we appreciate the increase in guidance. The guidance for the third quarter though 32 million is the midpoint often look pretty strong 55% year-over-year. But that is a little bit of a slowdown from the first half and even if you look at on a two-year basis, it's a little bit of a slowdown. And then, again, if we now have the full year guidance in the first half, and the third quarter guidance, we can back into the fourth quarter. And that's a further slowdown, in fact down year-over-year and a slowdown in the second quarter. So my guess is, it's just the uncertainty of the environment and don't read too much into it. But the numbers do suggest a slowdown. So I just was wondering if there's anything more that we should think about as to why the business might slow?

Hey, thank you, Michael. Yes, you're right. We're expecting a slowdown in the second half, comparing to the first half, the first half was definitely a robust half comparing to the pandemic impacted first half of fiscal 2021. But fiscal 2021, second half came back pretty strongly. So on a comparison basis, between the second half of fiscal 2022 versus the second half of fiscal 2021, the growth is not going to be as high as the first half. And we are still a little bit cautious, seeing the global supply chain issues that are basically heating everybody, which cause shortages on almost every product and long lead time. So we just don't know what is going to happen, whether this situation is going to improve or whether it's going to linger. So we just don't want to put too much hope on to Q3 and Q4. In Q3, we're pretty confident that we will hit the guidance number looking at all the orders that we have on hand. However, something might still happen. Just like last year, last quarter, at the end of -- toward the end of December, there was some delay in shipments. So we're just kind of being a little conservative in Q3 and Q4. So there's still some uncertainties out there.

Yes. That makes sense and I appreciate that conservatism. One more, I guess, maybe along the same type of lines, maybe the answer will be similar. But your year-to-date gross margin is 20.8%. You said full year expect high teens. So again, that implies lower margins at least sequentially in the back half of the year. I know that some seasonality in there, but again, anyways, why the gross margins wouldn't be quite as strong in the second half of the year?

Well, it's entirely because of seasonality, usually are strong, our first half would have stronger margins. And second half will be much lower. Because in the second half, we were producing for the summer or warmer type clothing. And the first half is mostly for winter jackets, outerwear products. And then, the second half, we also expect to have some higher volume below ASP sales to some of the mass merchandisers and more trading sales to new balance in the second half. So that will pull down the margin somewhat.

Your next question is coming from Mark Argento with Lake Street Capital.

Nice quarter. I do know, I mean part of the commentary in terms of the second half, the growth rate is, you guys -- I’m mean, comps get produced more aggressive in Q4, I think you guys were up 60 plus percent in Q4 of last year. So it's just kind of a lot of larger numbers there. But in terms of capacity utilization, you guys are at max capacity right now. Sounds like your books through May?

Yes.

What's the prospects or finding additional capacity to be able to kind of supply that demand that you guys see out there?

Well, we're actively looking. Actually, we're constantly looking for additional capacity. But at the same time, I think we still have some rooms to grow. First of all, at the newly acquired MK Factory, there's still room to increase number of people, increase the number of machineries. So those are probably ongoing as soon as we see the need, that will immediately -- we'll be able to immediately increase some capacity. Maybe, Eric, you can add something about the capacity growth.

Yes, currently, okay. We have 500 workers in our newly acquired MK Factory. But the total, I mean capacity MK can be able to accommodate is around 900 workers. So we still -- if the business is growing, we still have the ability to bring in another 400 workers to expand MK factory capacity. At the same time, apart from acquiring a new factory, we are also doing an in-house renovation. We have three factory producing garments, okay, in the industrial zone. So we are now making internal renovation, trying to group some of the departments together, in order that we have some more spaces to make more production lines. In this way, we will spend less money, but we can still be able to increase our in-house capacity. So this project is already carried out and will be finished maybe in the first quarter of next year.

Yes. At the same time, we were still studying and we should be able to start construction in the next three to six months on our larger piece of land that we plan to build a new factory. So we're currently still doing our internal studies and looking over all the engineering designs and constructions contractors bid or we haven't sent it out for bid yet but as soon as we finish our internal study, I think we will we'll get that going. So but that is a much more longer term of capacity increase.

How long? Like when can you bring a facility like that online? Is that a two-year build? Or how quickly can you turn something there?

No, actually, we're trying to get it down to within one year. Is that right, Eric?

Yes. Within one year and one year half.

Great. Just one quick question in terms of customers, I know you had mentioned in your prepared remarks that you saw an uptick, and I think you called an export order. So just want to understand what that was. And then any new kind of brands or customers in the mix, I know it's hard to go sell, additional manufacturing capacity when you guys are capacity constrained as you are currently, but any new brands or any new customers that you brought on the platform?

Thanks. Well, we try. We're going to run the trial order by ideas, but because of capacity constraint, we may not be able to bring them on in the near future, as one of our major customers, but I don't know, maybe there are some other potential customers talking to us. But at this point, I don't think we have any solid, big customer increase. Is that right? Eric?

Yes. We have been approached by Adidas last year. I mean, okay, sorry, I'm in the middle of this year, okay to see if we have capacity. But unfortunately, we are overbooked. So in order to do the -- I mean, pre-production arrangement, so Adidas send a team to audit Jerash factory and we got approval already. So we are now an approved vendor of Adidas. So Adidas already sent us one trial order around 10,000 pieces, okay, we are going to produce next year, February. So after this trial order, if the quality is acceptable to them, so they will proceed to discuss with how -- the capacity, we can provide it to them each month. So this is the latest situation of another big brand Adidas.

Your next question is coming from Rommel Dionisio with Aegis Capital.

In the past, you guys have in addition to talking about expanding production capacity in Jordan. You also talked about, looking at perhaps some additional capacity in China, just given all the supply chain issues going there. Have you have you sort of changed your view on that, and are looking to refill, you just increase your focus on Jordan? Or how do you guys think about that? Thanks.

Well, you're right Rommel. The current supply chain issues, actually, forming a trend that everybody is trying to shorten their supply chain. So getting a factory or getting capacity in China and supplying the North America or European market is just not going to be competitive. And maybe we misstated or misrepresented, but we have never even consider having a factory in China. We do have orders going into China by New Balance, but we supply those orders by outsourcing our production to two factories in Southeast Asia. So those are the so-called trading orders. And apart from the exporting order that we have in Jordan, which we produce in Jordan and export to North America or to Europe, those are the exporting orders that we actually produce ourselves. Now, of course, we also outsource or contract some of the production when we run our capacity to local Jordanian manufacturers, who are also qualified by our customers. In the Southeast Asian factories, they are also qualified by our customers, first, before we can outsource to them. So maybe that's some misunderstanding that we were looking for building or acquiring factories in China. But as you said, in the current situation, that may not be such a wonderful strategy.

Your next question is coming from [Michael Woo] [ph].

I have a question about new bench line. Can you give me some update on the New Balance, [indiscernible] business doing going forward?

Eric, do you want to take this one, on New Balance?

Are we talking about the New Balance?

Yes, yes.

Yes. We started New Balance, I think around one and a half years ago. And New Balance is trending actually to transferring more order to Jordan before, mainly they're producing in China and also some Southeast Asia countries. Now, because they understand that Jordan is having a free trade agreement with the U.S. and also the Europe. So from last year, they already start transferring most of the orders, stages by stages from the southeast Asia, China, to Jordan to our facility. And in Jordan, we are the only factory and apparel who is producing New Balance garments.

So, my question is, like, I know, you're doing really well, like last quarter, you did like 10 million, right? Do you have any numbers for this quarter, and then going forward, what’s the business, next outlook for New Balance line?

I think currently we are doing around 23% for New Balance garments, in view of our overall production. So, but this year and we are already talking with New Balance about increasing capacity and providing to them. So for our newly acquired MK factory, we can be able to offer more, I mean capacity for them. And they already told us that they need to do it. So we are, although it is not yet confirmed, we are expecting the New Balance business will be in the next year will be increased from 23%. Currently, maybe at least to 30%.

To answer your question, Michael, most specifically, last quarter, we did about $9.2 million with New Balance. And this quarter, we did about 6.4 million. The reason of the decrease this quarter with New Balance is because this quarter is primarily VF, the North Face, this is a very strong quarter for the North Face. But next quarter, we project new balance to be back into 10 million or 11 million level. So New Balance is growing very fast, very strong in terms of sales to them.

That's great. That's great. So how about the North Face line? I assume it's really strongly in this quarter. I mean, the first half, and if it exceeds the 2019 level or do you have a number for that negative for half year?

Well, the entire first half we did $57 million for the North Face.

Oh, that's a lot. Okay. Great. Thank you.

That's already higher than last fiscal year -- entire.

Yes. Great, thank you. Congratulations. Thank you.

You have a follow up question coming from Michael Baker.

Can you remind us last year it was in my model, the December 20 quarter, 3Q '21, gross margins were down about close to 800 basis points. What happened there? And as we think about the third quarter of this year, should we be -- two years ago the margin was 19.3, last year 11.7. What's the right expectation going forward for the third quarter?

I don't quite remember what caused that significant decrease in the gross margin. The sales was not that bad. I mean, obviously it was worse than the previous year because of the pandemic. So part of it would be due to not fully utilizing the capacity. And the third quarter, usually, we have more local orders, local meaning Jordanian orders that the margin really low, maybe sometimes even less than 10%. And we also had I'm trying to look back what the mix is for that physical quarter Q3, but I can’t find.

I guess, how should we think about it for this year? That's really the important point.

Well, for this year, it's going to be lower than the first two quarters, for sure. But it will be better than last year. We are projecting about 16.5% to 17% gross margin for this third quarter.

Understood. Yes. That makes sense. Okay. Yes. I appreciate that. Thank you.

We have no further questions from the lines at this time. I would now like to turn the floor back to Gilbert Lee for closing remarks.

Thank you, Kathryn. And thanks again to everyone for joining us today and for your support and interest in our company. We look forward to speaking with you again on our fiscal 2022 third quarter earnings call.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.