Good day, and welcome to Jerash Holdings Fiscal 2023 First Quarter Financial Results. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Roger Pondel, Investor Relations for Jerash Holdings. Sir, the floor is yours.

Thank you, operator. Good morning, everyone, and welcome to Jerash Holdings Fiscal 2023 First Quarter Conference Call. I'm Roger Pondel with PondelWilkinson, Jerash Holdings’ Investor Relations firm. It will be my pleasure to momentarily to introduce the company's Chairman and Chief Executive Officer, Sam Choi; its Chief Financial Officer, Gilbert Lee; and Eric Tang, who leads the company's operations in Jordan. But before I turn the call over to Sam, I want to remind everyone today that the 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 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. 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?

Thank you, Walter. And hello, everyone. Our fiscal 2023 first quarter again reflected Jerash Holdings reputation as the top quality garment manufacturer in Jordan and a competitive advantage to attract new global brand customers. We are happy to report that the company achieved key record first quarter revenue of $33.4 million. As retailers throughout the world face headwinds, including inflationary pressure and higher inventory levels, we are also feeling the impact. Receiving smaller purchase order quantities and then order mix shift towards products that command generally lower average selling prices, such as shorts, crew neck and pullover shirts. Despite the challenging economic environment, however, we see fiscal 2023 to be a transitional and opportunistic year from a business operation perspective, enabling Jerash to continue its goal of diversifying and expanding customer base. As previously announced, [indiscernible], with structures to our growing roster of high-profile global apparel brands earlier in the quarter. And we have to produce these initial orders of women's polos in our fiscal third quarter. Additionally, test orders for our first European-based high-end apparel brands are progressing well, and we are hopeful that this new customer will enable Jerash to be more visible among other European-based apparel brands. We are taking a conservative approach to our guidance, particularly in comparison with fiscal 2022, which experienced record high demand with the post COVID reopenings. Gilbert will discuss those details momentarily, and we will leave plenty of time for questions. First, I will now turn the call over to Eric Tang, who stays in Jordan; and then Gilbert will cover our financial results. Eric?

Thank you, Sam. Hello, everyone. With the challenging external environment and the generally-anticipated economic downturn by retailers, recent orders placed by our top global brand customers has been smaller, particularly for fleece jacket compared with orders received last year. We continue to proactively communicate with our existing customers to reconfirm their orders and shipment schedules. We believe this trend will continue through fiscal 2023 as retailers sell through the excess inventories and work through economic and inflation recovery, which would impact both all the fulfillment and delivery schedules. Fortunately, Jerash's competitive advantage and ability to attract new customers is keeping us busy. Our manufacturing capacity remains essential fully booked through December 2022. The global trend continues to diversify supply chains away from Asia, especially China, to a more stable and duty free country such as Jordan. As good news, we have received production inquiries from several new premium brand customers. which will allow us to further diversify our customer base. On the new customer front, we will start production for Timberland and Sketchers in the third quarter, although initial orders are for lower margin products and smaller quantities. Besides Timberland, there are 2 other VF brands that we are in the process of bringing onboard. As Sam mentioned, we are optimistic about working with our new customers, and we are confident that, over time, these new global brands will grow in a meaningful way. The new dormitory for our multinational workforce is on schedule to be completed by the end of next month. The high-quality, energy-efficient living space with comfort designs and highly safety measures will help position us for future growth as well as further our ESG goals on improving operation efficiencies to conserve electricity and water usage. We plan to move approximately 1,500 of our multinational workers to this new dormitory at the end of 2022. Lastly, we are in talks with the United Nations and Jordan Government to add an additional 100 to 150 CRM refugees to work at our factories as we continue to focus on our social responsibility efforts, serving as a very UN trusted employer to help refugees settle into the new hosting country. With that, I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 outlook. Gilbert, please.

Thank you, Eric. Revenue for our fiscal 2023 first quarter rose 12% to $33.4 million from $29.9 million in the same period last year. Gross margin expanded 100 basis points to 19.8% for the fiscal 2023 first quarter from 18.8% in the same period last year, reflecting lower average cost bases from larger production scale after integration of MK Garments in October 2021 and, to a lesser extent, margin improvements for products sold to local customers. Operating expenses totaled $4.4 million in the fiscal 2023 first quarter versus $3.3 million in the same period last year. The increase was primarily due to higher headcount from the acquisition of MK Garments, an increase of approximately $294,000 in stock-based compensation and expenses related to recruitment of new migraine workers and the associated travel expenses since COVID restrictions have limited our foreign worker recruitment for the past 2 years. In addition, we have established our Middle East and North Africa, the MENA region sorting team and expanded our merchandising and sampling operations in Jordan over the past few months. This strategic move will enable us to diversify our material and supply sourcing to reduce the dependency in Asia as well as to shorten material lead time. Through strengthening our merchandising and sample development in Jordan, we will be able to facilitate quicker response to customer inquiries and open up opportunities to other European-based customers as well as global brand customers with EU market presence. This increase in SG&A expense will pay off considerably in the long run. More near term, we anticipate saving approximately $0.5 million in annual rent expense with the new dormitory geometry starting next calendar year. Operating income totaled $2.2 million in the fiscal 2023 first quarter versus $2.3 million in the same period last year. Income tax expenses for…

[Operator Instructions] First question is coming from Michael Baker from D.A. Davidson.

A couple of questions for me. Back in early June, you had said to expect -- you sort of went through a quarterly cadence and then said full year sales around 15%. You just said, I think the term was, moderate sales growth for the year. Moderate sales growth seems less than 15% to me. Is that a fair characterization for your full year sales outlook?

Well, right now, we're looking at the full year of 2023 to be basically flat comparing to 2022. But there are hopes that we will be able to come back stronger in the second half. But right now looking at the first half, as you know, we grew only 12% in the first quarter. We anticipate second quarter to be slightly lower than the second quarter of last year. Looking at the orders that we have already and then projections from our existing customers, the fourth -- the third and the fourth quarter together will be about even with our last fiscal year, but we're not going to really guide the whole year because there are a lot of uncertainties and with the global market being in this situation, with the war going on in Europe and then inflationary. So it is just very difficult to say, but we're working hard with our new customers, and then we may bring on board a few more new customers. So for this time -- at this time, we're just going to say that this upcoming year is not going to be very clear.

Okay. So correct me if I'm wrong. It does sound a little bit of a more cautious outlook than just a few months ago. Let me know if I'm wrong about that. But as a follow-up, we know there's this inventory glut in apparel in the U.S., and that's causing some of the slowdown. I'm wondering if you've been able to see any kind -- are the retailers working through that at all? Is that glut similar, worse, better than it was 2 months ago? Any sign of progress in working through that?

Right now, what we are seeing is it is a little bit worse than 2 months ago. But to us, it is an opportunity to utilize our capacity, and we are building additional capacity. And comparing to last year, we do have more capacity. So we want to use that to absorb and to bring onboard new customers that we have been trying to bring in the past year or 2. So it is a good opportunity for us.

Yes, sure. No, that's definitely a good silver lining in the situation. One more if I could. Again, last quarter, you talked about full capacity through December, still saying full capacity through December. Am I reading too much into that, that feels a little negative to me. In other words, the capacity, you haven't been able to book out any more than you were 2 months ago. Or is -- am I interpreting that wrong?

Well, right now, we're still confident that we will be running at full capacity through December. However, the mix will change, the product mix will change. We're going to bring in more local workers -- I mean local orders, and we want to use any extra capacity to fulfill orders that are from customers with lower ASP and with lower margins. So yes, in terms of volume, we will use up all the capacity, but it's just that the ASP and the margin will suffer. That's why we're not going to guide anything beyond this current quarter because things are changing, but we're going to keep running our capacity at full speed.

Understood. And one more, I guess, point, maybe question, just remind us. So in terms of using this as an opportunity, historically, those new businesses do typically come on with lower runs and lower margins, which is what you're seeing now. But over time, because believe that's an opportunity for that to build and so take advantage of the -- a little bit -- having a little bit more capacity from new customers. Now you come into low margin, low run businesses, but over time, that grows. Is that the right way to think about this opportunity?

Yes, absolutely. Just for instance, 3 years ago, when we brought New Balance to our family, to our mix, at that time, they were just sending us lower ASP and lower margin products. And then in the first 3 to 6 months, we had to learn how to run their products, and orders were smaller. So at that time, our margin took a hit. And -- but now they are growing very strongly, and we're making -- the margin with New Balance has been improving over the past year or 2.

And the next question is coming from Mark Argento from Lake Street.

And yes, just a couple of quick questions. First off, on obviously, kind of cyclically a little bit of a soft period right now, just given the glove inventory out in the channel post COVID, kind of having to work itself through, which I'm sure it would. But when you think about the opportunity longer term to add capacity, does this create an opportunity for you, i.e., I think I'm sure probably some of your competitors in market, Jordan in particular, probably feelling it -- feeling the pinch a little bit as well. Any thoughts on cranking up the M&A strategy again? It seems like the macro trend towards moving away from Asia to other manufacturing venues is one that sticks around a lot longer than just the cyclical ups and downs that you're experiencing right now. But I just want to get your thoughts on more permanent and substantial capacity opportunities out there.

You're 100% right, Mark. Our competitors or people that we know in Jordan other factories, they are feeling the same. And Eric called me a few days ago that some factories they -- well, none of the factories are running at full capacity, except us, and some are even running at 30% down from full capacity. So everybody is feeling the pain. And if there is opportunity to do some M&A like the one that we did in last year for MK, we'll definitely jump on that because we have the cash, and it brings new customers. If they're already doing business with some of the similar customers that we have, that would even be better. So yes, we are open to any opportunity for M&A, especially in the Jordan or in the MENA region. Eric, Sam, do you have anything to add to this?

Yes, I'd say I totally agree with what you are saying. Okay. Although as a matter of fact, I mean I was approached by more than 10, 15 factories apparels in Jordan. They are all facing, I mean, the problem of buyers cutting down the orders about 25% to 35%, and they also need support from Jerash. In fact, Jerash also faced the same problem that our -- 1 or 2 of our major customers also reduced the order. Okay. But okay, at the same time, okay, we are -- when other brands understand that Jerash has immediate vacant capacity, always Jerash is top priority. So they maybe approach us and then we successfully took some orders from them and fulfill the capacity, although the profit margin might not be as good as like the jacket that we are doing. But that is, we have a reasonable profit margin, and we can fill up all our capacity by up to the end of December. .

And Sam Choi here as well. Yes, I think the economic outlook in the coming 1 or 2 year may not be good as we just discussed. There will be opportunity for Jerash as well because some branding customer, they, in the past, didn't source any government from duty free country like Jordan. And our strength is duty free as well as quality product. So some -- in fact, we have very positive discussion with some reputable brand name. They didn't source Jordan in the past and now they would consider seriously to source from Jordan instead of some political, unstable countries. And I hope we can have a very -- I mean opportunistic trends to do business with them. And those reputable brand name, and I do believe their margin will be much higher than other normal customers. So I hope in -- maybe in the fiscal 2024 or first quarter of 2024, we can start business with them after their procedures of specialty certification, et cetera, et cetera, then we will have -- we can diversify our customer with higher margin and captures more offices from the rest of the world. Yes.

Yes, you're right, Sam. Actually, we -- one thing that I would like to stress is that we have put in place our MENA sourcing team in Jordan. Previously, we really focused on sourcing from Asia and Hong Kong and China sourcing team have been really just in the lead in terms of sourcing. But now we have put a team together in Jordan to source from the Middle East and North Africa region. So we have already started sourcing our materials from Turkey, from Egypt, and that is going to give us a significant competitive advantage going forward. And in addition, we have also strengthened our merchandising and sample development capability in Jordan. And that will give us a lot of opportunity to work with any new customers, any new brands because we are right there to do the product development and to do the pricing with them. So with just these 2, I believe we're going to be very successful in bringing in new customers.

That's helpful. Just one housekeeping item. Did you mention -- Gilbert, did you guys buy some stock back in the quarter? Can you just refresh that for me?

Yes. We started our repurchase program I think back in July. Yes. I think we started buying in July. And so far, we have purchased about 24,000 shares. Well, we have to stop because of the quiet period. But as soon as we file the 10-Q, we will begin buying again.

And the next question is coming from Peter Sidoti from Sidoti & Company.

Just one quick question. For the rest of the year, do you see yourself generating cash, using cash? How do you see the cash flow going to the year?

Well, we will be very careful with our cash flow situation. We always generate sufficient operating cash flow, and we anticipate this upcoming -- well, at least for the rest of the fiscal year, we will be profitable. So -- and we always have sufficient credit facilities, and now we're working with the 2 largest customers that we have the financing program with them that any time if we need cash faster, they will pay us faster. Now we do have to spend some capital money on buying, let's say, the building and the land for the MK factory. And that is about -- I think we still owe them $2.2 million to close out the deal. We're going to buy the office building that we have in Hong Kong, and that is about $5 million. So just those 2 are the -- well, and also we have to finish up the dormitory construction. So we do anticipate spending quite a bit of money in terms of capital expansion. But other than that, I think we should have sufficient cash flow for this upcoming year.

I'm sorry, you're purchasing a building in Hong Kong for $5 million you said?

It's not an entire building. It's just the office space that we have been using for the past I don't know how many years. But in order to take advantage of the, I guess, after COVID, the real estate price has dropped, and we also want to save the rent. So that's why the Board decided to purchase the property.

The next question is coming from [Yazan Abdin], a private investor.

I just have one quick question regarding the operating expenses and the increase in that. I saw that you mentioned that part of this is due to increased headcount from the MK acquisition along with some other expenses. Can you highlight like what is a onetime expense out of that and what will be recurring?

Well, the -- I think the onetime expense is more on bringing more overseas workers. I think since a year ago when COVID just stopped, our headcount was like 4,500, 4,200, and now we're close to 5,800 people. So over this year, I think we brought in about 1,000 workers. Is that accurate, Eric?

Yes, yes, you're right.

Yes. So bringing in 1,000 workers takes a lot of money. We have to apply for the visas. We have to get permits from the Jordanian Government. We have to fly them in. So -- and we also absorbed the MK factory 500 workers, and I think it is now up to 600 and, it has room to go up to 800. So all this recruiting in HR-related expenses is probably just onetime. But we're looking at ways to reduce our SG&A because we're looking at not so much growth within this coming year. So we're going to start bringing in additional foreign workers for the time being. We still have permits to bring them in, but we're just going to hold on to that as well as if there are workers -- because, constantly, there are workers whose contracts are up and they have to go back. And when we want to, for the time being, not replacing those workers. So just through attrition, reduce the headcount. And while that doesn't really affect SG&A that much because the workers are more on the cost of goods sold - the line of cost of the goods sold in the margin. But at least, we're not going to spend as much money in terms of recruiting. And the SG&A increase over the past year, part of it, well, there is a separate line item for stock-based compensation, and that is over $1 million. Yes. And sales has also increased over comparing to last year. And sales, the selling cost, which includes the freight, the outbound freight, shipping the products to the ports, that has increased not just in volume but also, as you know, oil prices has gone up. So those transportation costs has gone up also. Yes.

So out of the -- so the increase year-over-year for the operating expenses was about $1.1 million. If you exclude the stock-based compensation, that leaves about $800,000. So how much of that do you think is onetime?

I don't have the detail in front of me, but I would believe about $300,000 or $400,000 is onetime, that will be my guess.

Okay. And with regards to the acquisition of the office in Hong Kong, you mentioned it's about $5 million. How much in rent are you paying for that? Like so how much spend savings will come out of the acquisition?

I don't remember exactly how much rent we're paying for the Hong Kong office. I think it's like $600,000 a year. Is that right, Sam?

Okay. In fact, the reason, I mean why we purchased the property is, we have been using that with some decoration expenses has been spent on that. So definitely, we will move out with new office, more decoration expenses of that. And also, for the purchase of the property of our own office, taking into account the depreciation of the office over 10 to 25 years, the existing brand is around close to 13 with increase in the rent. From the landlord, it will be close to -- it's U.S $13,000 per month, that will be around U.S. $360,000 per year. So after the calculation, in fact, there will be some savings sticking into the depreciation into account because depreciation will be 20 to 30 years for that. Yes, and so that's why we purchased the property. And also taking the COVID situation, the property price, we believe is below margin a bit. And if we use the office for long, definitely, I mean the office value will be increasing. Yes. So that's why we purchased that. So I mean after we purchase it in terms of profit and loss impact, there is a little bit of saving.

And the next question is coming from Michael Wu, who’s also a Private Investor.

First question is about the -- your jacket orders. So could you just give me more color on that, and amount that reduced the order on jacket, incurred on that?

Eric, can you answer this one, the reduction in jacket orders?

Okay. Our major customer is giving us a monthly jacket around 800,000 pieces. Okay. So we already relayed this message just now that they have reduced, I mean, around 200,000 pieces to 250,000 pieces a month. okay, because of the excess inventory. So that means we have to find replacement order in order to fill up our weakened capacity. And we have successfully doing so during the past couple of months, and that's why we are still booked through our capacity, still booked through the end of December.

So is this just like a quarter for you? Is that for the whole year? Like this is monthly, then up to which month for a reduction?

Actually, the buyers indicated that when they will resume the extra 200,000 or 250,000 pieces. But it depends on the market situation, especially the sale during this year, during the Christmas and New Year. So they will keep us posted as they -- to us.

Okay. Great. Can you just clarify what is the New Balance and North Face sales on this quarter?

Gilbert, you have this, right?

No, no, no.

The percentage, right?

Yes, the dollar amount. Last quarter -- I mean last year, you had $10 million, $20 million or something like that.

Well, North Face this quarter is about $21 million, and New Balance is about $8.5 million.

Thank you, and that's all the time we have for questions today. I would now like to hand the call back to Sam Choi for closing remarks.

Okay. Thank you, operator. And thanks again to all of you for joining us today. Our prospects remain healthy as we transverse the current environment. We appreciate your support and interest in our company, and we look forward to speaking with you again soon on our fiscal 2023 second quarter call. Thank you very much.

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

Thank you very much.

Thank you.