Karat Packaging Inc Earnings Call
Good afternoon, and welcome to the carrot packaging third quarter 2021 earnings conference call.
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I would now like to turn the conference over to Roger Pondo with Palmdale Wilkinson Investor Relations for care at packaging. Please go ahead.
Thank you Andrea and good afternoon, everyone.
Welcome to care packaging.
2021 third quarter earnings call.
I'm, Roger Pinedale would ponder will consume packaging <unk> investor relations firm that will be my pleasure to momentarily to introduce the company's Chief Executive Officer Alan you.
Interim Chief Financial Officer, Peter Lee.
Before I turn the call over to Alan I need to remind everyone today that our.
Our 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 IPO registration statement in its most recent 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.
Packaging undertakes no obligation to update any forward looking statements, except as required by law.
Please also note that during today's call management will be discussing adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures as defined.
The SEC regulation G.
Any reconciliation of non-GAAP financial measures to the most recently are the most directly comparable GAAP measures is included in today's press release, which is now posted on the company's website and with that it's my pleasure to turn the call over to CEO Alan you Alan.
Thank you Roger Good afternoon, everyone. We're pleased to be here with all of you today, our business continued to grow at a robust pace.
Earlier today, we reported solid third quarter net sales will that reflect exceptionally strong demand for our products and continued expansion in our customer base.
Market trends remain state remains favorable, particularly for the environmentally friendly product and solution Doctor with packaging provides.
For the third quarter net sales were in line with the guidance range that we have increased just last month growing at a pace of 35% year over years.
In our distributor online and National channel were particularly strong excluding the personal protective equipment products that we sold in the third quarter last year during the height of COVID-19 pandemic.
<unk> compared to sales growth for the third quarter was 43% online sales rose 64% year over year in the third quarter as we continue to ship our sales mix towards high margin channels sells through national and distributor channels also increased at a double digit pace ourselves or somewhat.
Constrained by inventory shortages.
Talking from tight labor conditions and port delays in the third quarter, we are managing the labor environment through increased recruiting efforts the use of temporary labor and target or target overtime and shifted distributions to other facilities in our supply chain.
Gross margin in the fiscal 2021 third quarter declined year over year, primarily due to the increase in freight costs.
Every company is experiencing.
Freight rate again rose from the third quarter relative to the last year, although they have begun to ease and stabilized recently.
Spike is the sequential improvement we expect these rates to remain at the current higher level compared with last year.
In addition.
Gross margin was affected by increased landed cost which include freight and duty and cut some brokerage fee of approximately $1 8 million versus a benefit in the same quarter last year and in preceding 2021 second quarter. These increased fees were capitalized into inventory in the prior quarter, resulting in a <unk>.
Higher inventory cost in the third quarter subsequently ask the companies. So it's higher cost inventory, resulting from increased landed cost capitalized from the second quarter. It negatively affected gross margin the landed cost vary from month to month, especially due to the extreme cost fluctuation of ocean freight this year.
We will likely see a benefit for the fourth quarter based on the current inventory being so it carries a lower landed cost.
To respond to the current inflationary pressures and product shortages.
And to protect our margins we used to to the multiple price increases in September and again in March and November without any pushback as a result, we expect our gross margin to improve sequentially in the fourth quarter.
Our positive business momentum has continued continuing into the fourth quarter with the secular tailwind. We've seen this year I think consumer spending where services adoption of environmentally friendly product, helping to drive demand and support for our business.
As a result, we're currently targeting net sales to be in the range of $93 million to $96 million in 2021 fourth quarter up about 34% at the midpoint of the range.
With the same period last year.
This sequential decline is consistent with normal seasonality, we expect ourselves to result for the full 2021 year in the range of 366 million to $369 million.
Growth in.
High margin online sales and actions we've taken to pass along higher freight costs also gave us confidence in our ability to improve our gross margin in the fourth quarter, we want to leave adequate time for questions. So I'll stop here and turn the call over to Peter to discuss our third quarter results in detail Peter.
Thank you Alan.
Our 2021 third quarter results.
Strong top line growth, although gross margin decline.
<unk> expenses increased primarily due to higher freight shipping and labor costs.
Net sales increased 35% over the prior year to $103 million in 2021 third quarter.
During the height of the pandemic last year, we shifted quickly two important PPE products to meet a critical need.
Sales of these products in the last year's third quarter totaled $5 million.
Since they peaked in the second quarter of last year PPE sales ethics that have declined.
<unk> represented less than 1% of total sales in this year's third quarter.
Excluding PPA product sales for 2021 third quarter rose, 43% year over year.
Sales to distributors, our largest channel grew 44% in <unk>.
Sales to national chains expanded 24%.
Primarily due to more business with existing customers online sales rose, 64% for the quarter, reflecting strong demand and our continued investment in this critical channel.
Sales to retail channel fell 14% from a year ago with themselves shifted from retail to online channel.
We also increased minimum shipping requirements to better manage it.
Our tight labor conditions, which shifted a portion of our sales mix from retail to distributors, which enabled us to better utilize staffing and resources.
For reference the tables.
Our earnings release issued earlier this afternoon break out sales of our traditional products, excluding PPE by channel.
Gross profit increased 29% to $30 million for 2021 third quarter, primarily due to the strong sales growth for the quarter, partially offset by a decline in gross margin.
Our gross margin was 29% for 2021 third quarter, a decline of 120 basis points.
Compared to 32% for the same period last year.
The gross margin decline, primarily reflects higher freight cost, which have begun to ease and stabilize in the fourth quarter.
Even if we continue to take actions to pass through of higher costs through a series of price increases.
Although our gross margin was slightly lower sequentially for the third quarter, we expect to see improvement in the fourth quarter and likely to see additional benefit from the freight and duty capitalization as Alan mentioned earlier.
Operating expenses for the third quarter increased 53% year over year to $24 million.
Principally reflecting higher shipping costs payroll expenses.
Associated with the workforce expansion increases in facility and transportation costs and higher professional fees.
Stock based compensation of <unk> 8 million.
Yeah.
Operating income declined 24% to $5 million for 2021 third quarter.
Operating margin was five 2% compared with nine 2% for the same period last year. This is primarily due to pressure from higher freight and shipping costs.
Provision for income tax expense was $1 million from 2021 third quarter slightly lower than our provision for the same period last year.
Our effective tax rate was 24% for both periods.
And we continue to expect our effective tax rate for 2021 to be in the mid 20% range.
Net income amounted to $4 1 million for 2021 third quarter compared with $4 6 million for the same period last year.
Net income attributable.
Attributable to care packaging was $3 8 million or 19 cents per diluted share for the 2021 third quarter compared to $4 1 million or two six or 26 cents per diluted share last year.
Adjusted EBITDA on a consolidated basis was $8 2 million for the 2021 third quarter comp.
Compared with $9 1 million a year ago.
Adjusted EBITDA margin was 8% in the third quarter compared with 11, 9% for the same period last year.
Adjusted EBITDA attributable to care packaging was $7 3 million for 2021 third quarter.
Adjusted EBITDA attributable to care packaging was seven 1%.
Net cash used in operating activities was $3 6 million for the 2012 third quarter compared with net cash provided by operating activities of $3 6 million for the same period last year.
The decline primarily was due to change in working capital in particular, decreasing accounts receivable and our line of credit balance.
I will now turn.
The call back to Alan for closing remarks, then we'll be happy to answer any questions you may have.
Alan.
Thank you Peter our business continues to thrive as we capture a positive secular trend in the foodservice industry.
Nimble supplier of a wide range of products carry packaging is able to respond more quickly to market conditions and because of the competition, which we believe give us a tremendous advantage our 2021 third quarter to deliver solid growth in sales as we proactively worked through our cost pressures. We're pleased that demand continued to be strong.
Which we believe will contribute to another solid sales performance in the fourth quarter with that alternative.
Call over to the operator, operator for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Jake Bartlett of Truest. Please go ahead.
Great. Thanks for taking the question.
My first question was on the supply constraints.
The ability to kind of to service customers. It sounds like demand is higher then they really you can you can accommodate right now so I'm wondering two questions on that one whether that makes the seasonality less so demand goes down in the fourth quarter, but.
Demand should be it sounds like its higher than even supply now so shouldn't.
If your ability to supply.
The same shouldn't and demand is kind of higher in the third quarter. Then you could you could you could meet shouldn't that lessen the impact of seasonality in the fourth quarter.
Jay that is correct and that's why I mentioned that we're not going to see a large seasonality in the fourth quarter.
Normally in the past.
Shortly.
The company's sales has been has dropped in the fourth quarter.
Starting in the October and November and December primary reason for that is.
Towards the end of December most of the distributors stopped purchasing product they stopped taking out inventory.
Inventory tax purposes, or adjusting their inventory or your inventory inventory count. So they were stopped reducing inventory and most likely towards the end of the year. The last week basically it's really hard to find any distributor of buyers that it's actually working most of them on vacation, except for the national chain account they've already stocked up so.
In the past, we see a bigger change and to get bigger in terms of differentiation analogies.
But this year due to the lack of supply we are having just hard enough hard time to catch up with it.
But the man it's like every single case of cut that we offload the container it's gone the next day.
Every single case, our product that we produce in our all of our facilities are basically purchased spot out we even have to ship product from Hawaii to Chino.
Hi, I had a pretty high shipping.
Shipping freight and they're gone immediately.
At the time, they are lending, California.
That's how the bank demand is right now in the market and even with that every I would say every manufacturer in the marketplace. It's happy to experience. The same thing and I was at anywhere you go into the west you'll find people that hate to Sarajevo, we might not have a lead we might not have a straw we now have a cup.
The substitution Cup and you won't be surprised if you go to any national chain and they usually are playing wild clear coming out of a brand of cup anymore. I mean, I wasn't even on the plane and you'll probably see people substitute.
Traditionally our airline local cops versus a clear Cup. This is how tied the demand is in the market right now and it's been it's very strong has been strong in the third quarter and we see this that hasn't stopped and it's gotten even worse now.
Got it that's helpful and if you think forward to 2022 and it sounds like demand should remain strong, but how do you. How comfortable are you that supply is going to going to improve so that your sales can grow with that demand where do you think that you know really sales growth is just going to be constrained just because of all the <unk>.
As you just mentioned.
I Havent, we havent informed by the supply manufacturing raw materials voucher.
The supply will be will be even tighter into your 2022, especially with paper product.
More and more cities and states are requiring company to go ESG and and the only way to go that is Egypt logos or multiple molded fiber product or paper and there's going to be a there has already been on allocation on paper, a raw material and we've been told that a 2022, it's going to.
It's even worse and as well as the compulsive raw material.
<unk> 2020, there is a there was a more supply in 2020 during the Covid period, starting now it has tightened up Dirty man made they're even till 2024 E. P. L. A risen husband basically pre purchase already.
Got it so just the implication if I'm hearing that right. You said you said you would expect that the supply.
Supply constraints.
The sales growth for you in 2022.
What we've done is we.
In port, where actually ordering more product from overseas, whereas supply more inventory from overseas.
And two to reduces our.
Basically increase our sales revenue because there's a demand out there and we've seen that more and more customers are coming towards us so to mitigate that.
We have.
<unk> actually found more vendors and overseas it.
Different countries to bring product in.
So that we can protect our revenues for the year 2020.
Great Great. That's helpful. And then just last question on gross margins.
For the fourth quarter, New specific and then going forward, but can you quantify.
The impact of $1 8 million.
Being that you had in the third quarter are you expecting that to reverse in the fourth can you help us by quantifying what that what that portion could be.
And then and then separately as you think about gross margins.
To assume that that freight costs kind of stay where they are now.
In the fourth quarter and into 'twenty, two and then you think about the pricing that you just took what would what would gross margins look like in that scenario. So given your pricing and then just assuming that freight costs stay where they are.
Well here's the thing.
Gross margin was 29% that's part of the reason the main reason because we had to wait until the capitalization of $1 $82 million that we are we are basically book in the third quarter and during the second quarter, we had actually had a cat.
Afraid annuity capitalization of gain of more than $1 $8 million I, its actually north of $1 billion. So we actually enjoy the benefit of the freight and duty capitalization, we imported more product at a higher ocean freight rate the second quarter. So now in third quarter, when we reduce our inventory.
<unk> and lowered our freight costs from the second quarters.
We were actually booking a negatively on the $1 $8 million in the fourth quarter, we already seen that we won't see that $1 $8 million negative affecting our gross margin.
We're actually looking at potential.
Potentially.
An increase again of.
Afraid duty capitalization in the fourth quarter.
How much I wouldn't I wouldn't say, but we are expecting to gain in the freight duty capitalization in the fourth quarter, but for sure if not that'd be a naked at $1.8 million back in the second quarters. So with that said, it's definitely will be.
North of 29, 5% just like we did in the third quarter at 29, 7% because of the favorable gain that will be booking fourth quarter plus the increase that we had a September 15, which had a very a pretty fairly large increase in September September 15, and some of the customer request.
<unk> got an extra one week to take into effect the pricing because they have purchase orders in so those increases are not fully reflected in third quarter and on top of that September 15 increase We Institute Institute at another large increase in November 1st.
Across all across almost all of the the most basic.
Basically the hottest item that we were selling carrying in.
Could it be at the cost basically.
It's going to help us pretty nicely on the fourth quarter gross margin.
What reduction in defrayed duty cost.
Improvement in sales.
We do see a very.
Healthy fourth quarters.
Potentially.
Helping us to reach our goal of 31% I mean, that's our goal we set in the beginning.
Beginning of the year, so basically where we're hoping to see that go basically.
Great. Thank you very much I appreciate it.
Yeah.
The next question comes from Ryan Merkel of William Blair. Please go ahead.
Hey, Thanks, So first off Alan I, just wanted to get your view high level. What are you hearing from restaurant customers our traffic.
Levels and then are they are you still seeing with delivery and take out at a very high rate.
Yes that is I do see the restaurant delivering take out weight at a high rate because our the demand for a night by night takeout food containers from all of our restaurant chain customer.
And not only that on the new customers and some of our national chain accounts are telling us they want they are seeing a 32.
240% increase.
In the holiday season for the takeout.
Mainly they're doing.
Most of them are doing promotions.
Adding it.
One of them one of my chain large chain that we've been working with are they only though we're working only with board Nash now, they're adding Uber eats and other channels are selling the product.
And Ah seasonality for the change I would say that the best month will be there.
The holiday season for most of these change how we work with and Oh.
Also this this time of the year reasonably we added.
It was actually a half a dozen or more a new chain customers accounts that came more to us with us and I'm certain that the restaurants still robust, especially in take out.
One of the main reason that they are focusing on takeout is they're lacking staff to two to service the dining area. So.
So it's a cost of less too just to surfaces takeout and by the way. They don't have people to actually work on the floor for the indoor dining.
Yeah, that's interesting makes sense okay.
Good to hear and then second question you've had a lot of price increases. This year can you just give us a sense of where is year over year price inflation right now and I got to think there's a lot that carryover is next year. If you could just.
Help us with you know maybe a range on what that might be.
Yes, we instead instituted.
At least five price increases this year.
And then most of them are from a from the last six months from past six months basically.
Primary reason inflation really.
Shot up labor costs really really skyrocketed.
It's really tough to get people employee to retain employees nowadays and.
Not really not to mention ocean freight domestic logistics freight cost has also nearly doubled in the past 12 months versus last year.
And are we seeing any.
Priced right.
Stability.
No we have not seen price stability, primarily there is a major factor that we're waiting to see how that's going to play into our costs for every importer in the U S.
We've been notified by all of our shipping carrier starting November 15, the port of Los Angeles will be penalizing.
Shipper.
If theres a container that's not pull out of the shipyard, but the problem is the shippers are telling the importers. They will pass all of these penalties into the importers and of course the important pass on these penalties to the consumers.
And in the past we were told that right now it's not that important important doesn't want to get these companion out of the port the port issue. The port doesn't have enough employees to get these containers chassis to get to the truck I mean, theres truckers basically these truck that they wanted to take these container out so there is.
There is no such thing as a shortage of truckers. The only reason that there's a shortage of truckers because its taking three times the amount of time to get a contained it out of the port due to shortage of labor in the port. So ultimately we're just waiting if this penalty is really going to go through because if it go through.
We're going to see even larger inflation because all of these foundries going to passed onto the consumer immediately.
Yeah, it's definitely an interesting situation with the penalties there okay. Thanks I'll pass it on.
Once again, if you would like to ask a question. Please press Star then one on your telephone.
Our next question will come from Michael Hoffman of Stifel. Please go ahead.
Yes.
Hey, Alan Peter Thank you.
Ellen you began this year going public with a guide that was 911 EBITDA margins.
Based on how you're framing.
The fourth quarter.
How does that how do we stand there I'm assuming we're at the low end, but are we going to still be inside nine to 11.
We are still projecting a nitrogen 11 EBITDA margin as we mentioned that the fourth quarter, we do see a strong margin due to the favorable favorable.
A favorable aspect that works, we're going to see that we already took the hit actually we are subtracted in third quarter, the freight and duty capitalization and we're going to see a favorable freight and duty capitalization, which going on also with the price increases and the increase in proven himself.
Nike 11, it's still our target.
For the year in okay.
And and Youre expecting both margin and dollars of EBITDA it would be better sequentially.
Yes.
Right, Okay, and just to be clear for everybody. So your freight duty was high and <unk> got buried in your inventory hurt your sales in three two you've worked all of that inventory out. So it's all gone or most of it has gone up how much of it's gone.
Our inventory level is at the lowest I've seen in this year currently.
Alright, so that one eight that was built into inventory but.
Put pressure on the gross margin and <unk> now out so unless theres incremental freight Judy customization Carson and.
Over and above what you were thinking of doing the same thing on short term or inventory turns I'm gonna be okay. We're gonna be okay.
Yes.
Let me if I may so all of them in.
Our inventory turns little bit above 60 days.
Following back guidelines to answer your question, yes, It would have all turned.
But there are different degrees of turns for each different skus, so but on average we would return.
And then your assumption would be correct in that.
The sales in the fourth quarter would have a lower cost inventory.
Got it.
You have talked numerous times are moving more and more supply out of China into other vendors and you were being aggressive about doing that given some of the rolling blackouts are going on in China.
What progress did you make on that can you share that with us.
Sure, we I would say that right now, we're getting a lot more product out of China into Taiwan.
Earlier in my conference call I mentioned that we added several new vendors and most of these vendors are in Taiwan.
Vendors on the Cup side on the mid size and some of these are most of our items that we added and from Vietnam.
Particularly we wanted to really move away we don't.
Political stability is a.
China, it's really uncertain, especially right now with the Covid that's basically it.
There are a lot of.
Actually increase in Covid cases in China, and in more and more its provenance or shutting them their city down for his many interesting state intercity travels and selander rest citizens residents to stay put.
Restaurants are doing bad because they're only doing take out and most of the restaurants are are shutting down due to COVID-19.
And we're concerned that if this continues I mean do they just started two weeks to three weeks ago. This escalation of Covid cases are spiking well just.
Concerned at it during the wintertime it will escalate even.
Even more into the more people will catch COVID-19 in China, and there'll be more shutdown in that state area.
Also the <unk>.
Blackout period, even though.
Most of the capacity that we worked with our back to 80%.
We don't know.
Any time it could take a shut them down and we don't want to take that risk. So by doing so we move more product into Taiwan.
And also Vietnam.
Okay. So you are about I think if I remember correctly about 20% out of China. So we're below 20 now.
I don't have that number but definitely I cannot give you. The after we after the call. We can look into the numbers see how much we are actually imported from China.
China versus other countries or how much we reduced okay.
So that would be helpful. And then you've been giving us all along through the year as a percent of total revs that were eco friendly and the trend has been very favorable what was it in the third quarter.
Peter do you have that number.
I think I saw the number was 18%.
For eco friendly sorry on the overall, sorry, I was on mute.
$18 7 million, which takes about 18% of the total revenue.
Okay. So that's.
Think I'm doing it off of memory.
Sounds sequentially on a percentage basis is that correct.
0.2%, Yes, so Q2 was 17 million 18% of total revenue.
Increased to $8.
Better on.
Okay, better on total dollars, but a little less 1%, so leveling off a little bit and is that mostly the supply issue is you could have sold more if you could have gotten it.
It is actually it is true.
And mostly mostly on supply issue and also we are stocking up more on the compulsive product line right now right now we're doing the stocking up in our Hawaii facility in our Chino facility, mainly two we know that January 1st Bill Foley, We'll continue we'll pass through we already stocking up for all of our <unk>.
China account on their proposal lids on their compulsive a clear Cup.
Basically and I'll take out containers, that's something that we'll start to turn on a basically Hawaii will will force every restaurant every national chain to start using cabos will take out product.
So we should start moving those out the mid December.
In Hawaii.
Hey.
Okay.
If my memory serves so I'm gonna want I always forget the a b whatever it is but there's a new content coming in in California, how is that disrupting the whole model at this point.
Disrupting might be positive, but that was impacting the model.
I'm sorry, what was it that you just mentioned that was a new neutral.
California has got a content of recycled content.
Packaging food packaging content coming in I believe in 2022.
And I was wondering how that is influencing buying behavior of your customers or your ability to meet the demand side, given what's happened with the contract role change.
I I'm not sure, which content you were referring to I mean recycling content, you're referring to I I know that.
California is actually asking people not to serve saw straws, while your titles.
If a public they're asking them to put behind the bar and restaurants.
Upon the request and I know that.
I believe that some of the cities are actually putting more pressure in terms of for the restaurant operators to use.
The proposal of a product versus paper and plastic.
That's what I know, it's been going on and they're just actually tightening up the rules and not adding more product to the list that you've already stated in the past and that's that basically it's it's going to really push more and more customer restaurants, and as far as sourcing for our proposal for product and we.
Just the past three past quarter, we actually.
Ah created or actually brought in more composed of a product line. So.
So that we could serve as additional customers.
Got it last two for me of where are you in adding manufacturing capacity, either in California, or Texas, and then I want to come back to Us November 15th.
Freight volumes.
Well when.
When we when we notice the freight and freight and ocean freight and everything.
Really begin to rise and the demand of these cups begin to rise as well as the demand for composites straws has a we're getting increase on that part.
We purchased based on what we mentioned in our IPO.
IPO that were using I believe was a certain percentage of our EBITDA our revenue to purchases of 5% was something on the $5 million I would say too.
Purchase equipment.
Already ordered.
Several paper machine plastic machine strawbridge additional strong machine and take out container machines and on top of that we are looking to orders.
Automated robotic packaging machines.
They will start to come in.
December which is next month and January and February all the way till the end of next year. We are looking to add additional much more capacity I would say additional 20, 30% of our existing capacity.
The biggest challenge right now is training the people I mean buying equipment and it's not that hard getting it and it's not the heart. The hardest thing is getting the people trained and getting people staff and that's why we've.
We had higher we actually change our policy in terms of our full time only.
Where we're taking the all the flexibility of the employee scheduled hours, so well are making that available for our.
People to enter the interview.
Newly hired or newly interviewed staff. They can work part time based on their flexible schedule and then we can call them because we know during the holiday there's going to be a lot of employee calling out for a sick or calling out on vacation and take out there and at least we want to make sure that it doesn't disrupt our service is shipping product out.
So we are having more part time seasonal workers that part.
Also seasonal drivers and very importantly, we will start working on.
On Saturday.
Adding one extra day each each week I was a working day not only for the production because it's our protection is 24 seven.
Warehouse facility shipping it used to be five days were adding the extra day. So that we can catch up with the orders and shipping a product starting I believe starting job.
November 3rd quarter third week of November.
Okay and then on this November 15th.
Fine that's coming from the ports have you looked back at <unk> and said if that find it existed during the quarter, what that would've been a been as an incremental cost.
I would estimate minimum.
Half a million dollars a month.
Half a million a month okay.
And are you hearing of.
The distributors and vendors.
But companies talking about any kind of legal action against the ports because this feels like a gouging issue on when you're when you think about it.
Certainly I can't understand how adding a compounding $100, where the second day, it's 200 to 30 days 300. Unfortunately, it's 400.
Is going to influence moving containers faster if there the bottleneck so what's the legal sort of ramifications at.
All of the.
People like you are sitting here on the gateways to get there.
Containers out of the ports the bottleneck.
Well I this is how I feel.
Where where it's small importer compared to target Walmart or Costco and and if we're gonna be hit with half a million dollars a month.
These large companies are going to be hit with millions.
And and basically ultimately, they're gonna be passing on to the consumers.
I I'm, just sitting on the sidelines of weight.
How is this going to play out because like you said it the money will be made by the port of Los Angeles.
Port already making tons of money.
They're paying these are union workers, a lot of money already to move these two to call sick or two are they.
Whatever is happening right now and like you said, it's not gonna help moving these container.
They just need to get more people into working.
I mean, we did.
The president of items that were asking them to work 24 hours seven yeah, Jack and asking them to work 24 hours seven but they don't have people to manage towards 24 seven.
No you're you'll be question had to do it they don't have people to do it.
Yeah.
That's an issue and finding the shipper and ultimately finding the consumer that is not going to help.
We've already seen the highest inflation in the past months.
Once these fine goes through.
We don't see even higher inflation.
Down the road.
And but some of the input or am I just just.
Abandoned the computers.
Containers.
Costing me already $15000 per container, if I'm gonna be fire another $10000 container.
Importers I'll just abandon it I don't want to get it it's not worth it right and that's what create more bottleneck when people start banning abandonee containers, whereas the port Gonna put those abandoned container app.
Right yes.
Yeah, that's what I've been hearing from other distributors alright, good luck interesting environment Huh.
It's challenging never been before.
Yeah.
Thank you guys. Thank you. Thank you all thank you everyone.
Well.
The next question is a follow up from Jake Bartlett of true list. Please go ahead.
Hi, Thanks for the follow up I'm, just just a couple quick ones.
And your comment about kind of being able to hit.
The low end of that of that 9% to 11% EBITDA margins when they just want to confirm that that's the kind of the X global wealth.
EBITDA as you think about it.
Just just doing some rough math, if you assume that that you're at 31% gross margins. The high end of the revenue guidance. It would seem that some of the other costs would have to come down to hit the 9% for that for the year and so those include shipping costs.
Even even if they come down and stay constant as a percentage of sales.
You'd be challenged to get there so the other missing pieces, where the other piece of the puzzle is recurring G&A.
Or operating costs, which which had been going up pretty significantly every quarter is there any reason to think that that that cost might be coming down anything kind of abnormal than it's been in the been in the third quarter and second quarter that.
Is that would that would ease in the fourth.
You are correct, we are seeing the shipping cost coming down as well as labor costs coming down one of the thing that really hit us in the second quarter is that due to labor shortages, we have to hire third party lump of services, which was much higher than our normal services, we had to hire out temp agencies, which have to pay a premium for the temp agency staffing.
So we made it we manage to higher direct more direct people employees and also doing the second quarter, we have to spend a lot of actually I always say almost 70% more just to ship product over the road from California into Texas, because there was there was so much product.
Coming in we overwhelmed the California warehouse, which we have to spend more money to transfer into the other warehouse location, which we mitigated that and we are effectively reduce that in the near the end of the.
Third quarter and continuing into the fourth quarter. So, yes, we will see shipping domestic shipping coming down we will see our labor cost coming down.
We will also see a major freight.
Freight coming down because.
US utilizing more of our contracted freightway ocean freight rate versus the higher brokerage freight rate that we have to use in the third quarter.
The quarter got it got it that's really helpful. And then just another question on <unk>.
Sales in the national sales revenue.
The year over year, but it didn't accelerate much from the second quarter into the third.
Whereas whereas distributor accelerated a bunch of all the other.
Channel has accelerated I think more.
So so just what is going on with Nash is there. Some reason why the sales there would be constrained.
In this environment may be there.
You're less likely to kind of look outside there.
Maybe it's harder to get incremental.
You know customers for you just just why isn't that channel growing quicker in this environment.
We have a lot of inquiries from these Nash.
New National chain accounts, we told them, we don't have enough capacity. So we're asking them to give us more time to get ready to service them one of the national chain.
Well, knowing Texas, we told them that we can start maybe December once we stock up more in our inventory because we do have to service the existing national chain account first before we can take on new ones on the distribution side basically we're selling to whatever we have enough inventory. There is no commitment too to really have to fulfill.
The order of 100%, so and because of the shortage in the entire market, we're getting distributor buying from everywhere and anywhere they can find product to serviced or their retail customers, but for national chain account, we can't just take a national chain account I mean, knowing that we're going to get out of products.
Got it that makes a lot of sense I appreciate it.
Thank you Jake.
This concludes our question and answer session I would like to turn the conference back over to Alan you for any closing remarks.
Thank you operator, and thanks to everyone who joined US today, we appreciate your support and interest in our company.
You have our commitment to working hard and working smart toward achieving our collective goals of enhancing shareholder value. We look forward to speaking with you again soon goodbye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
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Good afternoon, and welcome to the carrot packaging third quarter 2021 earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Roger Pondo with Palmdale Wilkinson Investor Relations for care at packaging. Please go ahead.
Thank you Andrea and good afternoon, everyone.
Welcome to care and packaging.
2021 third quarter earnings call.
I'm, Roger Pinedale would ponder will consume packaging <unk> investor relations firm that would be my pleasure to momentarily to introduce the company's Chief Executive Officer, Alan you and its interim Chief Financial Officer, Peter Lee with <unk>.
I turn the call over to Alan I need to remind everyone. Today that our 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.
Would you beyond the company's control, including those set forth in the risk factors section of the company's IPO registration statement and in its most recent Form 10-Q as filed with the Securities and Exchange Commission copies of which are available on the SEC's website at Www SEC.
<unk> Dot 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 care packaging undertakes no obligation to update any forward looking statements, except as required by law.
Please also note that during today's call management will be discussing adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures as defined by.
SEC regulation G.
And a reconciliation of non-GAAP financial measures to the most recently are the most directly comparable GAAP measures is included in today's press release, which is now posted on the company's website and with that it's my pleasure to turn the call over to CEO Alan you Alan.
Thank you Roger Good afternoon, everyone. We're pleased to be here with all of you today, our business continued to grow at a robust pace.
Earlier today, we reported solid third quarter net sales growth that reflects exceptionally strong demand for our products and continued expansion in our customer base.
Market trends remain space remains favorable, particularly for the environmentally friendly product and solution that care packaging provides.
For the third quarter net sales were in line with the guidance range that we have increased this last month growing at a pace of 35% year over years.
In our distributor online and National channel were particularly strong excluding the personal protective equipment product that we sold in the third quarter last year during the height of COVID-19 pandemic.
<unk> compared to sales growth for the third quarter was 43% online sales rose 64% year over year in the third quarter as we continue to ship our sales mix towards higher margin channels sells through national and distributor channels also increased at a double digit pace our sales were somewhat.
Constrained by inventory shortages.
I'll keep on tight labor conditions and port delays in the third quarter, we are managing the labor environment through increased recruiting efforts the use of temporary labor and targets over target of over time, a shifting of distributions to other facility in our supply chain.
Gross margin in the fiscal 2021 third quarter declined year over year, primarily due to the increase in freight costs.
Every company is experiencing.
Freight rate again rose in the third quarter relative to last year, although they have begun to ease and stabilized recently.
<unk> sequential improvement we expect these rates to remain at the current higher level compared with last year.
In addition.
Gross margin was affected by increased landed cost which include freight and duty and cut some focus fee of approximately $1 8 million versus a benefit in the same quarter last year and in preceding 2021 second quarter. These increased fees were capitalized into inventory in the prior quarter, resulting in a <unk>.
Higher inventory costs in the third quarter.
Subsequently at the company is still with higher cost inventory, resulting from increased lending costs capitalized from the second quarter. It negatively affected gross margin the landed costs vary from month to month, especially due to the extreme cost fluctuation of ocean freight this year.
We will likely see a benefit for the fourth quarter based on the current inventory being so that carries a lower landed cost.
To respond to the current inflationary pressures and product shortages.
And to protect our margins, we instituted multiple price increases in September and again in November without any pushback as a result, we expect our gross margin to improve sequentially in the fourth quarter. Our positive business momentum is continuing continuing into the fourth quarter with the secular tailwind we've seen this.
Year in consumer spending where services adoption of environmentally friendly product, helping to drive demand and support for our business.
As a result, we're currently targeting net sales to be in the range of <unk> $93 million to $96 million in 2021 fourth quarter up about 34% at the midpoint of the range.
With the same period last year.
This sequential decline is consistent with normal seasonality, we expect ourselves to result for the full 2021 year in the range of 366 million to $369 million.
Growth in.
High margin online sales and actions we've taken to pass on higher freight costs also give us confidence in our ability to improve our gross margin in the fourth quarter. We wanted to leave adequate time for questions. So I'll stop here and turn the call over to Peter to discuss our third quarter results in detail Peter.
Okay.
Ireland.
Our 2021 third quarter results.
Like strong topline growth, although gross margin declined.
<unk> expenses increased primarily due to higher freight shipping and labor costs.
Net sales increased 35% over the prior year $203 million in 2021 third quarter.
During the height of the pandemic last year, we shifted quickly to important PPE products to meet a critical need.
So it will be probably in the last year's third quarter totaled $5 million.
Since they peaked in the second quarter of last year Pp sales ethics specs that have declined.
And represented less than 1% of total sales in this year's third quarter.
Excluding PPA product sales for 2021 third quarter rose, 43% year over year.
Sales to distributors, our largest channel grew 44% and sales to national chains expanded 24%.
Primarily due to more business with existing customers online sales rose, 64% for the quarter, reflecting strong demand and our continued investment in this critical channel.
Sales to retail channel fell 14% from a year ago with themselves shifted from retail to online channel.
We also increased minimum shipping requirements to better manage it.
Our tight labor conditions, which shifted a portion of our sales mix from retail to distributors, which enabled us to better utilize staffing and resources.
For reference.
Tables.
Our earnings release issued earlier this afternoon break out sales of our traditional products, excluding PPE by channel.
Gross profit increased 29% to $30 million for 2021 third quarter, primarily due to the strong sales growth for the quarter, partially offset by a decline in gross margin.
Our gross margin was 29% for 2021 third quarter.
Klein of 120 basis points.
Compared to 32% for the same period last year.
The gross margin decline, primarily reflects higher freight cost, which have begun to ease and stabilized in the fourth quarter.
Even if we continue to take actions to pass through our higher cost through a series of price increases.
Although our gross margin was slightly lower sequentially for the third quarter, we expect to see improvement in the fourth quarter and likely to see additional benefit from the trade and duty capitalization as Alan mentioned earlier.
Okay.
Operating expenses for the third quarter increased 53% year over year to $24 million.
Principally reflecting higher shipping costs payroll expenses.
Associated with workforce expansion increases in facility and transportation costs, and higher professional fees and stock based compensation of $8 million.
Yeah.
Operating income declined 24% to 5 million for the 2021 third quarter.
Operating margin was five 2% compared with nine 2% for the same period last year. This is primarily due to pressure from higher freight and shipping costs.
Provision for income tax expense was $1 million in 2021 third quarter slightly lower than our provision for the same period last year.
Our effective tax rate was 24% for both periods.
And we continue to expect our effective tax rate for 2021 to be in the mid 20% range.
Net income amounted to $4 1 million from 2021 third quarter compared with $4 6 million for the same period last year.
Net income attributable.
Attributable to care packaging was $3 8 million or 19 cents per diluted share for the 2021 third quarter compared to $4 1 million or two six or <unk> 26 per diluted share last year.
Adjusted EBITDA on a consolidated basis was $8 2 million for the 2000 <unk> third quarter comp.
Compared with $9 1 million a year ago.
Consolidated adjusted EBITDA margin was 8% in the third quarter compared with 11, 9% for the same period last year.
Adjusted EBITDA attributable to care packaging was $7 3 million for 2021 third quarter.
Adjusted EBITDA attributable to care packaging was seven 1%.
Net cash used in operating activities was $3 6 million for the 2012 third quarter compared with net cash provided by operating activities of $3 6 million for the same period last year.
The decline primarily was due to changes in working capital and particularly a decrease in accounts receivable in our line of credit balance.
I will now turn.
The call back to Alan for closing remarks, then we'll be happy to answer any question you may have.
Alan.
Thank you Peter our business continues to thrive as recast for positive secular trend in the foodservice industry.
As a nimble supplier of a wide range of products carry packaging is able to respond more quickly to market conditions and competition.
Which we believe gives us a tremendous advantage our 2021 third quarter delivered solid growth in sales as we proactively worked through our cost pressures. We're pleased that demand continued to be strong.
Which we believe will contribute to another solid sales performance in the fourth quarter with that I'll turn the call over to the operator, operator for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Jake Bartlett of Truest. Please go ahead.
Great. Thanks for taking the question.
My first question was on the supply constraints.
The ability to kind of to service customers. It sounds like demand is higher then they really you can you can accommodate right now so I'm wondering two questions on that one.
That makes the seasonality less so demand goes down in the fourth quarter, but.
Demand should be it.
It sounds like it's higher than you can even supply now so shouldn't kind of if if.
If your ability to supply.
The same shouldnt and demand is kind of higher in the third quarter. Then you could you could you could meet shouldnt that lessen the impact of seasonality in the fourth quarter.
Jason that is correct and that's why I mentioned that we're not going to see in large seasonality in the fourth quarter.
Normally in the past historically.
The company's sales has been has dropped in the fourth quarter.
Starting in October and November and December primary reason for that is.
Towards the end of December most of the distributors stopped purchasing product they stop taking out inventory <unk> inventory tax purposes, or adjusting their inventory or your inventory count. So they were stopped reducing inventory and most likely towards the end of the year. The last week basically it's really hard to find any.
Distributor of buyers that it's actually working most of them are on vacation, except for the national chain account they've already stocked up so.
In the past, we see a bigger change than it is bigger in terms of differences in seasonality.
But this year due to the lack of supply we are having just hard enough hard time to catch up with it.
The man.
It's like every single case of cut that we offload the container it's gone the next day.
Every single case of product that we produce in our all of our facilities are basically purchased spot out we even have to ship product from Hawaii to Chino, either hot at a pretty high.
Shipping freight and their God immediately.
The time, they are lending, California.
That's how the bank demand is right now in the market and even with that every every manufacturer in the marketplace.
Excluding the same thing and I was anywhere you go in the U S. You'll find people said hey, it's already above we might not have a lead we might not have a straw we now have a cup.
I'll use a substitution cup and you won't be surprised if you go to any national chain and they usually are playing wild clear coming out of a brand of Cup anymore.
I wasn't even on the plane and you'll probably see people substitute.
The traditionally airline local cut versus a clearer Cup. This is how high the demand is in the market right now and it's it's very strong has been strong in the third quarter and we see this.
Stop and it's gotten even worse now.
Got it great Thats helpful.
If you think forward to 2022.
It sounds like demand should remain strong, but how do you. How comfortable are you that supply is going to improve so that your sales can grow with that demand.
Where do you think that you know.
Sales growth is going to be constrained just because of all the challenges that you just mentioned.
I have we have been informed by the supply manufacturer raw material voucher.
Supply will be will be even tighter into your 2022.
Actually with paper product.
More and more cities and states are requiring company to go ESG and.
And the only way to go that is either because or multiply molded fiber product or paper and there is gonna be a there has already been allocation on paper, a raw material and we've been told that 2022, it's going to get even worse and as well as the proposal raw material.
During 2020, there is a there was more supply in 2020 during the Covid period, starting now.
<unk> tightened up their demand.
They're even till 2024 E PLE risen has been basically pre purchase already.
Got it so just need the implications if I'm hearing that right. You said is that you would expect it to.
<unk> constraints too.
The sales growth for you in 2022.
What we've done is we've.
We're actually ordering more product from overseas or.
Supply more inventory from overseas.
And two to reduces our.
Basically increase our sales revenue because theres a demand out there and we've seen that more and more customers are coming towards us so to mitigate that.
We have actually found more vendors and overseas in different countries to bring product in.
So that we can protect our revenues for the year 2022 got it.
Great Great. That's helpful. And then just last question on gross margins for.
For the fourth quarter, specifically and then going forward, but can you quantify the impact of $1 8 million gain.
Being that you hadn't been with third quarter, you're expecting that to reverse in the fourth can you help us.
Quantifying what that what that portion could be.
And then separately as you think about gross margins.
To assume that that freight costs kind of stay where they are now.
In the fourth quarter and into 'twenty, two and then you think about the pricing that you just took what would what would gross margins look like in that scenario. So given your pricing and then just assuming that freight costs stay where they are.
Well here's the thing.
Our gross margin is 29% that's part of the reason the main reason because we have to wait until the capitalization of $1 $82 million that we are we are basically book in the third quarter and during the second quarter, we had actually had a cat.
Afraid due to capitalization of gain of more than $1 8 million, it's actually north of $1 million. So we actually enjoy.
The benefit of the freight duty capitalization.
Imported more product.
Higher ocean freight rate the second quarter. So now in third quarter, when we reduce our inventories and lowered our freight costs from the second quarters.
We were actually booking a negatively on the $1 $8 million in the fourth quarter, we already seen that.
We won't see that $1 $8 million negative affecting our gross margin.
And we're actually looking at a potentially.
Potentially.
The increase again of.
Frank do the capitalization in the fourth quarter.
How much I wouldn't I wouldn't say, but we are expecting to gain in the freight duty capitalization in the fourth quarter, but for sure if not there'll be a negative $1 $8 million back in the second quarters. So with that said, it's definitely it will be in.
North of 29, 5% just like we did in the third quarter at 29, 7%.
It does.
The favorable gain that will be booking fourth quarter, plus the increase that we had.
September 15, I wish I had a very a pretty a fairly large increase system September September 15, and some of the customer requested that an extra one week to take in effect the pricing because we have purchase orders in so those increase that is not fully reflected in third quarter and on top of that the September 15 increase we used to do institute it and.
Another large increase in November 1st.
Across all across almost all of the the most.
Basically the hottest item that we're selling carrying.
Could it be at the cost basically.
It's going to help us.
Pretty nicely on the fourth quarter gross margin.
What reduction in defrayed duty cost.
Improvement in sales.
We do see a very <unk>.
The fourth quarters that potentially.
Helping us to reach our goal of 31% I mean, that's our goal we set India.
At the beginning of the year, so basically where we're hoping to.
Do you see that go basically.
Great. Thank you very much I appreciate it.
Yeah.
The next question comes from Ryan Merkel of William Blair. Please go ahead.
Hey, Thanks, So first off Alan I, just wanted to get your view high level. What are you hearing from restaurant customers our traffic.
Levels and then are they are you still seeing the delivery and takeout at a very high rate.
Yes that is.
I do see the restaurant delivering takeout rate at a high rate because our the demand for a night by night takeout food containers from all of our restaurant chain customer.
And not only that on the new customers and some of our national chain accounts are telling us.
What they are seeing a 32.
240% increase.
In the holiday season for the takeout.
Mainly.
Most of them are doing promotions.
Adding.
One of my chain large chain that we've been working with are they only that we're working only with door dash now theyre, adding uber eats and other channels are selling the product.
And Ah seasonality for the change.
I will say that the best month will be there.
The holiday season for most of these changed how we work with and.
Also this this time of the year reasonably we added.
Actually a half a dozen or more new chain customers accounts that came up more to us with us and I'm certain that the restaurants still robust, especially in takeout.
One of the main reason that they're focusing on takeout is they're lacking staff to two to service the dining area. So.
So it's a cost of less too.
Just to serve as a take out and by the way they don't have people to actually work on the floor for the indoor dining.
Yeah, that's interesting makes sense okay.
Good to hear and then second question you've had a lot of price increases. This year can you just give us a sense of where year over year price inflation right now and I got to think Theres a lot of carryover next year. If you could just help us with maybe a range on what that might be.
Yes.
We instead instituted.
At least five price increases this year.
And then most of them are from.
From the last six months from past six months basically.
Primary reason inflation really.
Shot up labor costs really really skyrocketed.
It's really tough to get people employee to retain employees nowadays.
<unk>.
Not really not to mention ocean freight domestic logistic freight cost has also nearly doubled in the past 12 months versus last year.
And are we seeing any price cycle.
Stability.
No we have not seen price stability, primarily there is a major factor that we're waiting to see how that's going to play into our cost for every importer in the U S.
Been notified by all of our shipping carrier starting November 15, the port of Los Angeles will be penalizing.
Shipper.
If theres a container that's not pull out of the shipyard or the <unk>.
This the shippers are telling the importers they will pass some of these penalties into the importers and of course the important pass on these penalties to the consumers.
And in the past we were told that.
Right now it's not that important important doesn't want to get these container port if the port issue. The port doesn't have enough employees to get these containers chassis to get to the truck I mean, theres truckers basically these truckers there. They wanted to take these contained it out. So there is there is no such thing as shortage of truckers, the only reason that.
Theres a shortage of truckers, because its taking three times the amount of time to get a container out of the ports due to shortage of labor in the port.
So ultimately we're just waiting if.
This penalty is really going to go through because if it goes through.
We're going to see even larger inflation because all of these foundry is going to pass it onto the consumer immediately.
Yeah, it's definitely an interesting situation with the penalty there okay. Thanks I'll pass it on.
Once again, if you would like to ask a question. Please press Star then one on your telephone.
Our next question will come from Michael Hoffman of Stifel. Please go ahead.
Yes.
Hey, Alan Peter Thank you.
Ellen you began this year going public with a guide that was 9% to 11 EBITDA margins.
Based on how you're framing.
The fourth quarter.
How does that how do we stand there I'm assuming we're at the low end, but are we going to still be inside nine to 11.
We are still projecting a nitrogen 11 EBITDA margin we.
We mentioned that the fourth quarter, we do see a strong margin due to the favorable favorable.
Favorable aspect that we're going to see that we already took the hit accurate. We are subtracted in third quarter freight and duty cannibalization and we're going to see a favorable freight and duty capitalization, what's going on also with the price increases and increased improvement in sales.
911 is still our target.
For the year end okay.
And and you're expecting both margin and dollars of EBITDA it would be better sequentially.
Yes.
Right, Okay, and just to be clear for everybody. So your freight duty was high and <unk> got buried in your inventory hurt your sales in <unk>, you've worked all of that inventory out. So it's all gone or most of its gone and how much of it is gone.
Our inventory level as well.
Lowest I've seen in this year currently.
Alright, so that one eight that was built into inventory but.
Put pressure on the gross margin and <unk> is now out so unless theres incremental freight Judy customization Carsten and.
Over and above what you were thinking doing the same thing on short term or inventory turns so I'm gonna be okay. We're gonna be okay. Yes.
Let me if I may so are all of them in.
Our inventory turns a little bit above 60 days.
Following bad guidelines to answer your question, yes, they would have all turned.
But there are different degrees.
<unk> for each different skus, so but on average they would return.
And then your assumption would be correct in that.
The sales in the fourth quarter would have a lower cost inventory.
Got it.
You have talked numerous times of moving more and more supply out of China into other vendors and you were being aggressive about doing that given some of the rolling blackouts are going on in China.
What progress did you make on that share that with us.
Sure.
We I would say that right now, we're getting a lot more product out of China into Taiwan.
Earlier in my conference call I mentioned that we added several new vendors and most of these vendors are in Taiwan.
Vendors on the Cup side on the mid size. Some of these are most of our items that we added and from Vietnam.
Particularly we wanted to really move away.
Does the.
Political stability is a China, it's really uncertain, especially right now with the Covid.
That's basically it.
There are a lot of actually.
The increase in Covid cases in China and in more and more it's.
Providence are shutting them their city down for if any inter state intercity travels and tell lender citizens residents to stay put.
Restaurants are doing bad because they are only doing take out and most of the restaurants are are shutting down due to COVID-19.
And we're concerned that if this continues I mean do they just started last two weeks to three weeks ago. This escalation of Covid cases are spiking.
Concerned at.
During the wintertime it will escalate, even even more into the more people will catch COVID-19 in China, and there'll be more shut down in that state area and also the blackout period, even though.
Most of the capacity that we work with our back to 80%.
We don't know.
Any time it could take a shut them down and we don't want to take that risk. So by doing so we moved more product into Taiwan.
And also Vietnam.
Okay. So you are about I think if I remember correctly about 20% out of China. So we're below 20 now.
I don't have that number but definitely I cannot give you. The after we after the call. We can look into the numbers and see how much we are actually imported from China.
China versus other countries or how much we reduce okay.
So that would be helpful. And then you've been giving us all along through the year. The percent of total revs that were eco friendly and the trend has been very favorable what was it in the third quarter.
Peter do you have that number.
I think I saw the number was 18%.
For Eagle for any progress sorry on the overall, sorry I was on mute.
$18 7 million, which takes about 18% of the total revenue.
Okay. So that's.
I think I'm doing it off of memory.
Sounds sequentially on a percentage basis is that correct.
0.2%, Yes, so Q2 was 700 million.
18% of total revenue.
Increased to $8.
Bedroom.
Okay, better on total dollars, but a little less 1%, so leveling off a little bit and is that mostly a supply issue is you could have sold more if you could have gotten it.
It's actually it is true.
And mostly mostly on supply issue and also we are stocking up more on the <unk> product line right now right now we're doing the stocking up in our Hawaii facility in our Chino facility, mainly two we know that January 1st Bill Foley will continue will pass through.
Already stocking up all of our National chain account your compostable lids.
On their compulsive a clearer cup based.
Basically and I'll take out containers, that's something that we'll start to turn on.
Basically Hawaii.
Will force every restaurant every national chain to start using couples will take out product.
So we should start moving those out the mid December.
In Hawaii Okay.
Okay.
If my memory serves so I'm going to I always forget the a b whatever it is but there's a new content rule coming in in California, how is that disrupting the whole model at this point.
And disrupting it might be positive, but that was impacting the model.
I'm sorry, what was it that you just mentioned that was a new neutral.
California has got a content of recycled content.
<unk> food packaging content coming in I believe in 2022.
I was wondering how that is influencing buying behavior of your customers or your ability to meet the demand side, given what's happened with the content will change.
I am not sure, which content you were referring to I mean recycling content, you're referring to.
I know that.
California is actually asking people not to serve store straws, while your titles.
Public, they're asking them to put behind the bar and restaurants.
Upon request.
And I know that.
I believe that some of the cities are actually putting more pressure in terms of for the restaurant operators to use.
The component of a product versus paper and plastic.
That's what I know, it's been going on and they are just actually tightening up the rules and not adding more product to the list that they've already stated.
As stated in the past and that's that basically it's it's going to really push more and more customer restaurants, and so our sourcing for proposal of a product.
And we just the past three past quarter, we actually.
Created or actually brought in more supposedly product line.
So that we can serve as additional customers.
Got it last two for me of where are you in adding manufacturing capacity, either in California, or Texas, and then I want to come back to Us November 15th.
Freight volumes.
Well.
When we when we notice the freight and freight and ocean freight and everything.
It really began to rise and the demand of these cups begin to rise as well as the demand for Composedly Straws has we're getting increase on that part.
We purchased based on what we mentioned in our.
IPO that were using I believe was a certain percentage of our EBITDA or revenue to purchases of 5% was something on the $5 million I would say to purchase equipment.
You already ordered seven.
Several paper machine plastic machine storming additional strong machine and take out container machines.
And on top of that.
Looking to orders.
Automated robotic packaging machines.
They will start to come in.
December which is next month and January and February all the way till the end of next year.
We are looking to add additional are much more capacity I would say.
Additional 20, 30% of our existing capacity.
The biggest challenge right now is training the people buying the equipment and its not that hard getting it and it's not the hard the hardest thing is getting the people trained and getting people staff and that's why we've.
We hire we actually change our policy in terms of our full time only.
Where we're taking the flexibility of the employees scheduled hours, so well are making that available for our.
People to enter the interview.
Newly hired or newly interviewed staff. They can work part time based on their flexible schedules and then we can call them, because we know that the holiday there's going to be a lot of employee calling out for a six or a calling on vacation and take out there and at least we want to make sure that it doesn't disrupt our service is shipping product out.
So we are hiring more part time seasonal workers and that part.
Also seasonal drivers and very importantly, we will start working on.
Saturday.
Adding one extra day each each week.
Working day not for the only point protection because our protection is 24 seven.
Warehouse facility shipping it used to be five days, we're adding an extra day. So that we can catch up with the orders and shipping a product starting I believe starting.
November 3rd quarter third week of November.
Okay, and then on November 15th.
Fine that's coming from the ports have you looked back at <unk> and said if that find that existed during the quarter, what that would've been a been as an incremental cost.
I would estimate.
Minimum.
Half a million dollars a month.
Half a million a month okay.
And are you hearing of.
Other distributors and vendors.
But companies talking about any kind of legal action against the ports because this feels like a gouging issue on.
Then when you think about it.
Certainly I can understand how adding a compounding $100 where the secondary its two hundreds of third days 300. Unfortunately, it's 400.
It is going to influence moving containers faster if there the bottleneck so what's the legal sort of ramifications that.
All of the people.
People like you were sitting here on the gate waiting to get there.
Painters out in the ports the bottleneck.
Well I this is how I feel.
Where where it's small in quarter compared to target Walmart.
Or Costco.
And if we're gonna be hits with half a million dollars a month.
These large companies are going to be hit with.
Millions.
And and basically ultimately they're going to be costly onto the consumers.
I I'm, just sitting on the sidelines of weight how.
How is this going to play out because like you said it the money will be made by the port of Los Angeles.
Port already making tons of money Theyre paying these are union workers a lot of money already to move these to call sick or two.
What ever happened to you right now and like you said, it's not going to help moving these container because they just need to get more people into working on.
I mean.
The president of items that were asking them to work 24 hours seven Jack and asking them to work 24 hours seven but they don't have people who manage towards 24 seven.
No you're you'll be question you have to do it they don't have people to do it.
And that's the issue and finding the shipper and ultimately finding the consumer that is not going to help.
<unk>.
We've already seen the highest inflation in the past months once these filing goes through.
We don't see even higher inflation.
Down the road.
And but some of the import or am I just.
Abandoned the containers.
Containers.
Costing me already $15000 per container, if I really find another $10000 container.
Importers I'll just abandon it I don't want to get it.
Right and that's what create more bottleneck when people start banning abandonee containers, whereas the port gonna put those abandon container app.
Right yes.
That's what I've been hearing from distributors alright, good luck interesting environment Hey.
It's challenging never been before.
Yeah.
Thank you guys. Thank you. Thank you all thank you everyone.
<unk>.
The next question is a follow up from Jake Bartlett of Truest. Please go ahead.
Hi, Thanks for the follow up I'm, just just a couple of quick ones.
And on your comment about kind of being able to hit at.
At least to the low end of that of that 9% to 11% EBITDA margins. One I just wanted to confirm that that's the kind of the X global wealth EBITDA.
EBITDA as you think about it.
Just just doing some rough math, if you assume that you're at 31% gross margins behind the revenue guidance. It would seem that some of the other costs, we would have to come down.
The 9% for the for the year.
So those include shipping costs.
Even even if they come down and stay constant as a percentage of sales.
You'd be challenged to get there so the other missing pieces, where the other piece of the puzzle is recurring G&A.
Or or operating cost, which which had been going up pretty significantly every quarter is there any reason to think that that that cost might be coming down.
Can you kind of abnormal than it's been in the been in the third quarter in the second quarter that debt.
That would that would ease in the fourth.
You are correct, we are seeing the shipping cost coming down as well as labor cost coming down one of the thing that really hit us in second quarter is that due to labor shortages, we have to hire third party lump of services.
It was much higher than our normal services. So we had to hire out to agencies, which have to pay a premium for the temp agency staffing. So we've made it we manage to higher direct more direct people employees and also doing the second quarter, we had to spend a lot of actually I would say almost 70% more just to ship.
Product over the row from California into Texas, because there was so much product coming in we overwhelmed the California.
Our house, which we have to spend more money to transfer into the other warehouse location, which we mitigated that and we effectively reduced that in the near the end of the <unk>.
Third quarter and continuing into fourth quarter. So, yes, we will see shipping domestic shipping coming down we will see labor cost coming down.
We will also see a major.
Freight coming down because.
US utilizing more of our contracted freightway ocean freight rate versus the higher brokerage freight rate that we have to use in the third quarter a.
Our second quarter got it got it that's really helpful. And then just another question on <unk>.
Sales in the National sales revenue it was up solidly year over year, but it didn't accelerate much from the second quarter into the third.
Whereas whereas distributor accelerated a bunch of all the other.
Channels accelerated I think more.
So so just what is going on with Nash is there. Some reason why the sales there would be constrained.
In this environment may be there.
You're less likely to kind of look outside there, maybe it's harder to get incremental.
Because customers for you just just why isn't that channel growing quicker in this environment.
We have a lot of inquiries from these Nash.
New National chain accounts, we've told them.
We don't have enough capacity, so we're asking them to give us more time to get ready to service them.
One of the national chain that are well known in Texas, we told them that.
Could start maybe in December once we stock up more in our inventory because we do have to service the existing national chain account first before we can take on new ones on the distribution side basically we're selling to whatever we have enough inventory. There is no commitment too to really have to fulfill the order of 100%. So.
A shortage in the entire market, we're getting distributor buying from everywhere and anywhere they can find product to serviced or their retail customers, but for national chain account, we can't just take a national chain account I mean, knowing that we're going to get out of products.
Got it that makes a lot of sense I appreciate it.
Thank you Jake.
This concludes our question and answer session I would like to turn the conference back over to Alan you for any closing remarks.
Thank you operator, and thanks to everyone who joined US today, we appreciate your support and interest in our company.
You have our commitment to working hard and working smart toward achieving our collective goals of enhancing shareholder value. We look forward to speaking with you again soon goodbye.
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