Q4 2022 Karat Packaging Inc Earnings Call

Speaker 1: Dave.

Speaker 1: We C.

Speaker 2: All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch tone phone.

Speaker 2: To withdraw your questions, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Roger Ponder and investor relations. Please go ahead. You are represented.

Speaker 3: Thank you, operator. Good afternoon, everyone, and welcome to Carrot Packaging's 2022 Fourth Quarter Earnings Call. I'm Roger Ponder with Ponder Wilkinson, Carrot Packaging's investor relations firm.

Speaker 3: It will be my pleasure momentarily to introduce the company's chief executive officer, Alan Yu, and his chief financial officer, John Guel. Before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meeting.

Speaker 3: of the Private Securities Litigation Reform Act of 1995.

Speaker 3: 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 Factor section of the company's most recent Form 10-K , as filed with the Securities and Exchange Commission.

Speaker 3: and 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.

Speaker 3: and carrot packaging undertakes no obligation to update any forward looking statements as except as required by law.

Speaker 3: Please also note that during today's call we will be discussing adjusted EBITDA, adjusted EBITDA margin, and adjusted diluting, diluted earnings per share, which are non- GAAP financial measures as defined by SEC regulation G. A reconciliation of the most comparable GAAP measures

Speaker 3: to the non- GAAP financial measures is included in today's press release.

Speaker 3: which is now posted on the company's website. And with that, I'll turn the call over to CEO Alan Yu. So, Alan.

Speaker 4: Thank you Roger and hello everyone. We were able to grow a top line during the fourth quarter of 2022 against a very strong prior year quarter.

Speaker 4: Despite an overall challenging deflationary environment in our industry and multiple price reduction that we've implemented. Additionally, thanks to our continued margin improvement of effort, we achieved record full year gross margin of 31.2 percentage.

Speaker 4: to buy a negative out of period inventory right off of approximately $900,000 and generated a record full year operating cash flow of $29.5 million.

Speaker 4: With the stabilization of ocean freight costs and the supply chain issues caused by the pandemic now essentially behind us, we are focusing on operating costs, containment, and eliminating inventory redundancies during the supply chain disruption period.

Speaker 4: during the fourth quarter.

Speaker 4: We added a number of contracts with new national and regional chain accounts.

Speaker 4: and we expanded product offering to existing customers.

Speaker 4: We are expecting these new agreements to materialize and add to our top line starting mid-2023.

Speaker 4: and we are continuing the strong momentum in building our pipelines.

Speaker 4: In a near term.

Speaker 4: Revenue for the 2023 first quarter will likely to be down about 10% compared with prior year period.

Speaker 4: We are anticipating revenue to pick up again toward the end of second quarter. For the full 2023, we are expecting revenue growth to be at the high single digit year over year.

Speaker 4: As a reminder, year-over-year comparisons were impacted by pricing for inventory sold during most of the first half of 2022.

Speaker 4: Year-over-year comparisons were impacted by pricing for inventory sold during most of the first half of 2022, which was near peak level.

Speaker 4: Also, order volumes. Did that time period last year, where I'm usually high due to spiny shortages?

Speaker 4: We continue to see solid growth in our environmentally friendly products. This category grew 24% in the fourth quarter over the prior year quarters.

Speaker 4: and demand remains strong into 2023.

Speaker 4: Our joint venture in Taiwan, building a state-of-the-art bagasse factory for manufacturing 100% compostable food service products is progressing well.

Speaker 4: We are continuing to receive orders and made an increase that could fill capacity quite quickly, which would be a good problem to have.

Speaker 4: However, construction of the plan is behind schedule because the power supply issue, which now have been resolved.

Speaker 4: We currently expect initial shipment to begin in the second quarter.

Speaker 4: We are implementing a number of growth strategies in 2023 that we are confident will provide solid long-term returns.

Speaker 4: Among them, we are improving our fill rate and inventory management and modifying our model to be more asset-like.

Speaker 4: by scaling back manufacturing production in California.

Speaker 4: manufacturing production in California while expanding import products.

Speaker 4: which carry higher margins. To accommodate future growth, we are working on increasing our distribution space. In February , we signed new lease for the approximately 52,000 square foot distribution for Sillotin Chicago, and expected to move in by end of April .

Speaker 4: We are also getting close to sign the lease for another distribution facility similar in size in Houston.

Speaker 4: Additionally, we are working on expanding our existing warehouses by adding approximately 50% of the new rack space.

Speaker 4: As part of this initiative,

Speaker 4: We are targeting geographical extension in the east coast and that was region.

Speaker 4: graphical extension in the East Coast and that was region. To do so.

Speaker 4: we are increasing the size of our sales team by approximately 35%.

Speaker 4: by approximately 35%. Lastly,

Speaker 4: We are in the process of upgrading our e-commerce platform and extending online support teams.

Speaker 4: As well, we are excited to begin offering online sales in Canada and Hawaii.

Speaker 4: We expect to again generate strong operating cash flow and continue to scale back our Cap Access year, which will give the company flexibility to consider returning excess capital to our shareholders.

Speaker 4: as we continue to look for strategic growth opportunities.

Speaker 4: I will now turn the call over to Gentao, our chief financial officer, to discuss our financial results in greater detail. Good morning, Antonio?

Speaker 2: Thank you, Alan. Our 2022 fourth quarter results reflect continued top-line growth despite a challenging year-over-year comparison, improved margin and continued strengthening of our liquidity position.

Speaker 2: Now, let me provide more color on our operating results starting with revenue. Net sales for the 2022 fourth quarter increased 1.5% to $92.7 million from $91.3 million a year ago.

Speaker 2: The 2021 fourth quarter was a particularly strong revenue quarter with COVID reopening and price increases implemented due to extraordinarily higher ocean freight and other costs.

Speaker 2: By channel, sales to distributors, our largest channel, grew 3.1% for the 2022 fourth quarter.

Speaker 2: Douse to the retail channel increased 4.6%.

Speaker 2: Sales from the online channel increased 1% and sales to national and regional chains

Speaker 2: decreased 3% for the quarter. The decrease in the chain accounts

Speaker 2: was due to certain operational issues which have been essentially resolved.

Speaker 2: Stealth of our eco-friendly products increased 24% for the fourth quarter.

Speaker 2: During the fourth quarter, we completed a project to re-evaluate and classify our inventory to be more aligned with a variety of product categories offered to customers.

Speaker 2: As a result, some of the product category data, including ego-friendly products, in the prior period, was recast to allow for a more meaningful comparison.

Speaker 2: We continue to see accelerated growth from these products as we strengthen our market leadership position and expand our product offering in this category to meet the needs of our customers and the evolving regulatory landscape.

Speaker 2: Eco-friendly products represent 27% of our total sales in 2022 compared with 21% in 2021.

Speaker 2: Growth profit increased 4.8% to $29.7 million for the 2022 fourth quarter.

Speaker 2: from $28.3 million last year.

Speaker 2: Gross margin expanded 100 basis points.

Speaker 2: to 32.0% from 31.0% in the prior year quarter.

Speaker 2: Growth margin was favorably impacted by lower and stabilized ocean freight costs for the 2022 fourth quarter and 9.8% of net sales compared with 12.3% of net sales in the 2021 fourth quarter. The growth margin was negatively impacted by lower and stabilized ocean freight costs for the 2022 fourth quarter and 9.8% of net sales in the 2021 fourth quarter.

Speaker 2: by a 1.7 million inventory write-off.

Speaker 2: which represented an out of period adjustment for certain inventory items in the previously issued quarterly and annual financial statements as well as an impact of $2.4 million from freight and duty capitalization.

Speaker 2: Based on current cost factors, we are expending our 2023 four-year margin goals to be in the range of 32 to 33 percent.

Speaker 2: operating expenses in the 2022 fourth quarter were $24.9 million or 26.8% of net sales compared with $21.2 million or 23.2% of net sales in the prior year quarter.

Speaker 2: The increase primarily reflected higher labor costs of $1.5 million due to workforce expansion, higher production costs of $1 million due to unexpected machinery repairs, and about $600,000 due to an increase in labor costs of $1 million due to the increase in labor costs of $1 million.

Speaker 2: in rental expense from the two additional warehouses added in May 2022.

Speaker 2: Operating expenses in the 2022 fourth quarter also included a CapEx deposit write-off of approximately $500,000 related to pre-pandemic capital investment project.

Speaker 2: Net income for the 2022 fourth quarter decreased to $4.5 million from $6.0 million for the same quarter last year. Net income margin was 4.9%.

Speaker 2: for the 2022 fourth quarter versus 6.5% in the prior year quarter. Net income attributable to CARET for the 2022 fourth quarter was $4.5 million.

Speaker 2: or 23 cents per diluted share compared to the average share.

Speaker 2: with $5.6 million or $0.28 per diluted share in the prior year quarter.

Speaker 2: Adjusted EBITDA, a non-GAAP measure was $9.9 million for the fourth quarter versus $10.9 million in the prior year quarter.

Speaker 2: Consolidated adjusted EBITDA margin was 10.7% of net sales versus 11.9% in the prior year quarter.

Speaker 2: Adjusted diluted earnings per common share was 30 cents per share for the 2022 fourth quarter versus 32 cents per share in a prior year quarter.

Speaker 2: During the 2022 fourth quarter, we generated operating cash flow of $17 million and continue to expect strong cash flow in 2023. We believe Carrot is well positioned to execute on its future growth strategy.

Speaker 2: We finished 2022 with $84.5 million in working capital compared with $72.1 million at the end of 2021.

Speaker 2: We have financial liquidity of $63.0 million.

Speaker 2: as of December 31, 2022, and declared and paid a special cash dividend of 35 cents per share on our common stock.

Speaker 2: Lastly, we just completed the extension of our $40 million credit line, extending the maturity to March 2025.

Speaker 2: We expect to continue to further strengthen our financial and liquidity position in 2023.

Speaker 2: Alan and I will now be happy to answer your questions and I'll turn the call back to the operator. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up a handset before pressing the keys.

Speaker 2: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time we will pause momentarily to assemble a roster.

Speaker 2: Our first question comes from Jake Bartlett with TruViz Securities. Please go ahead.

Speaker 4: Great, thanks for taking the question. My first one is on the 2023 sales growth. Alan or Jen, can you talk about what the drivers are? So, high single digits. Does that include negative impact from pricing? So pricing would be a headwind.

Speaker 4: If you could give us the components of that high symbol of growth, that would be helpful. Sure Jay. First of all, we believe that right now we are seeing that price contraction due to deflationary, especially from ocean freight pricing coming down, to back to pre-pandemic.

Speaker 4: So we have been adjusting our prices ever since September of last year, October , November , December , even January . We do see that pricing to be a little bit basically stabilized as well as ocean phase being stabilized.

Speaker 4: So our growth are part of the several factor. One, our online sales. We're seeing strong online sales. Also we added, we're looking to start in Canada for online sales in Canada. We never really tried to approach the past years. And this is because we actually modify our platforms and

Speaker 4: increase our warehouse spaces. And of course, second is national chain account and regional chain account. As mentioned in the previous discussion, we actually signed in several, over a dozen different regional and national chain accounts that is expected to start shipping.

Speaker 4: starting April , May, June , July of this year. And they will add to our existing volume. Right now the obstacle hit when to service these national chain accounts that we just added is warehouse spaces.

Speaker 4: we have been short of warehouse spaces ever since the end of last year. So we added some spaces that were still not adequate. So that's what we are continuing to seek for new spaces. And this is an area that we are looking to really expect at speeding up the process of getting additional warehouse spaces.

Speaker 4: in different areas. Even in California, we are actually looking for additional spaces in California. In New Jersey, South Carolina, we just expanded an additional 50,000 square feet in South Carolina.

Speaker 4: and we're racking up the entire warehouse in New Jersey. And we're moving some of the equipment out of California and using that space to rack in space for product that we're coming in to service these accounts that we signed up. Also, another factor is that we'll actually, growth will be the eco-friendly product.

Speaker 4: We are seeing more and more states, cities are banning styrofoam, plastic, and straws. So we are bringing more higher margin, higher revenue wise product from overseas to sell to our customers and because of the need on that part.

Speaker 4: Great. Just kind of really just narrowing back on the pricing side because that seems to be, obviously it was a headwind in the fourth quarter here, and so I think you mentioned it Alan that you thought that the pricing level, the absolute level pricing has stabilized. I just want to get your confidence on that, that we're not going to just see continuing.

Speaker 4: decrease in pricing which is going to squeeze margins, but also limit the sales growth. So in the 10K, as you disclose the drivers to the change in revenue, I think the implication here, if I did the math right, is that pricing was a negative 4% drag in the fourth quarter. And so the question is, if you kept prices where they are now,laugh to end the second quarter of the month. How, so nothing, simpler how,

Speaker 4: How much of a drag would that be for 2023 as a whole? Should we assume that pricing is going to be a negative impact on growth for 2023 as a whole? Well, earlier we mentioned in the conference call that the 2022 first quarter was the biggest, the highest ever.

Speaker 4: in history of ocean freight. And that's what we're seeing, and also as well as supply chain disruption, was all in the first quarter, mainly in the first quarter of last year, that everyone was rushing to buy whatever they can and stocking up everything and then at the higher price, even ourselves, we did that too. And this year we're seeing that first quarter, we're seeing everything's coming down.

Speaker 4: All the prices coming down, ocean phrase coming down right now is ocean phrase stabilized. It has been continued to come down since July of last year to even till the end of the last year. So in January , the ocean phrase started to stabilize. And I do see that there's not much of a price.

Speaker 4: difference anymore in the future for 2023 unless we have sufficient spaces that we're going after even more accounts that we're looking to sacrifice our margin and prices to obtain new accounts, which we already have enough pipelines and also agreements that basically it's going to fill our

Speaker 4: using too much facility costs. OK, great. And then I just want to, sorry, Jane, thanks.

Speaker 2: Hi Jake, this is Jen. If I can just add on to Alan's comments real quick, I think Alan provided a lot of great color on pricing, so hopefully that answers your question about pricing as far as what the trend is going to be for 2023. I also just wanted to add that we are...

Speaker 2: continue, we do expect to continue to be able to expand our growth margin even when pricing starts to stabilize, right? As Alan mentioned, pricing as of last year, if you're looking at earlier part of 2020, it was...

Speaker 2: at peak level, a lot of that was because of the significantly higher ocean freight costs. Now, even as we start to take actions to be proactive to pass on savings to our customers, because of the significant jobs in ocean freight and because of the significant costs of savings to our customers,

Speaker 2: a lot of the other margin improvement sort of initiatives that we are implementing, we're actually guiding higher growth margin on a four year basis for 2023. And we're very confident that we can continue to expand our growth margin even with this.

Speaker 4: price action that we're talking about. Great. Let me add one more thing to price margin wise. Jen mentioned that we are able to keep, well actually increase our gross margin even with the price decrease.

three, gross margin. And if we take a look at back and forth quarter, we actually took almost over around $2.4 million in freight duty capitalization. Same thing with the third quarter, it was like more around the same area of freight duty capitalization. But starting the first quarter of 2023, I don't believe we'll see any more defray duty capitalization that will take down.

on our gross margin wise and revenue wise. So we're seeing that it's going to be a favorable thing which Ocean factoring in the Chino facility.

One question is, are you keeping the manufacturing in Texas facility? And what is it, just maybe a little more detail in the decision to make that change? There were some reasons why you did, you had manufacturing capabilities before. So I am wondering what changed to drive that decision.

Yes, we actually have started increasing our equipment and moving some of the equipment from California into Texas.

So we're increasing our Texas manufacturing capability because it has more space. And also the warehouse space costs less. The manufacturing cost is much lesser in Texas versus California. Finding skilled mechanics, laborers, it's much easier in Texas versus California.

California, the warehouse facility cost has gone up triples since two years ago. So in terms of health and all as well as labor cost has done up a lot tremendously.

And we're seeing that, and that has been one of our key headwinds in the third and fourth quarter of last year as labor continue to go up, different loss changes in California. So we see California more as a hub that can facilitate product manufacture oversea into California

And for us to manufacture more in Texas, it's more favorable for us because it's more in the inland area. And also, most of our new accounts, new customers are actually out of the Midwest in Texas, Midwest and East Coast now. We're seeing most of our growth in the Midwest and East Coast versus...

a decline in the West Coast area market. Great, thank you so much. I appreciate it.

The next question comes from Ryan Myers with Lake Street. Please go ahead.

Hey guys, thanks for taking my question. First one for me, some of the revenue in national and regional chain accounts was negatively impacted by some operational issues that you said have since been resolved. Just wondering if we can get some more detail on that and what went on there. Well, Brian . Um

In the fourth quarter, we had some issues with our equipment. They were shutting down, they were broken. So we had a decline in production output. And we then had to turn over to our overseas partners to have them start producing for us.

And basically, it was a bit of a delay because we had to ship them overseas into California versus it was mainly California. These products have come in and we see that this is actually pretty good in terms of it would cost us less to bring the product overseas versus...

continue to maintain the CAPX expenditures to fix these equipment to maintain these equipment, continue to purchase these equipment. So that's one of the decisions that we may, in January , that we want to reduce manufacturing California because we're losing mechanics, skill mechanics in California.

it's challenging to find new ones to replace them. So we might as well just start to move our equipment into Texas and also for the West Coast, regarding our overseas partners.

Got it. That's helpful. And then just kind of switching gears and we think about the eco-friendly product, you said it was 27% of the mix here in 2022. How would you expect that business to grow and what percentage of mix would you expect that to represent in 2023? Jan, do you have the actual numbers on that part?

I can explain to you the part that, what I'll do is I'll explain the part that the growth part, the growth aspect is that we see that 2023, more and more cities and states are going to push, force the law into effect, especially like in California. We're banning the styrofoam completely in California and in some of the cities.

And also we're adding the, like in May, there's no more styrofoam in the city of Los Angeles County. So everyone has to go into paper, something more eco-friendly. And more and more seeds are actually, now that the COVID pandemic is behind us, they're going back and start looking at eco-friendly packaging.

and that's where we see the growth is, as well as our online channels. We are seeing more sales in the eco-friendly aspect of the product through our online channels. And with the new sales that we are moving into Canada, Canada has completely gone into eco-friendly.

And that's where we see the major huge market in terms of eco-friendly products in the northern state of Canada. Got it. And then last question. Oh, go ahead Jan. Yeah, if I can also add on just from the numbers perspective. If you want to also add in the prof Jan inoky design, you know,Cassadee as well as Kisstimer as well. So please make sure you hit the red button if you're interested in that kind of Isn't Sometimes Editor question, you know, as well as free within Like your email account, but share that, or if you're if you're interested in the alternative.

I think as you pointed out, on average for the entire full year of 2022, eco-friendly products represented about 27% of total sales. This is based on the updated product category that we talked about in our...

So you can clearly obviously see the momentum in the growth of our eco-friendly products. And as Alan mentioned, with all the strong demand, the regulatory, the change in the regulatory environment, and our continued expansion of the products that we are offering in this category, we do see that this momentum is going to continue.

into 2023. Got it. That's super helpful. And then last question for me, appreciate the commentary on building up a sales force there. Obviously, you're targeting some new geographies, but I'm curious, are you guys targeting any industries outside of food service?

I'm sorry, what was it? The food service area? Because we are targeting with the additional sales force, we're targeting geographic location as well as we're adding new food products. Yes, beverage items, bubble tea, global product supplies. We do see that the demand for bubble bus supply has come back up this year.

So, that's the area that we're targeting. But mainly, geographic area in the Midwest and the East Coast and Southeast, that's where we see the biggest driver of our growth in 2023.

Thanks for taking my questions.

Thank you very much for...

and Alan Jen can we speak to I want to get to the sales growth thing a little early can you walk us through what we should assume for cadence one two three four Q to get to a seven and nine percent so mid point eight that's high single-bit sales growth for the year what's the cadence look like over the four quarters

So, Michael, let me go over the strategy in that part.

The first quarter of 2023 versus 2022, we see a decline because the first quarter, that was when the market was short of everything. So everyone's trying to grab a whole container, then they were stocking up, they were worried about everything. So I think we were selling out everything that we had on the floor. So we started to really increase our inventory, which all came in.

in the second quarter of 2022, which really bought kind of a

actually decrease our operationals because we were, we couldn't move anything in our warehouses and we immediately, we added new warehouse facilities in California and that didn't, that helped a lot for third and fourth quarters eliminated the warehouse space issues.

And in second quarter, that's why we see a decline, year over year decline, because we actually normalized this year, where else were the prices coming down. But we see that this is a continued issue for 2023. That's why we started to look for additional spaces early in the last year. In January , we finalized the Chicago.

And we're looking to finalize Houston. So we want to make sure we have an operational by May of this year. Because we see a bulk of our new accounts that are coming on board, they need the product, we need to stock for them by April , May of this year. And that's where we really see the increasing need of

South Carolina, space to increase. New Jersey warehouse need to increase the space. Texas need to increase the space. Seattle, every one of our facility need to increase our existing space by racking up the entire warehouse, adding additional 15 to 25% additional spaces, plus the two additional warehouses.

That will help us for the growth of facilitating the growth of the new account that we're signing up, which we already signed up. It's just that the product will be started coming in from overseas and also domestic. We have to increase stockpiles, 30 to 60 days inventory on the floor for them to start to take on the product. Medicalearthyard.com

and that's where she the number is. And then my home.

Hi, this is Jen. No, you're fine. Just maybe to provide a little more color from the numbers perspective.

to answer your question on the breakdown by quarters in 2023. So this is what we have in mind.

For Q1-23, we already discussed in the previous prepared remarks that we were currently expecting the revenue to be down about 10 percent. And I think Allen provided a lot of great color operationally with driving that.

From overall the trends perspective, I think that's going to, we talked about that trend is going to revert and now we're going to see that revenue growth is going to accelerate towards the end of the year. So we do currently expect.

continued momentum in our revenue growth primarily in the second half of 2023, probably around 20% or above in the fourth quarter. So when we are looking at the full year 2023, that's 2023.

about 8%.

That's just the overall trend is we're going to start a little slow, but it's going to continue to accelerate throughout the year. Yes. Right. Right. And the way I sort of characterize it, 1Q negative 10, 2Q sort of up 5 to 10, 3Q up 10 to 15, 4Q up 20 to 25.

that blends you into, you know, call it an 8% number, that's a high single digit. Would you discourage us from thinking about it that way?

No, I wouldn't. I think the overall trend makes sense. Obviously, part of it depends on the timing of the shipment, especially as we think about quarter end, but I think overall the trend is...

makes sense. Okay and then I mean you know your margin outlook 32 to 33 straddles the 32.2 for the year so it's a slight down to an up 80 basis points.

and you're dealing with a negative in the first quarter. So the nature of this question is are we looking for increased number of skews

and better quality of what's being sold is what helps overcome a headwind in margins in one queue and then an improving trend to get you to call it the midpoint 32 and a half, which would be up modestly year over year on a four year basis at the midpoint. Is that the right assumptions about how that's happening?

Michael, Michael, let me answer that question. We're going to see more of a higher margin in the first quarter and second quarter, and then we're going to see a lesser margin in the second half of the 2023. That's one of the strategies that we're seeing is because…

we are going to go full ahead in terms of competing the market and starting the second quarter, the second half of the year as we have more capacity in terms of facilities space.

And yes, and earlier Jie mentioned that in the fourth quarter we're going to see, actually starting third quarter, fourth quarters, we're going to see more of an increase because historically our increase year over year has been around 15 to 22% year over year growth. And that's where we're going to see the momentum on that part, mainly because of our additional sales rep that we've hired.

as well as the additional warehouse space that we have to service the new geographic area customers. We mentioned that in the past years our goal is to continue to grow into the area that we have not touched. That is the South East, Midwest, and the East Coast. Finally, with the additional space that we added, we will be able to accommodate.

into the first half in order to land at a midpoint of 32.5 for the full year, which is your guide is 32 to 33. Correct. Okay. Okay. And then I don't want to belabor the fourth quarter much. I get some of the dynamics that are happening that we're out of your control between down equipment and...

and getting product from overseas. But if you, and I haven't had a chance to do this because I'm on the road and I, so I confess I should have done it myself, but I haven't, so I'm asking you.

If you account for, let me ask it a different way. You gave guidance that would have landed us at about 33.2 for the margin for the quarter, and we came in at 32. So what accounts for that 120 basis points? And I'm assuming some of it's the write offs.

and some of it's the timing of product that got disrupted because of the equipment failures, but I would like to hear sort of what's

what made up some of that 120 basis points? Chen, would you, my understanding is the write off, but Chen can go into detail on that part. Yeah, I can take that question. The biggest impact in terms of the...

In terms of the margin in the fourth quarter, you're right, it is the write-off. The out of period which we talked about in the prepared remarks, the impact is $1.7 million for Q4 2022.

Okay, all right, I can do the math on that. So what's really important is you would have hit your margin target even if the sales...

We're down because of the pricing givebacks related to freight that That's the real important messages margins wrong on track X the write-off Yes, March is actually on track to grow

But I'm specifically in the fourth quarter, margins were okay, X the write-off. I get the dollar amounts lower because I'm starting on a smaller sales base because you had to give price back. But the margin actually was...

your margin trend extra write-off for the fourth quarter was on budget or better? I can take that question. So it actually is going to be better. So without the impact of the 1.7 million

out of period adjustment, our fourth quarter margin would have been 33.8. So it would have been better. And then in Q1, we are seeing that operationally that some of the actions that we are taking to improve the margin is actually we're starting to see that the change is to such a certain point that we are Squ drift over the?.

to see some of those translating into numbers. So we do expect margin to continue to expand from that number into Q1 2023.

Okay that I wanted to make sure we had that clarity because I think that's important for everybody to understand. You had a good margin quarter. You had to give back some price but you had a good margin quarter. Okay that's last question for me. Capital spending you said it was gonna be down but what's the dollar amount you're budgeting?

to spend under $4 million for capital expenditures as we decrease manufacturing in California. So we will reduce the convex expenditure for the maintenance expenses.

Yes, that's absolutely right. So I would say our round rate cap at is going to be significantly lower as Alan talked about. That number is excluding, for example, the continued investment that we are making.

into the joint venture or if we were to expand to continue to invest into the joint venture. But that's absolutely right, the round rate, capex, is at a much lower level.

the joint venture or if we were to expand to continue to invest into the joint venture but that's absolutely right the round rate capex is at a much lower level. Okay so about four million is what I'm hearing.

That is correct. Okay. Great. Thank you for taking the questions. Thank you, Michael.

The next question comes from Paul Dirks with William Blair. Please go ahead. Hi, good afternoon. Thanks for taking my questions. My name is Paul Dirks.

The first one for me is, and forgive me if this was covered earlier, but on the de-stocking you know, obviously

I think the thinking was that it would end here in the fourth quarter. It's obviously continuing into 2023. Can you help us parse out if there are certain customer segments, certain product categories or any other certain, you know, labeling of what actually is being de-stocked and how much confidence do you have that it will wane over the next quarter or two? I believe that the stocking part for most of our clients that we serve is

have ended in the end of last year. We continue to emphasize to our customers do not overstock. We will bring product in. There's no shortages. There's no supply chain issue in most cases. Ocean Freight are better than last year in terms of the arrival time. They're more clear, the easier to get contained out of the port.

it's less congested and the domestic local carriers are actually faster than before so there's less of an issue of of surprising disruption only in certain cases that some of the container might get delayed but in most cases it's not going to be delayed and also as well as

The price we actually kind of alerted our most of our customers that price was has started to come down since last August September October's and they continue to come down and we will continue to let them know What is the what is the market price on that part? So our client has been Educated advice on that part

So I don't see any more of the de-stocking. That's where I mentioned earlier that everything should be normalized in 2023. Okay, so just to be clear, no more de-stocking here in the first quarter? Correct.

Okay, got it. Next question for me. In 2022 price was up about 12% for the company.

Can you let us know what was priced up for the carrot earth products? Or maybe if you have it this way how much do carrot earth products contribute to your overall price increase?

Do you have the numbers? Carrot in itself in terms of the percentage of the overall price increase is actually not a super significant percent. It should be below 10%. You guys are lost.

Okay, so you know and then maybe into 2023, are we seeing any price deflation on Carrot Earth products or are those somewhat saved given the fact that there's so much of a push globally into eco-friendly products?

Yes, Paul. I am seeing some deflationary pricing, including the Kerri Earth. They're brought in from overseas. When the price increase in Ocean Freight, it was also added to the Kerri Earth. Basically, all category lines were added on the Ocean Freight lines.

So we also have announced a price decrease on the Keras Earth product in the fourth quarter and also January of this year as well.

Got it, that's helpful. Then last one for me. You know, into 2023, what are your expectations for being able to leverage your SG&A? Do you expect that you'll be able to do that for the full year, or is this something that we should think about only when revenue is growing in the back half of the year?

I do believe, I'm sure Chen can elaborate more, but my understanding is that SG&A is coming down. In the second part of last year, SG&A went up sharply, facility costs, labor costs, and also production manufacturing expenses, but SG&A should be starting to come down in terms of 2023 as we reduce manufacturing in California.

Mainly the SG&A increase was due to manufacturing in California trying to repair the equipment and also hiring the people and skilled labor to maintain this equipment. That was one of the biggest challenges for the past two quarters. We do see that moving to

Texas, that will give us more of a leverage in terms of balancing out and reducing the expenditure and the CNN apart.

give us more of a leverage in terms of balancing out and reducing the expenditure and the CNN part. Okay, very well. Thank you for your help.

The next question is a follow-up from Jake Bartlett with Truist Securities. Please go ahead. Great. Thanks for taking the question. I had just a couple follow-ups. One was on the CapEx and what you're talking about kind of for expectations for 23. But if I include just CapEx plus deposits, which I think seems to be the best way to do it, but it was 14.7 in 22.

What should that number be in 23? You mentioned 4 million in CapEx, but that's not maybe the whole picture, and especially with what you're investing into the JV. So what should we, if we think about free cash flow as a combination of CapEx and deposits, what should that number be?

Well Jake, for the year 2022 and 2023, the equipment that we ordered in 2022, we pay most of the deposit and we actually accounted for that as a CapEx expenditure already in 2022. So basically there's not much coming in into 2023.

And basically all we have to do is pay the remaining balance of those equipment that we paid for already in 2022. As far as JV, we actually paid a majority of it in 2022 already in terms of CapEx deposit on that part. In 2023, as we mentioned, we want to see first how the joint venture internship...

the sales growing and growth and everything to see if we do increase the CapEx, the additional investment, or actually we're looking to having additional parties to join the joint ventures in terms of selling the shares and having more shareholders for the company.

area that we're actually looking to right now on that part. So we don't see much of an increase in CapEx or deposit in 2023 for the joint venture, but as well as for the equipment wise. So that's why we're saying that we're pretty safe in terms of $4 million in terms of maintenance and some of the CapEx Spanish award we're actually looking to spend is on new trucks.

new trailers, warehousing, rackings, and those are the things that we're spending in terms of the 2023. More on the logistics side. Okay, now in the Chicago or Illinois factory and Houston warehouse, those wouldn't be big CapEx expenses? The $4 million includes those? Yes, that would not be a big expenditure for CapEx.

And then my other question is about back to pricing. And in my other coverage covering restaurants and their guidance for costs in 23. And all of them have packaging costs being up year over year, they're not seeing this.

at least telling us yet about deflation on that line. Is there any nuance that maybe what restaurants order for to-go packaging is not going to be deflationary, but other items are? Just maybe a little more detail, because I'm seeing a little bit of a disconnect in terms of what the restaurants I cover are talking about.

Plastic actually dropped more than anything. Paper has not dropped at all.

Paper costs in the US has actually done up a lot in 2022, even till the end of the year. I've even seen a price increase in January of 2023 on the paper side. But on the plastic side, it has dropped a lot, more than 40% in terms of recent costs. And that's basically, it's known to everyone. One thing about the restaurant industry.

restaurants, even though they order, they buy direct from manufacturers like us, they actually have to have a third-party logistics such as Cisco, Sigma, or other national distribution companies. They would do the markup. In terms of what is the landed cost, the actual cost is determined not just by buying the product from us, but also from the logistics side of the business. Now in that part of the second business, I've seen that.

increase a lot in terms of facility and labors. So that might be in the case that the actual lender cost has gone up versus the product cost has come down. Okay. Thanks a lot. I appreciate it. Thank you, Jay. This concludes our question and answer session. I would like to turn the conference back over to Alan Yoo for any details in the mics.

Well, thank you for everyone for joining the conference call of Care of Packaging, and I look forward to the future conference call. Thank you all, everyone. Goodbye. The conference is now concluded. Thank you for attending today's presentation. You may all now disconnect.

The C.

I have you.

The F.

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