Q1 2022 Karat Packaging Inc Earnings Call
Good day and welcome to the Carrot packaging, Inc. First quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Roger Pantel. Please go ahead.
Good afternoon, everyone and welcome to care packaging as 2022 first quarter earnings call I'm, Roger Pond L with Pinedale Wilkinson carat packaging <unk> Investor relations firm it will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan you and its chief Financial Officer.
Genco before I turn the call over to Allen I want to remind all 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 recently Form 10-K as filed with the Securities and Exchange Commission copies of which are available on the S.
He sees website at Www SEC Gov, along with other company filings made with the SEC from time to time actual results could differ materially from these forward looking statements and carrot packaging undertakes no obligation to update any forward looking.
Except as required by law. Please also note that during today's call we will be discussing adjusted EBITA adjusted EBITA margin and adjusted diluted earnings per share, which are non-GAAP financial measures as defined by SEC regulation G. A reconciliation.
One of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website and with that it is 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 first quarter 'twenty 'twenty. Two result, again demonstrated excellent operational execution.
Achieving record sales and strong margin expansion our positive sales performance was broad based across all categories, including national and regional chain account distributors.
And retail channels sales were boosted to stomach standby carrots T cells branded products.
Particularly bubble tea supply and our newly expanded logistics services.
We continued to gain wallet share with our existing customers and.
And we added many new customers through wholesale distribution and e-commerce direct to consumer channels.
Our online presence continues to be an important initiatives.
In addition to selling carat product, we plan to expand the selling platform on our site to enable other foodservice purveyor to showcase and sell their product and creating a convenient one stop shopping option for our customers.
The company achieved gross margin of 32.5% in the year 2022 first quarters.
Increasing 390 basis points over the same quarter last year.
Despite continued supply chain challenges and higher freight costs. This demonstrated our ability to improve operational efficiencies and cost leverage.
Margin also benefited from freight and duty capitalization.
Demand for can postpone and biodegradable products is on the rise.
As more cities and states are beginning to enact regulations to ban single use plastic.
Phone products.
Carrots long standing commitment to providing environmentally friendly disposable products has empowered us to grow into a leaders in the industry.
As we continue to provide new and innovative offerings.
Just subsequent to the close of the quarters, we enter into a joint venture agreement chipped away at 180000 square feet state of the art automated factory in Taiwan.
To manufacture, 100% cut possible foodservice products combo, Clos, which is a derivative of sugarcane pulp.
The new plant, which will feature state of the art robotic is expected to produce approximately 7600 tons or 650 containers of takeout boxes plates bowls tableware and other precast products in the year 2023.
About half of it the product produced at this plant will be earmarked for carrier customers.
This will further enhance carrots vertical integration and its supply chain and minimized dependence on imported goods from China.
Which is where most of the cost products in the United States are currently imported from.
Longer term it is our objective to build a similar plant in the United States and become a dominant domestic manufacturer in the near future.
I'm also happy to mention that as of this month, we expanded our warehouse capacity, adding.
Adding total of 90000 square feet of new lease warehouse space in California, and Hawaii.
We also expanded our South Carolina warehouse space by 50000 square feet to me continuing increasing demand.
This much need additional warehouse space will give us more growing broom and allow us to further increase our fulfillment rates and support additional sales growth.
As we proceed into 2022.
We believe we will see continued business growth further accelerated by the expansion of our warehouse space and continued operating efficiencies.
We are currently targeting net sales for the 2022 second quarters can be in the range of $116 million to $118 million.
Up about 24% at the midpoint of the range over the same period last year.
Accordingly.
For the full 2022 year, we are increasing our guidance with net sales expected to be in the range of $445 million to $449 million versus $360 million in the year 2021 and up from last quarter forecast of full year growth guidance of 17% to 19% or 402.
$6 billion to $433 million.
Our gross margin goal for the year 2022 full year remains at 31% to 32% on average the ocean freight costs are challenging to predict we currently expect the freight rate to remain elevated for the remainder of 2022, while some of our higher first quarter Ocean freight costs will be absorbed in the sector.
And possibly the third quarter of 2022, we reiterate the full year average gross margin goal of 31% to 32%.
We currently expect some tailwind from foreign currency gains and continued operating efficiencies to offset most of our expected favorable impact of freight and duty capitalization in the second quarters.
I want to leave adequate time for questions. So with that said I will turn over the call to Chantal, our chief financial officer to discuss our financial results in greater detail Jan.
Thank you Alan.
Adam mentioned, we delivered another quarter of impressive sales growth.
Significant increase in adjusted EBITDA.
We reported record quarterly net sales.
In the 2020 to first quarter.
Rising 39% to $1 $5.4 million from 75 $7 million in the same period last year.
Reflecting strong inflows from existing and new customers.
Our new product offerings.
Radar product penetration and price increases into Monday throughout the second half of 2021 and the first three months of 2022.
All contributed to the strong sales growth.
By channel sales to distributors, our largest channel 12, 48% for the 2020 to first quarter.
So national and regional chains advanced, 36% and all lifestyles increased 18%.
Sales to the retail channel rose, 32% for the quarter fueled by our bubble tea suppliers.
Gross profit increased 59% to $34 $3 million for the 2022 first quarter gross margin for the 2022 first quarter rose to 32, 5%.
Eight 6% for the same quarter last year.
The margin expansion was primarily a result of the strong sales growth in our higher margin products.
Improved operating efficiencies and fixed cost leverage along with favorable foreign currency impact.
Also benefiting gross margin was strong pricing to offset increased product ocean freight and labor costs.
Although some of the higher first quarter freight costs will not be absorbed and caught up good solid I'll show, the second or possibly the third quarter of 2022.
Overall freight costs as a percentage of net sales increased.
From eight 6% in Q1 2021 to 14, 4% in.
In Q1 2022.
While we currently expect the ocean freight rates to remain elevated for the remainder of 2022 as Alan mentioned, we are confident that we will continue to effectively manage the freight cost and deliver on our gross margin golf for the full year.
Operating expenses for the 2022 first quarter or $24.8 million.
24% of net sales.
Compared with $17 $9 million.
Also 24% of net sales in the prior year quarter.
Our operating cost leverage remained consistent with the prior year quarter as the operating efficiencies achieved well offset by higher shipping transportation and production cost.
And stock based compensation.
Heading into the second quarter of 2022, we are seeing some abatement in the shipping cost increases and expect stock based compensation to be more comparable year over year.
Other income net was one $1 billion.
The 2022 first quarter compared with $465000 in the prior year quarter.
We recognized in interest income of $1 $3 million in both quarters from the change in the fair value of our interest rate swaps.
The interest expense on our line of credit and term loan decreased $572000 year over year, primarily due to the decrease in our average debt outstanding for the first quarter of 2021 to the first quarter of 2022.
Provision for income taxes.
Well, it's $2 $7 million or 25%.
Well, the 2022 first quarter, compared with $1 2 million or 28% for.
For the prior year quarter.
The higher tax rate in the prior year quarter was absolute of all inquired to inclusion of certain non deductible cost related to tariffs initial public offering which was completed in April 2021.
Net income more than doubled to $7 $9 million for the 2020 to first quarter.
$3 $1 million for the same quarter last year.
Net income attributable to Carryout packaging, Inc was $6 $7 million.
All 34 cents per diluted share for the 2022 first quarter compared with $1 $8 million or 12 cents per diluted share for the same quarter last year.
We delivered record first quarter consolidated adjusted EBITDA of $13.0 million, an increase of 90% from $6 $8 million a year ago.
Consolidated adjusted EBITDA margin improved 330 basis points to 12, 3% in the first quarter.
Some 9.0% for the same quarter last year.
Adjusted diluted earnings per common share more than doubled.
36 cents.
While the 15th.
In the prior year quarter.
Net cash used in operating activities was 11 $4 million for the 2022 first quarter versus net cash provided by operating activities.
$4 $5 million.
For the same quarter last year.
This primarily reflected changes in working capital, including inventory build up to accommodate higher demand in our peak season, and an increase in accounts receivable from higher sales, partially offset by higher accounts payables and accrued expenses.
We finished the quarter.
With $93.7 million in working capital compared with 72 $1 million at the end of 2020 one.
We believe Cabot is well positioned to execute on its future strategies as of March 31st 2022.
The company had $10 $10 billion of borrowing outstanding under the line of credit and additional availability of $29 $8 million under this line.
We invested $4 $8 million in Capex during the 2022 first quarter principally for manufacturing automation.
Alan and I will now be happy to answer your questions and I'll turn the call back to the operator.
Thank you.
We'll 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 two.
And once again pressing star then one would allow you to ask a question.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Jake Bartlett from tourists Securities. Please go ahead.
Great. Thanks for taking my questions and congrats on a great quarter good start to the year.
Mike My first question is on the increased guidance for sales in 2022, if you could maybe just give us some detail as to what the main drivers of the increased.
Guidance is it seems like demand for for a while now has been really kind of stronger than than you can accommodate so so it feels like it's Jimmy and it's already been strong. So I'm wondering is it is it the increased capacity that you've added in the quarter is it just the increased staffing that you're seeing.
And then also if you can touch on whether there's more pricing assumed.
And in that guidance I think the pricing at least what I had was about 5% to 7% was gonna be willing through in 2022, maybe any update there.
Sure Jake well one thing that we've seen that the increase is coming from the man.
For example.
You've heard that we are adding additional warehousing space, both in California, and Hawaii is because we've seen the demand of Hawaii has expecting explosively grew a lot than what we anticipated it was going to be theres more tourists going to Hawaii and it basically everywhere, there's a demand for packaging.
And same thing in California that.
Now, we're shipping to Las Vegas, and Arizona, there isn't really a strong demand increase on the packaging side for the state of Arizona, and Las Vegas, more and more tourists coming into Vegas, and more and more towards like in California, and the other thing is or all of our key supplier. We have we are seeing a huge demand in the growth.
What about T supply this first quarter already that we're entering into our peak season in the second quarters and that's attributed to a large sum of growth in our call. Our overall revenue wise.
Lastly of course, more and more people looking to go into the eco friendly life, we're seeing a high demand in the glass products.
Composedly utensils.
Categories, and our foil lines growing I would say is it is.
Particularly there's few categories growing really strong, but other categories are growing as well. The other thing is our fill rates are going up.
That's automatically we last quarter I mentioned that are still label its only 60%, but will actually increase our fill rate to approximately 70% to 75% now it automatically increases the revenue so I wouldn't attribute much of the increase in gold.
The increase in guidance towards the price increase on that part.
Great. That's really helpful. And then on gross margins. If you could just if you could give us how much the first quarter was helped by the capitalization of our freight and duty.
That would be helpful and you mentioned it in the guidance in the press release that that includes that bad debt that moving piece, maybe just help us understand how that might flow through through the rest of the year. It was it was a help in the first quarter or does it hurt in subsequent quarters, just help us understand how to how to model that quarterly progression there.
Ken I'll, let you answer that question for Jake.
Sure.
Jason Thank you so much for the question.
So in terms of the impact.
<unk> found that the capitalization for it in Q1, the total dollar amount of the impact was about approximately $6 million.
As we mentioned in our remarks, even with the $6 million in benefit in our cost of goods sold in the first quarter over all ocean freight cost remained.
At the present itself much higher year over year loss, yes here, while we were at eight 6% ourselves versus Q1 this quarter.
It was 14.4 and a lot of that with primarily because we were really.
Stocking up we we brought a lot of the shipments from Asia to stock up on inventory in anticipation of our peak season.
Starting with the second quarter, so to answer the second part of your question in terms of the expectation for the remaining.
Corners in 2022 so in Q2, we expect or what was the warm weather.
Probably the a.
Chunk of the benefit that we realized in Q1 in terms of the pet.
Capitalized ocean freight cost.
That said I would I will highlight a few.
Factors as we think about our growth and watch out for.
The second quarter as well as for the full year 2022, a holistic play E.
Even with a little bit of a headwind if you will.
They Oh, Santa Fe capitalization in Q2, we are seeing some favorable impact and we do expect to be able to to offset.
At least partially or mostly some of that negative impact.
From the Ocean freight optimization in Q2.
<unk> just to name a few so while we are seeing a fairly significant and positive impact from foreign currency impact just really strong USD against <unk>.
Some of the currencies in Asia, and then we continue to see improvement.
Our product mix as we continue to shift into higher margin products as well as continue to improve.
Some of our Oh on the operating efficiency. So we are seeing quite a few positive factors.
Our trending towards basically.
Offsetting the negative the expected negative impact in Q2, and that's the reason why we reiterated that for the full year 2022, we still expect to deliver on the gross margin of 31% to 32% on average.
Great. Thank you that's really helpful. And then my next question is on the JV.
That you're.
Youre entering into in the facility.
You mentioned Ellen.
Tons of packaging and some containers could you help us understand what that might mean for sales in 2023 and do you expect that facility to be you are hoping kind of early in the year and this could be a benefit for the whole year.
That's my next question I had one more quick follow up.
Sure well as you said, we expect the 2023 feet a year, we'll actually start the year is out.
Many state M S.
Citi will be transforming from styrofoam or paper and plastic into 100% compostable packaging product we've already.
We see the news that the.
County of Los Angeles, starting May 1st is going to ban all single or.
Single use plastics, such as I recall, and a plastic utensils plastic straws and pass it take out containers. How are you already did that last year and new Jersey are spending about two and more and more state I was going to be the same thing, but as we all know most of the people gasp, although it's still coming out of China and this is what we've been telling.
Our investors and seamless anyone that we're trying to move away from China into other parts of the World Asia World or perhaps possibly with the JV that we are we started in Taiwan. Our goal is to test out the automation of these robotic system can we bring it into Texas to manufactured domestically and and yes.
You know what our goal is basically see if we can produce these domestically and that is our job.
And what how.
What kind of impact would it happened on the revenue side definitely it will have a favorable impact on the revenue side now we can actually control the cost of our product that would produce versus.
They basically and in terms of Ocean freight we don't have to worry about ocean right. Oh, we have to worry about is the raw material, which domestically can be found and some of the raw material can be actually be a contributor to from our paper manufacturing into the bagasse protection under the more cross product I would say that.
And then shouldn't we can produce 650 containers out of that first part of the joint ventures, and we do have a second part of a joint venture, which will also be able to produce another 650 containers out of those same locations and that par so what exactly the total revenue of 2023.
We're still figuring it out right now.
Got it and then real quickly is that more of a certainty of supply and.
Of course.
Move or is that more of a driver of sales you you'd think with with that JV.
I would say, it's driving the sales.
Also the ability of learning the ability to test out.
The new equipment, a see if they are suitable for domestic manufactured in the U S.
Great. Thanks, a lot I'll pass it on.
Okay.
And again, if you have a question. Please press Star then one.
The next question is from Brian Butler with Stifel. Please go ahead.
Hi, Thanks for taking my questions.
But let's just start on the eco and environmental products can you just update everyone kind of what percent of revenue that is now and then kind of the expectation.
What that that percentage for 2020 for 2022 guidance and where it could go once the new facilities kind of ramped up in 'twenty three.
Sharon can you actually get Brian .
The numbers in alcohol, where it would be the future goes or be a coke bottler.
Yeah sure I can take that question Hi, Ryan So in terms of our eco friendly products overall.
As a percentage of total sales.
It's a one off or just a little bit song Q4 and remained in the high teens I think Q4, we set shows to 20 high teens. So it's still in that range went up just a little bit less than 1% in terms for and that is.
That is for them obviously in the current quarter as we think about sort of the rest of 2022 and 2023.
We think the percentage will continue to increase throughout 2022, especially as as we are seeing some of the regulatory development some of the regions counties cities, where there.
There are there were there was some recent developments close towards the use of eco friendly products and cause some of the and definitely also the continued shift on the consumer's preference side.
Towards the eco friendly products as well.
We do expect the trend to continue.
Into 2023.
The second part of your question is it, especially with additional capacities on our end as.
The JV that joint venture.
Production starts in the second half of this year.
And Brian I'll go for the 2023 as well where are the always shouldnt could be 30% of overall revenue to be eagle for any product like the green product that is our goal.
Can you Ron can you remind me with the eco friendly product materially higher in margins or is it pretty similar to your other products.
But they do carry higher margins than our traditional products.
It is higher Martin Okay.
It is.
My next question was kind of on the overall growth can you break that down between kind of price and in volume between.
The strong growth you saw in the end and then maybe are you getting priced at a level that's offsetting the inflation in each business line.
Yeah.
M a C.
Can you rephrase that question.
Well I guess just at the very highest level can you can you break down the organic growth between price and volume.
Janet Jackson.
That's something that you're having there Hans.
Yeah I can take that question. So when you look at the overall Romney cross yeah, well yeah.
I would say roughly.
Approximately half of that came from pricing and then the remaining <unk>.
Although volume and mix so in terms of the pricing that additional color I'll I'll add here is.
You're aware, we implemented multiple price increases in the second half primarily in the second half of 2021.
I'm also a little bit in the first quarter of this year. So that's really.
One what we're looking at the year over year comparison, that's given us the benefit there.
So about so if I heard that correctly 50 about 50% of the growth was from the increased pricing that you had put in place.
Correct, a little over 50% little over 50, okay.
On the cash flow side on the inventory build.
How should we think about that inventory through the remainder of the year or does that come back down and we ended up with a working capital number that that's either flat or slightly negative or is that going to remain.
At an elevated level for a while.
I would think that inventory will be remain elevated level for a while because to support our growth because we do expect our growth continued to be strong.
And in the last year, there was a lot of shortages in our product and that's one of the thing, causing a fulfillment rates would be at 60% and we realize that we can it.
It took us two months for three months to get a product from overseas to the U S. And we can have we can a customer want the product. They want it now so we have we have to have product in place sitting in a warehouse and this is one of the reasons that we increase our warehousing space in California, Hawaii understanding that if we have the product in place there's a demand for it then that would definitely.
I'll now to increase ourselves. So we are actually looking for more warehousing space in Texas.
And in California to grow that with that said, we'll be bringing in more inventory to support our growth.
Okay. So we've got that kind of change in in a higher inventory to support the growth I mean is the expectation that free cash flow is going to be flat to negative this year.
I would say free cash flow will be positive. This year. What are you know what with us generating more net property.
On the operation.
Okay, so even with the.
The additional investment in North inventory, you expect free cash flow will be positive for 2022, that's that's fair.
Got it Sir.
Okay, and then last one for me.
And any color on or update kind of on the M&A.
Environment and outlook for 2022 and 2023.
Well.
Yeah.
Last year it was challenging in terms of what the market was booming everyone was doing well and there are a lot there's a lot happening.
<unk> seen a lot of M&A activity in the market.
I guess now what the market coming down there's I've seen less M&A activities in the region months and I would think that this will be a good opportunities.
For us to really looking to you who actually it which made it look what partnership or which company that would be suitable to partner up with in terms of in the next six to nine months.
Economy, a shift downward.
Most cases all of them. So I would say that there's just I think I've just walked through that he found a role than it was six months ago.
Okay, great. Thank you for taking my question.
Thank you Brian .
And the next question will be from Paul Dircks from William Blair. Please go ahead.
Hi, good afternoon, and thank you for taking my questions.
So first one for me.
Wanted to ask Alan over the last 30 to 60 days how has the tone of the conversations that you've had with national account customers changed.
As we've seen the rapid inflationary pressures across the economy take greater hold.
Well the past 30 to 90 days, we've seen our most of our National account customers are still continued are looking to us.
To work closely with us and they're seeing that there is still concern that there's a supply change.
<unk> in the marketplace.
Primarily on the paper side there is a there's still I mean, the paper shortage is still ongoing I'm not necessarily on the plastic side, but on the paper side. There is a shortage of papers raw material and it it could be from a paper food container paper Cup or a paper trail or something else, but mostly on the paper side.
There is a shortage in the domestic marketplace. So we've talked to a lot of the national chain account. They do want to work with us even closer in terms of if we can be a secondary supplier to them.
I'm guessing taste that their primary supplier would not be able to accommodate them and wish I think it's a good idea that during the pandemic that it changed everyone's perception that you're having a single source vendors.
Benders versus not only a secondary but third backup source in order to make sure that there's no supply chain disruption, which we are still seeing right now.
Got it so maybe said differently.
My my I'm, implying or I guess your answer implied so we're not really seeing much of a change from a demand standpoint from those national account customers.
If for no other reason than they're looking to carry it as a solution for somebody there from some of their own supply chain challenges, we're not really seeing an economic impact here as far as the demand goes and as it relates to your debt.
That'd be a first for me.
Yes, I haven't heard much of a good bad increase on that part yes.
Thank you no I appreciate that.
Switching to the online channel you'd mentioned during the prepared remarks that you guys were planning to open up the website to become more of a one stop shop can you maybe talk about you know one does this require a step up in expenditure in two how would this change the growth potential and maybe even the margin profile.
The online channel, which as we know as.
Your highest margin channel for your business.
Well I don't see any change in margin in our online sales. One thing is we've seen we have been utilizing Amazon to sell our products would be and we haven't yet utilizing our wallet app store or website to sell directly to the end user at the same time, we feel that we need to expand.
Our product offering not just what we have carry ourselves, but in terms of oh, it could be a source it could be a trough shot sort of flavor you saw it could be a chili sauce. It could be other items that is basically a needed by our customers. So what we're looking at is partnering with different vendors that they can use us as a plan.
For them to use our clientele.
This and to sell the product and that's what we can earn condition or affiliated commission on that part as a revenue stream just like some of these are platform out there. We do see that we can we want to better utilize our 40000 customer online to see what else. We can offer them as a one stop shop.
That's helpful.
And I guess, maybe quickly to follow up on that is it is it your expectation that there would be a major step up in your expenditure.
In terms of your website or how quickly should we expect to see some of these new ideas implemented online.
I don't see much of it expenditure now because most of our expenditure has been spent last year and the year before in the past few years with the operational expense has been higher than I would say this year is that we spend more money on the technologies a warehouse management system.
Within the last two years as well as our online upgrades that we made sure it in their past quarter, earning calls we've spent millions of dollars on the upgrading of our online system right now I would say that what would need to spend we won't be spending is on people the people to manage.
New product the people to manage how to buy.
Find partners that we would like to use our platform to sell their product as well. So that's what we're gonna be investing if people versus the website. This year.
That's helpful last one for me you had mentioned that you expect ocean freight rates to remain elevated over the course of 2022, but you know recently here, we're starting to see rates come down a bit. So my question is can you remind us if those rates do continue to come down how quickly we should see those affect you.
P&L or we could we perhaps see some margin tailwind from this later in the year. If we continue to see the current change persist over the course of the year.
Sure. The reason I said, we expect that the ocean freight to be Oh look remain elevated is that facing where last year. We saw it came down for a brief period of three weeks four week five week and went back again right now we see that yes. The ocean freight has come down in the past.
Four and five week, mainly due to the lockdown in the port of China now what happened when the poor opens reopens or are we going to see the rate go up again. So we're we're not right now we're just we're not we're not changing our stance in terms of how the rate is going to drop.
Generally.
So we're going to wait and see them and until the port Openreach from try that and see how it goes because I'm sure. Once the port opened there'll be a lot of factories in China I wanted to ship the product in the U S and with that said they might raise the price again or is it. The economy is still continues to stay at this low left in that.
The ocean freight will come down.
Like you said, what that says and it will help the margin in terms of the third quarter not the second quarter, but one thing I would mention that it is helping the margin is the domestic freight.
Truckload rate has come down due to the.
Lack of product coming from overseas, we've seen their truckload rate coming down but at the same time offsetting by the L. T. All carriers have raised their domestic shipping by nearly double.
Where we used to ship $400 now its being we're being told that it's going to be $800, but of course a lot of these are actually paid for by the customers. So we're seeing the market is still not in the normal mode right now, it's there's a lot of changes in the market for shipping.
Understood I appreciate the color. Thank you.
Thank you.
And the next question will be from Michael Hoffman from Stifel. Please go ahead hi.
Thank you.
Tell from my voice I'm, sorry, Brian a quick question for a follow up if I could.
With regards to the ocean freight how much.
Or is your freight costs are contracted rate versus the spot rate.
Yes, we have purchased we have contracted rate, which last year, our consciousness anywhere average about $2500 or current year contract rate is about $10000 and that is one of the reason that we mentioned that we expect the high end the ocean freight to be elevated at the same time because.
If you look at it actually a double what a double this year as contracts versus last year.
Good thing is we're able to get the long contract away from Oh from the face of orders at.
About $90000, so even without it's still higher than the contract rate from last year.
Okay.
Excuse me what percent of total freight is contracted versus spot.
Last year I would say.
50% well contracted rate versus the Oh.
The stock rate.
This year so far.
The newly contracts start my first so far in May 1st we only took on maybe 10% of our 20% of our contract with the remaining 80% we'd be using a market rates.
So Kurt.
The trend is favorable.
Actually get for free as a tailwind because you can lean on the spot rate for for some of that.
Right.
The next question is about jobs.
Capitalized freight costs with them.
Before your guidance how much of your assumed you're capitalizing freight as a dollar amount versus two 6 billion and one too.
Women the capitalization, what's the time line to Emmas amortize that at all.
Jackie answered that question yeah.
Yeah, I can probably take that question hi, Michael if I'm hearing you correctly. Your first question about how much we how much of a benefit we got out of the capitalized capitalization of ocean freight cost in Q1, so to answer that question.
We capitalized approximately a roughly $6 million in Q1, but as I previously mentioned.
In my prepared remarks, even with the benefit of roughly two 6 million. The total ocean freight costs worth about 15 point to by the end of 14, 4% of net sales in Q1 in terms of how quickly that we expect to amortize if you will.
That benefit them over the on the P&L, our current estimate and and this.
It depends on the.
The volume of the purchase that we are making and in the second quarter as long as the third quarter based on our current estimates we do expect that will absorb the majority of the benefit from Q1 in a second.
They have my E mail, it probably won't be just a little bit over there that we would recognize over the third quarter. This year as well I mentioned previously.
And just wanted to.
Provide a little bit more color on sort of the expectation for the second quarter gross margin, even with the expected hit if you will.
No Ocean freight customization, we are we still reiterated their full year gross margin goal of 31% to 32% on average and that's and that's because.
We expect.
We are seeing some favorable impacts now, we believe well well pretty much offset the negative impact from the ocean freight capitalization in Q2, so to name a few.
The continued shift towards the higher margin products operating efficiencies.
Some of the gains on the foreign currencies I mean, we are seeing continued favorable impacts from quite a few factors.
Okay.
Make it a little bit of a finer point, which I think is important is the.
Our full year guidance is not.
Predicated on having capitalized.
For the full year, you're going to basically re absorbed it.
And this is more of a timing difference on when they recommend one that explains but pushing some portion of that expense will be recognized.
And the context I'm thinking of capitalization between five and 10 year amortization type cycle, but I think that's an important.
Yeah.
Observation that Mike am I wrong about that.
The full year, if I'm understanding your question correctly, Michael our four yeah.
Guidance on the gross margin is with the expected impact.
From Ocean freight capitalization from all quarters.
Putting your 'twenty, if I understood you correctly.
What you're saying is.
The capitalized <unk> youre going to reabsorb most of it in to a little bit of three so that but you fully absorb it within the P&L and you're still going to make your numbers.
Well, it's still what numbers I'm, sorry, I didn't get to.
Yeah, sorry.
Losing my voice.
You've given the margin guidance for gross margin and <unk>.
What I'm hearing or correct me if I'm wrong is that gross margin is not going to be the pendant or you haven't capitalized mixed but you'll have reabsorbed the timing of that capital legislation in more than two by the time the full year is over.
That's correct Yeah, I think that's an important point is you're not you're not getting to your numbers by.
Capitalizing and expense for the full year, you're there it's more of a timing issue.
You're absolutely right, obviously, we touched on the improvements that we're making.
That's not really what's driving the margin expansion the margin expansion I was not really driven by the capitalization of capitalization just caused a little bit of fluctuation.
Between the quarters, if you will.
But I mean, it didn't help your reported number I mean more than two but for the full year.
You're not you're not.
Making your number by having capitalized and expense.
Yeah, Yeah, you're absolutely.
Right I think that's an important comment.
And given the inventory build has that improved your fulfillment because that one you alluded to fulfillment dipped pretty meaningfully in <unk>.
Fulfillment.
Pardon me.
Fulfillment rebound.
Yes, our fulfillment is definitely better than fourth.
Last quarter and also last year the same quarters.
A major cell phone the issue last year, all the way through the entire year I would say I would say first quarter is it better and second quarter will be even better.
Okay.
And lastly, labor has been a challenge for you, but you didn't bring it up just fine.
So it was making decisions like adding warehousing or what have you you can staff out and you're feeling better about labor availability on a relative basis.
I would say labor is definitely better than the beginning of the year more people are looking for jobs now and I would say that it's true I mean, that's one thing that can help us ship the product and grow the business and making sure that we have sufficient labors.
Yes, I think it's a it's it's better now than they were better situations better than our previous quarter and that left last year also.
Okay, and the rest of my questions.
Judge for my Raspy voice.
Thank you Michael.
And the next question is a follow up question from Jake Bartlett from <unk> Securities. Please go ahead.
Great. Thanks for taking the follow up my money is on the pricing.
You mentioned that the essentially the pricing.
It was about 20% in the first quarter.
Of the roughly 40% revenue growth.
So the question in that.
That kind of was implemented throughout 2021, you've taken a little bit more in 'twenty two already so what is how much of pricing is contributing to the 22% to 23% revenue growth are you expecting in 'twenty two.
I believe Jim mentioned, a 50% of that 23% and is contributing to the price increase that we had last year, especially towards the end of last year. We are seeing the price increases were using the new price now that we've raised back in October and November and all of them.
January of this year and this is what we're seeing that benefit.
That 23% to 50% of that if the price increase.
Or is there going to be more price increases down the road.
I always say, yes, particularly on the paper products.
Because we have just received additional price increase some of our Oh.
Of course that it's telling us that there is still challenging in terms of paper raw materials. So there's going to be more additional price increase down the road on the paper side not necessarily on the on the overall product line, but a certain product there's going to be a price increase.
So just to clarify because I understood. The first question about pricing to be about the first quarter, specifically, but it wasn't so youre, saying that.
About 11.
11, and 12% pricing is what you expect on average for the whole year of 'twenty two.
The growth of the.
If we're if we're saying that our growth just shares 25, 22% year over year growth about 10% of that that is some price increase.
Okay, and then and then maybe just ask the question about what in the first quarter, how much of the 39% revenue growth was from pricing.
Do you have that number.
Yeah, So I see what you're talking about shake the total first quarter year over year, a little over 50% was from the pricing increase and maybe just also to add on to Alan's point as we think about the impact from the pricing increase for the full year 2022, I I would I would agree with Alan that it's probably been going.
Rusty.
Roughly half of the debt the total revenue growth or maybe just a little bit less because obviously when we're comparing year over year last the first quarter last year well. We are I mean this is this is a this is a a well welcome Harry.
The year over year, a lot of it because a lot of that most of the price increases that went into my last year. It was on the second half of 2021, so as we head into the second half of this year the year over year impact from the pricing will be a little bit less but overall I would agree with alan's comments for the full year.
Great. That's helpful and then I got a cough now too.
The other question was on Capex for the year and I think that that includes deposits paid for property and equipment, but you know how much you expect to spend on Capex in 2022.
And does that include the investments related to the JV.
And if not maybe maybe this is kind of break that out as well.
I would say that majority of the spending that we're seeing in 2020 two we're actually spend.
In 2021, we've been using our 2021 for us because we have to pay a deposit down last year to get the product in this year.
And over 50% of that was already paper last year and moving towards this year is that what we've seen in the products such as the automated robots and you actually mentioned the JV.
The investment I would say that's part of the Capex that we're looking to spend in terms of no more than 5% of our revenue that's still our goal.
Okay. Thanks, a lot appreciate it.
Thank you.
Just with the JV I mean are you explain how does the JV work in terms of your investment in the JV.
Jay Z we're investing.
Approximately $6 million in the first place and and basically.
Production was should be starting.
Later this year about around the fourth quarter of this year into full production in 2023.
And so.
Alright, well take over 50% of the product products that are produced out of that manufacturing plant and the other 50% will be sold to other.
Other clients it could be in Australia could be Japan could be other customers in the U S.
Private label behind me for other manufacturers.
That's what the goal is I'm not going to be.
Great. Thanks, a lot I appreciate it.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mr. Alan you for any closing remarks.
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And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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