Greetings. Welcome to Jerash Holdings’ fiscal 2023 third quarter financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Roger Pondel, Investor Relations for Jerash Holdings. You may begin.

Thank you Operator, and good morning everyone. Welcome to Jerash Holdings’ fiscal 2023 third quarter conference call. I’m Roger Pondel with PondelWilkinson, Jerash Holdings’ investor relations firm. It will be my pleasure momentarily to introduce the company’s Chairman and Chief Executive Officer, Sam Choi, his Chief Financial Officer, Gilbert Lee, and Eric Tang, who leads the company’s operations in Jordan. Before I turn the call over to Sam, I want to remind our listeners that today’s call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company’s control, including those set forth in the Risk Factors section of the company’s most recent Form 10-K 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 those forward-looking statements and Jerash Holdings undertakes no obligation to update any forward-looking statements except as required by law. With that, it’s my pleasure to turn the call over to Sam Choi. Sam?

Thank you Roger, and hello everyone. Our fiscal third quarter performance demonstrated the company’s ability to navigate through continued challenging market conditions [indiscernible] sector. Although orders received from our major global brand customers continued to be smaller compared with last fiscal year, our team in Jordan was able to keep our facilities running at full capacity by adding supplementary production for other customers. Accordingly, we achieved record third quarter revenue. Nevertheless, we continue to see fiscal 2023 as a transitional and opportunistic year for Jerash while we made progress on our initiatives to diversify our customer base and product mix. Since the last conference call, we have successful begun to ramp up production on orders from Timberland and Skechers, which are newer group of brand customers. Additionally, test runs for our previously announced first European-based high end apparel brand were well received with initial shipments to begin at the end of March. Our plans to form a joint venture with Busana Apparel Group are proceeding well. We anticipate launching the venture early in our new fiscal year, giving Jerash additional opportunities to serve Busana’s group of brand customers that have expressed interest in shifting their production from Southeast Asia to Jordan, which has longstanding duty-free agreements with the U.S., EU and other countries. Additionally, we are gaining visibility into the athleisure wear and technical clothing segments. [Indiscernible] is well known for its high quality woven apparel production in technical garments, active sportswear and formal wear. Before I turn the call over to Eric, who is based in Jordan, I want to say that our thoughts and prayers go out to all of the families that were impacted by the recent devastating Turkey/Syria earthquakes. I will now turn the call over to Eric Tang to talk about our operations, and Gilbert will then discuss the quarter’s financial results.

Thank you Sam. Hello everyone. As Sam mentioned, with the challenging retail environment, orders placed by our top global brand customers have been smaller while retailers continue to work through economic and inflation recovery. We expect these trends to continue for several more months. During this time, we are actively communicating and maintaining excellent relationships to better understand our customers’ needs going forward as market conditions improve. Fortunately, we continue to receive inquiries from other premium brands as global brand trends remain to diversify supply chains away from Asia, especially China. On the new customer front, we introduced and shipped initial orders for Timberland and Skechers in the third quarter and are scheduling additional production for both. In the current quarter, we recently began production for our first European-based high end apparel brand with initial shipments to start soon. Please keep in mind that new customer inquiries and test runs for premium brands typically take several months. Also, initial new customer orders are in relatively small quantities with generally lower margins to start. During this time frame, we are able to maintain our full staff and our facilities fully booked by adding supplementary production of products for buyers other than our major customers in the U.S. We are also expanding the capacity at some of our factories to gear up for our joint venture with Busana that Sam mentioned earlier. Lastly, please note that our sourcing of fabric and other materials from new partners in the Middle East and North Africa is continuing and is not expected to be impacted by the earthquakes. 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 third quarter increased 17% to a record $43 million from $36.8 million in the same period last year. The increase was mainly due to supplementary sales to customers outside of the U.S. with lower margin products. The gross margin was 13.5% in the fiscal 2023 third quarter compared with 18.8% in the same quarter last year. The decrease was primarily driven by the lower proportion of export orders to two major customers in the U.S. that typically generate higher margins. Operating expenses totaled $4.5 million in the fiscal 2023 third quarter, mainly from SG&A, compared with essentially the same amount in last year’s third quarter, including SG&A expenses of $4.2 million and stock-based compensation expenses of $319,000. Operating income totaled $1.3 million in the fiscal 2023 third quarter versus $2.4 million in the same period last year. Total other expenses were $111,000 in the fiscal 2023 third quarter compared with $80,000 in the same quarter last year. Interest expenses were $249,000 versus $73,000 a year ago. Net income for the most recent third quarter was $900,000 or $0.07 per diluted share versus $1.7 million or $0.13 per diluted share in the same period last year. Comprehensive income attributable to Jerash Holdings common stockholders totaled $929,000 in the fiscal 2023 third quarter versus $1.7 million last year. Jerash’s balance sheet and cash position remain strong with cash of $26.2 million and net working capital of $47.1 million at December 31, 2022. Inventory was $26.7 million and accounts receivable amounted to $5.5 million. Net cash provided by operating activities was $9.9 million for the nine months ended December 31, 2022 compared with $14.6 million in the prior year. The net change reflects working capital activities attributable to reduced net income, increases in advances to…

At this time, we will be conducting a question and answer session. [Operator instructions] Your first question for today is coming from Mike Baker at DA Davidson.

Okay, hi guys, thanks. A couple questions. Can you talk about the state of your larger customers and the inventory situation in the U.S. versus what it was three months ago? Some of the big customers, maybe not your customers but some of the big apparel sporting goods retailers in the U.S., like VF Corp, Under Armor, Columbia, the inventory is actually getting larger, growing, not decelerating as many would have expected, so is the situation better or worse than it was three months ago for your larger customers?

Eric, do you want to take this?

Yes. I talked to some of our major buyers, like VF Corp and New Balance. They are saying that they also have recorded some growth in the past couple of months in sales, but they are still not too optimistic about the coming several months, so they are still trying to absorb and trying to reduce the level of the inventory. That’s why despite the fact that there is growth in the sales, they are still not placing too many new orders until the inventory level is down to a level which is, they think, more safe and acceptable to them. This is the latest information I get from my buyers.

Okay, thanks, so maybe as a follow-up on that, I think Gilbert had mentioned growth in 2024 - you used the word growth. Now understanding you’re not giving 2024 guidance right now, but that expresses a level of confidence that you will grow next year. Can you tell us what gives you that confidence?

Well, right now we’re--I mean, with our existing customers like TNF and New Balance, they are being very cautious in issuing new orders for us. Normally, in a normal year, they would have already filled up our capacity in the first half of the next fiscal year by now, because we have to start planning for the winter season, for the fall season and so on. However, this year they are still being cautious and the orders are smaller than previous, so we’re still waiting on them. That’s why we’re not comfortable in providing guidance for the next fiscal year or the first half, but we are confident that with our efforts in this past fiscal year, fiscal 2023 when have some breathing room to on-board some new customers, such as the very high quality premium European brand, which we all know who they are but we cannot say, their order is already starting. We have passed everything, they came to our factory and all the quality people have already certified us or approved our factories to start producing, so the shipments will actually begin pretty soon. Also, with our joint venture that currently--I mean, maybe we’ll talk about the joint venture later, but the good news is we are progressing very, very well and we anticipate a joint venture agreement will be signed. Last quarter, we signed the MOU, but over this past quarter we have been working with Busana in developing the joint venture agreement, and everything is basically agreed upon, we’re just making some final changes in the wording and so on, so we anticipate that will be signed very soon and then we will start working together. Busana, in fact they have already started doing the marketing. They’re coming to the U.S. in the next couple of weeks to start going to all their customers and they’re going to represent Jerash, and they will move those orders to Jerash, so we are very confident that the impact from this joint venture is going to help us even though we may not have substantial growth, or maybe maintaining the same level of business with our existing customers. This additional opportunity from the joint venture will help us move Jerash forward. That’s why we’re cautious, but we are optimistic in the next fiscal year, but I cannot give you guidance at this point. All we can say is that currently, we are looking at the first half of the year being--we’re confident that we will maintain the same level of business, maybe a little bit of growth. It depends on the timing of the new business coming.

Okay, one more if I could, related to that. The fourth quarter guidance which you’ve given, two questions on that. One, you just grew your sales 17% and were at $43 million, why the implied--well, the guidance for fourth quarter sales is down 10% to 16%. Why would that reverse so much? Then the gross margin, I understand you just kept the full year number, but could you tighten it up a little bit because, basically, it backs into my math, at least, for the fourth quarter anywhere between 12% on the gross profit line, gross margin line to 22%, so you know, if you could help tighten that maybe a little bit for fourth quarter.

Sure, let me try and explain. First of all, understand that the third quarter, we had record revenues, and that is primarily because we supplemented the lack of orders or the reduction in orders from our major customers. That’s why gross margin for third quarter dropped down to 13.5% compared to 18.8% in the previous year third quarter. Sales increased by 17% in third quarter, quarter-to-quarter--I mean, year-to-year for the third quarter, but margin basically dropped a lot, but that was because of the local orders, orders to third parties, so that’s why margin was very low. Now fourth quarter would be a little bit of a different picture. We are doing more or a higher proportion of the FOB order to North Face and New Balance, but we are going to do less of the lower margin orders, so the gross margin percentage of the fourth quarter, this current quarter that we are in, is going to go back up to between 16% to 18%. That will give us the full year around 17%, but sales will be down in terms of dollar amount compared to last year.

Okay, understood. In the press release, though, it sales full year guidance 16% to 18% on the gross margin, but you’re saying that is also good guidance for the fourth quarter?

That’s also for the fourth quarter, exactly.

Understood, okay. Thank you very much.

Your next question is coming from Mark Argento at Lake Street.

Yes, hi. Good morning guys. Just a follow-up on the Busana relationship. I know last quarter when you talked about it, you were still working out some of the details. It sound like maybe you have a better understanding of the agreement. When you think about the economics of the deal, can you talk a little bit about will it be accretive to gross margins, or how will this flow through your P&L once you start booking revenue?

Well, the joint venture is going to be a separate company. It’s just a new company that we set up in Hong Kong. The company is already registered, we just need to wait until the joint venture agreement is signed. This company will be formed by two shareholders or two partners: one is Jerash Holdings and the other is Busana Apparel Group. Jerash will own 51% and Busana will own 49%. We will consolidate Busana’s revenue, gross margin, all the profits, and then 49% will go to Busana, so that’s how the sales and profit will flow to our consolidated.

Great, that’s helpful. Then I think it was Eric, in the prepared remarks mentioned that you guys are expanding capacity or adding capacity for that relationship. Can you talk a little bit about where you stand right now in terms of [indiscernible] production capacity and what you’re looking to add?

Eric?

Gilbert, should I answer this question?

Yes, please, about capacity expansion.

Okay. Regarding our current capacity, we will be--we are running at full capacity until July, and I am also expecting that we will continue to run at full capacity until maybe September to October with the coming in of the Busana orders. For Busana, because all the factories are located in Asia, it is--the reason why there is a joint venture with us is because they are requested by the buyers to move the orders out from Asia and then to the duty-free country, and the selection from the buyer is Jordan. Jordan is because of the duty saving issues, so we will be expecting the inflow of Busana orders starting maybe between July and August, okay, we will continuous. For the capacity, I think we also made announcement that we are going--already started our in-house expansion in Jerash One, so we are expecting the in-house capacity, we can increase four production lines by the end of July. This is explained by extra capacity for Busana, that if they have more orders to inject into Jerash--I mean, the joint venture company.

So you’re taking existing facilities and adding onto those, or maybe could you just give us a little more color on how you’re adding the capacity?

Yes, the building--

For the existing--yes, please?

The building, actually we--

I mean, for the--yes?

For the expansion, we basically added an expansion to the existing building, so I think we added one more floor and then the building was expanded horizontally also, so that will--I believe we estimated it will increase our capacity by about 15% for that particular factory, by adding more--of course adding more machinery and adding more people.

And you expect that to be complete by July, or is that done already?

Right, yes. We’re still working on it. We anticipate it will be done by July. Earlier, we--I think we started this in 2022. Just because of the market conditions, we are just kind of taking the time and not really pushing to get it done earlier, but right now we’re almost done. We’re just finishing up and we anticipate this could be put into use by July.

And just one follow-up in terms of the capital required to do the expansion, is it relatively nominal, or what are you thinking from a capex perspective?

For the capex, I think this is just slightly above $1 million, $1.1 million or $1.3 million.

Great, thanks guys.

Your next question for today is coming from Aaron Grey at Alliance Global Partners.

Hi, good morning, and thank you for the questions. First question for me, just in terms of the supplemental sales that you guys had with the lower margins, is that more a function for the quarter, just a way to get some revenue in due to some under-utilization given the larger clients were having smaller orders? It sounds like it’s not going to continue for the next quarter, and you guys do have full capacity from July to September, so can you just help us understand maybe that you’re going to have that full utilization, maybe why it was just maybe a one-time thing to where you went more local to get that revenue, even at the lower margin, is not going to be a potential need going forward? Thank you.

Sure Aaron. Yes, this is just for this third quarter that there is a substantial amount of local orders and orders at the lower margin, because we want to keep running and utilizing all our capacity. First of all, we can more allocate or more absorb our fixed costs of the factories that we have, and then we also don’t want to lay off or reduce our workers because we need those workers when the business turns around, when the market turns around. Unlike other factories in Jordan, many of those have already reduced their staff, laying off people, and some smaller factories even went out of business. Everybody is suffering, even in Jordan, so we decided and our strategy is we have to prepare for the business to come back and for even future growth, because we’re talking about a joint venture, we’re talking about new customers that we are on-boarding, so we don’t want to cut into the bone so we want to keep everybody busy, and that’s why we went out and we brought in a lot of this supplementary business. These are people that we have done business with before and they are very happy to send us the business. Now in this current quarter, Q4 of 2023, we kind of [indiscernible] the business with our existing customers, like New Balance and The North Face, actually we are quite busy this quarter, and then we’re going to be busy in the first quarter of 2024, which is the April to June quarter producing for these two largest customers also. The amount of the supplementary orders, or what we call the CM orders, is going to reduce, it’s not going to be as high proportion as in this current quarter. But if we need to, to use up the capacity, we will accept these kind of orders. It’s all the mix of the business, the mix of the orders, and that will affect the gross margin and also the top line sales. Does that answer your question?

It does. That was actually really helpful. Then turning to the flipside of that, as you continue to ramp up some of these new ones - Timberland, Skechers, and some of the athleisure as well, as those progress and potentially advance into bigger and larger orders, can you just give us an update maybe on the timing of that and whether or not then if you are at full capacity now, for the next couple months, and then how you potentially kind of ramp up those lines as well along with the current ones for your two largest customers, particularly in a scenario of when the business turns around and then you’re back at full with the legacy and you’ve also ramped up these new brands. Thank you.

The ramp-up of these new brands - I mean, first of all, we have--I think we started quoting Hugo Boss almost a year ago, and now we are--correct me if I’m wrong, Eric, I think we’re going to start shipping the first orders for Hugo Boss maybe in March, is that correct?

Exactly - yes, correct.

And then the ramp-up--yes, there will be a ramp-up period, and I think after the first few test orders, they will just continue to bring us new styles, and also Hugo Boss is a long time customer of Busana. In fact, Busana helped us quite a bit to on-board Hugo Boss, even though we first contacted Hugo Boss about a year ago but Busana came in and they assisted us on a lot of the technical areas and how to do business with Hugo Boss. But eventually, Hugo Boss will be part of the joint venture when we start doing business with Busana. Besides Hugo Boss, there are a lot of other premium brands that Busana has been working with and those will come in, but of course it will take time for them to do the sampling, to do the test, and make sure all the quality is up to their standards. I don’t know, it could be--the timing could be tricky. It also has to do with our capacity and our manpower, but by that time, Busana will be onboard and they will be assisting us, so we feel very optimistic, cautiously optimistic about this coming year.

Okay, great. Thank you very much and I’ll jump back in the queue.

Thanks.

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

Yes, good morning. I wonder if you could just expand on your initiative to source additional fabric from local partners in the Middle East. I know you touched upon this in prior quarters, but there are moving parts in gross margin, obviously the customer mix had a shift resulting in a shift in gross margins. But do you then have--does the additional sourcing from local partners have a beneficial impact in the quarter, and what is your outlook is for those initiatives going forward? Thank you.

Yes, sure. We started the sourcing in the Middle East and North Africa region probably more than a year ago - I remember it was December when I first went to Egypt and Turkey to start sourcing efforts. But now, we already are purchasing fabrics from both Turkey and Egypt. For Egypt, I think it’s primarily for the Timberland products. In Turkey, I think it’s also Timberland too, but that--besides giving us much less dependency on the Asia fabric sourcing, especially China, especially during the pandemic there were a lot of shutdowns and interruptions, I think it is more strategic and more long term. I think without going to the MENA region to source, we wouldn’t be doing the Timberland business, at least not so soon. That really helped us in getting this new customer, Timberland, and then it opens up other opportunities to other European customers or potential customers. The cost for the raw material may not be--may not have a big difference because comparing to China, the Middle East fabrics and the supplies are--the prices are higher, however we save the freight costs, and the most important thing is the shortening of the logistics time from shipping from Asia comparing to shipping from the Middle East. That is the biggest benefit for us, is the quicker turnaround and we don’t have to carry so much inventory--I mean, raw material inventory and so on. But yes, there are pros and cons, but I think there are more pros than cons, and it opens up a lot more opportunities for us to grow our customer base.

Okay, and just as a follow-up, I think you’ve mentioned that it’s a difficult situation for some of your competitive factories in Jordan. Is that causing any sort of impact on your labor base? Are you able to source more domestic workers within Jordan, or how is that sort of affecting your everyday operations from a labor perspective? Thanks.

Eric, do you want to take this question about sourcing local workers, maybe some opportunities?

Yes, just now it is mentioned that some small factories already closing down and some of the big factories, because of the order situation, they also reduced the number of workers, so it will become more easy for Jerash to source especially the local workers who it is very easy to shift from one factory to another. For the foreign workers, of course if the factory is shutting down, they need to finish the contract and go back to their country, but they can--I mean, there is more chances, more opportunities for them to come to work in Jordan for Jerash.

Great, thank you very much.

Yes, that’s the reason why we want to hold on as much as possible to our existing workers, because they are familiar with our operations and they are very experienced. It is a big cost if you want to go out and find new workers, whether it’s local workers or import workers.

Okay, thank you.

Thank you.

We have reached the end of our question and answer session, and I will now turn the call over to Sam Choi for closing remarks.

Thank you Operator. We are optimistic about Jerash’s prospects and the progress of our strategic initiatives. We look forward to speaking with you again soon and appreciate your continuing support. Thank you.

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