Good morning, and welcome to the Jerash Holdings Fiscal 2022 Q2 Financial Results. At this time, all participants are on 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 over to your host, Roger Pondel, investor relations for Jerash Holdings. Sir, the floor is yours.
Thank you, Catherine, and good morning, everyone. Welcome to Jerash Holdings Fiscal 2022 Q2 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 a prior business commitment. Before I turn the call over to Gilbert, I wanna 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 these forward-looking statements. 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 Gilbert Lee. Gilbert.
Thank you, Roger, and hello, everyone. Our fiscal 2022 Q2 results demonstrated continued strong progress. Revenue was at a record level for the Q2, reflecting robust shipments to our largest customers as a result of strong demand and expanded capacity. Gross profit also represented a record for the Q2, 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 Q2. 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 an operator of a 71,000 sq ft manufacturing facility in Amman, Jordan. Our agreement 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 Q2. 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 the manufacturing licenses and existing physical operations, including all machinery equipment, 500 workers and a 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 Q3 of calendar year 2022. The high-quality living space with comfort designs and the highest HD 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 Q2 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 higher sales volume reflects stronger demand as well as increased capacity. Gross margin expanded 40 basis points to 22.1% in the fiscal 2022 Q2, 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 margin as well as increased production and sales volume. Operating expenses totaled $4.5 million in the fiscal 2022 Q2, compared with $2.9 million in the same period last year.
The increase 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 Q2 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 Q2 from $2.6 million or $0.23 per share in the same period last year. Our balance sheet remains strong with cash of $26 million and net working capital of $54 million at September 30th, 2021. Inventory was $21 million and accounts receivable was $13 million.
Net cash provided by operating activities was $22 million in the fiscal 2022 Q2 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 Q2 following strong increases in the Q1. We expect the business to generate cash from operating activities on an annualized basis. We continue to have access to supply chain financing programs with our major customers and an untapped $3 million line of credit available. As you know, we also recently completed a public offering of 1.4 million shares at a price of $7 per share. The total number of shares included 1 million shares issued and sold by the company and 400,000 shares sold by a selling shareholder.
The company received net proceeds of $6.25 million from the offering, which we expect to use for working capital and expansion plans. In terms of our fiscal 2022 outlook, we're increasing revenue guidance to be in the range of $125 million to $130 million as strong demand continues and our capacity expands. We also anticipate revenue in the fiscal 2022 Q3 to be in the range of $31 million to $33 million. Orders continue to reflect high-margin jackets and other outerwear products, which are expected to support gross margins in the high teens for the full fiscal 2022 year. I would also like to remind you that operating expenses are expected to be higher in fiscal 2022, reflecting our growth and the pandemic's impact on last year's first half.
We also anticipate stock-based compensation to be at a higher level for the rest of fiscal 2022 compared with the same period last year. While customer orders remain strong, it is important to note that potential risk from supply chain issues that some of our customers are facing could affect the timing of shipments in the near term. We'll continue to monitor developments over the next few months and give you an update on the next quarter's earnings call. In addition, our board of directors approved a regular quarterly dividend of $0.05 per share to our common stockholders on November 2nd, payable on November 29th, 2021 to stockholders of record as of November 22nd, 2021. With that, we will now open to the call for questions. Operator, may we have the first question, please?
Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Your first question is coming from Michael Baker with D.A. Davidson. Your line is live.
Hi, thanks. Just a couple from me. One, so very strong results and we appreciate the increase in guidance. The guidance for the Q3, though, of $32 million at the midpoint, you know, up at a pretty strong 55% year-over-year. That is a little bit of a slowdown from the first half. Even if you look at it on a two-year basis, it's a little bit of a slowdown. Again, if we now have the full year guidance in the first half and the Q3 guidance, we can back into the Q4, and that's a further slowdown. In fact, down year-over-year and a slowdown in the Q2. My guess is it's just the uncertainty of the environment and, you know, don't read too much into it.
you know, the numbers do suggest a slowdown. I just was wondering if there's anything, you know, more that we should think about as to why the business might slow.
Hey, thank you, Michael. Yes, you're right. We are expecting a slowdown in the second half compared to the first half. The first half was definitely a robust half compared to the pandemic impacted first half of fiscal 2021. Fiscal 2021 second half came back pretty strongly. 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. We are still a little bit cautious seeing the global supply chain issues that are basically hitting everybody, which cause shortages on almost every product and long lead time.
We just don't know what is going to happen, whether this situation is going to improve or whether it's going to linger. We just don't want to put too much hope onto 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, toward the end of December, there was some delay in shipments. We're just kind of being a little conservative in Q3 and Q4. There's still some uncertainties out there.
Yeah, that makes sense, and I appreciate that conservatism. One more, I guess maybe along the same type of lines, and maybe the answer will be similar, but your year-to-date gross margin is 20.8%. You said full year expects high teens, so again, that implies, you know, lower margins at least sequentially in the back half of the year. I know there's some seasonality in there.
Yeah.
Again, any reason why the gross margins wouldn't be quite as strong in the second half of the year?
Well, it is entirely because of seasonality. Usually our strong first half would have stronger margins and second half will be much lower. Because in the second half, we're producing for the summer or warmer type clothing, and the first half is mostly for winter jackets, outerwear products. Then the second half, we also expect to have some higher volume but lower ASP sales to some of the mass merchandisers and more trading sales to New Balance in the second half. That will pull down the margin somewhat.
Okay. That makes sense. I'll turn it over to someone else. Thanks.
Okay. Thanks, Michael.
Your next question is coming from Mark Argento with Lake Street. Your line is live.
Hey, Gilbert.
Hey, Mark.
Nice quarter. Yeah, I do know, I mean, you know, part of the commentary in terms of the second half and the growth rate is you guys, you know, I mean, comps get pretty, you know, more aggressive in Q4. I think you guys were up what, 60+% in Q4 of last year, so there's just kind of a lot of larger numbers there. In terms of capacity utilization, you guys are at max capacity right now. Sounds like you're booked through May.
Yes.
You know, what's the prospects for finding additional capacity to be able to kinda supply that demand that you guys see out there?
Well, we are actively looking. Actually, we're constantly looking for additional capacity. At the same time, I think we still have some rooms to grow. First of all, at the newly acquired MK factory, there is still rooms to increase number of people, increase number of machineries. Those are probably ongoing. As soon as we see the need, then we'll be able to immediately increase some capacity. Maybe Eric, you can add something about the capacity growth?
Yes. Currently, we have 500 workers in our newly acquired MK factory. The total, I mean, capacity MK can be able to accommodate is around 900 workers. If the business is growing, we 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, you know, we have three factories producing garments in the industrial zone. We are now making internal renovation, trying to group some of the departments together in order that we have some more spaces to, I mean, to make more production lines.
In this way, we will spend less money, but we can still be able to, I mean, to increase our in-house capacity. This project is already carried out and will be finished maybe in the Q1 of next year.
Yeah. At the same time, we're still studying and we should be able to start construction in the, I don't know, next three to six months on our larger piece of land that we plan to build a new factory. 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 get that going. That is a much more longer term of capacity increase.
Yeah. 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. Between 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 in, I think you called it export orders. Just wanted to understand what that was. Then any, you know, any new kinda, you know, brands or customers in the mix. I know it's hard to go sell, you know, additional manufacturing capacity when you guys are capacity constrained as you are currently. Any new brands or any new customers that you brought on the platform? Thanks.
Well, we're going to run the trial order for Adidas, but because of capacity constraint, we may not be able to bring them on in the near future as one of our major customers. I don't know, maybe there are some other potential customers that are talking to us. 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 the middle of this year to see if we have capacity, but unfortunately, we are overbooked. In order to do the pre-production arrangement, so Adidas sent a team to audit Jerash factory, and we got approval already. We are now an approved vendor of Adidas. Adidas already sent us one trial order around 10,000 pieces. We are going to produce next year, February. 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. This is the latest situation of another big brand, Adidas.
Great. Thanks, guys.
Thank you.
You're welcome.
Your next question is coming from Rommel Dionisio with Aegis Capital. Your line is live.
Yes. Good morning. Thanks for taking my question. You know, in the past, you guys have, you know, in addition to talking about expanding production capacity in Jordan, you've also talked about, you know, looking at perhaps some additional capacity in China. You know, just given all the supply chain issues going there, have you sort of changed your view on that, and are looking to, you know, 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 are actually forming a trend that everybody is trying to shorten their supply chain. Getting a factory or getting capacity in China and supplying the North American or European markets is just not going to be competitive. Maybe we misstated or misrepresented, but we have never even considered 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 factories in Southeast Asia. Those are the so-called trading orders.
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 order that we actually produce ourselves. Now, of course, we also outsource or contract some of the production when we run out of capacity to local Jordanian manufacturers who are also qualified by our customers. The Southeast Asian factories, they are also qualified by our customers first before we can outsource to them. Maybe there's some misunderstanding that we were looking for building or acquiring factories in China. As you said, in the current situation, that may not be such a wonderful strategy.
Okay. Thanks very much, Gilbert.
Thanks.
Thanks, Rommel.
Your next question is coming from Michael Wou. Your line is live.
Oh, hi. I have a question about New Balance line. Could you give me some update on the New Balance line? How is the business doing and going forward?
Eric, you wanna take this one on New Balance?
Are we talking about the New Balance?
Mm-hmm. Yes, yes.
Yes. We started New Balance, I think, around one and a half years ago. New Balance is planning actually to transferring more orders to Jordan. Before, they are mainly 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 Europe, so from last year, they already start transferring most of the orders stage by stage from the Southeast Asia, China to Jordan to our facility. In Jordan, we are the only factory and apparel who is producing New Balance garments.
My question is like, I know you are doing very well. Like last quarter you did, like, $10 million, right? Do you have any numbers for this quarter? Then going forward, what's the business like outlook for New Balance line?
I think currently we are doing around 23% for New Balance garment or in lieu of our overall production. This year we are already talking with New Balance about increasing capacity and providing to them. With our newly acquired MK factory, we can be able to offer more, I mean, capacity for them. They already told us they need to do it. Although it is not yet confirmed, we are expecting the New Balance business will be in the next year increased from 23% currently maybe up to maybe at least to a 30%.
Okay, great.
To answer your question, Michael, more specifically, last quarter we did about $9.2 million with New Balance. This quarter we did about $6.3 million to $6.4 million. The reason for 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. Next quarter we project New Balance to be back in the $10 million or $11 million level. New Balance is growing very fast, very strong, in terms of sales to them.
That's great. How about The North Face line? I assume it's really strong in this quarter. I mean, the first half, does it exceed the 2019 level or, you know. Do you have any numbers for that, like the first full half year?
Well, the entire first half we did $57 million for The North Face.
Oh, that's a lot. Okay.
Yes.
Great. Thank you.
Yes.
Thank you.
That's already higher than last fiscal year.
Last year.
In fact.
Yeah, yeah. That's all. Yeah. Great. Great. Thank you. Congratulations. Thank you.
Thank you for calling.
You have a follow-up question coming from Michael Baker. Your line is live.
Hi. Thanks.
Hey, Michael.
Hi. Can you remind us, last year was in my model, the December 2020 quarter, Q3 2021 gross margins were down about close to 800 basis points. What happened there? And as we think about the Q3 of this year, you know, should we be. Two years ago, the margin was 19.3%, last year 11.7%. What's the right expectation going forward, for the Q3?
I don't quite remember what caused the 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. Part of it would be due to not fully utilizing the capacity. The Q3 usually we have more local orders, local meaning Jordanian orders that the margin are really low, maybe sometimes even less than 10%. We also had. I'm trying to look back what the mix is for that fiscal quarter Q3. I can find-
Well, I guess.
Anyway.
More importantly is how should we think about it for this year? That, that's really the important thing.
Well, for this year it is, it's going to be lower than the first two quarters for sure. It will be better than last year. We are projecting about 16.5% to 17% gross margin for this Q3.
Understood. Yeah, that makes sense. Okay. Yeah, I appreciate that. Thank you.
Sure.
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, Catherine. 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 Q3 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.