Q2 2023 Karat Packaging Inc Earnings Call
Good day and welcome to the Coeur Packaging, Inc. Second quarter 2023 earnings Conference call.
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I would now like to turn the conference over to Roger Pando with Pando Wilkinson Investor Relations for care packaging. Please go ahead.
Thank you operator, and good afternoon, everyone. Welcome to cure packaging 2023 second quarter earnings call I'm, Roger Pond L will consume tariff packaging Investor relations.
My pleasure momentarily to introduce the company's Chief Executive Officer, Alan you as Chief Financial Officer, John go.
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 meaning of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factors section of the company's most recent Form 10-K 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 FCC from time to time.
Actual results could differ materially from these forward looking statements and Karen packaging undertakes no obligation to update any forward looking statements, except as required by law.
Please also note that during this call we will be discussing adjusted EBITDA adjusted EBITDA margin and adjusted diluted earnings per share, which are non-GAAP financial measures as defined by SEC regulation G. A reconciliation of the most directly comparable GAAP measures.
non-GAAP financial measures is included in today's press release, which is posted on the company's website and with that I will turn the call over to CEO Alan <unk>.
Alan.
Thank you Roger good afternoon, everyone. Despite revenue being impacted by anticipated price reductions and lower revenue from logistics services and shipping charges, we achieved excellent second quarter results.
Sales for our core disposable foodservice product grew during the quarter.
With volume increasing 5% over the prior year period demand for eco friendly product remained strong sales for the category grew 22% in the second quarter over the prior year period.
2023 objectives 40, eco friendly product category is to be at about 35% of total sales.
We were able to sustain record levels for the gross margin. Despite the industry wide deflationary environment and multiple price reductions that were implemented.
Well, that's right off of raw materials associated with the disposal of certain machinery and equipment.
We continue to implement our asset light growth initiatives to focus more on important distribution drive margin expansion and improved inventory management and fill rates.
We are working through some operational challenges in the opening of our Chicago and Houston warehouse, but we currently expect both warehouses to be fully operational before the end of September 2023.
We are also looking for additional warehouse space in strategic locations, such as Arizona, Florida, together with the scaling back of manufacturing footprint in certain U S locations substantially completed combined with the expansion of import items, we were able to achieve and maintain greater margin.
I also want to mention that we completed that transaction of selling a portion of a joint venture project in Taiwan and have received payment for a full investment of $6 million plus interest our current operating model and strategic initiatives are producing strong operating cash flow accordingly.
As we announced earlier today, our board of director declared a special dividend of <unk> 40 per share. The board also approved the initiation of a regular quarterly cash dividend policy and they could declare a dividend up 10 cents per share.
These distribution demonstrates the board's confidence in carrots, future and commitment to returning value to our shareholder.
I'll now turn the call over to Genco, our Chief Financial Officer to discuss the company financial results in greater detail Jan.
Thank you Alan.
Despite a challenging year over year revenue comparison second quarter 2022 results demonstrated our ability to implement our business strategy and we were again able to uphold enhance the margin and strengthen the company's liquidity position.
Net sales for the 2023 second quarter as anticipated decreased 5.3% to $108 $7 billion.
Well I'll hand, you a $14.9 billion a year ago.
The decrease was primarily due to pricing reduction as long as lower logistics services and shifting rapidly.
Partially offset by the increase.
In volume and change in product mix.
By channel.
Two distributors, our largest channel was lower by five 7%.
For the 2023 seconds okay.
Dallas to National and regional change decreased 5.0% Dallas.
Dallas to the retail channel decreased 13.7% and south from the online channel increased modestly.
As Alan mentioned, our core disposable put service product volume grew 5% over the prior year period.
In our eco friendly products increased even more at 22% for the second quarter.
Carriage is a leading provider in this category based in part on our in large dissolving network and expansion of our product offering eco friendly products represented 32% of total sales in the 2023 second quarter compared with 25% a year ago.
Gross profit increased significantly by 23.3%.
Two of $41 $9 million for the 20th 23 seconds. Okay.
$34.01 million in the prior year quarter.
Our gross profit in this quarter includes a write off of $1 $7 billion of raw materials as we disclosed all of a sudden machinery and equipment in the U S.
Gross margin increased to 38, 5% in the second quarter of 2023, which included a 160 basis point impact of raw material write off the gross margin for the prior year second quarter was 29, 6%.
Gross margin expansion benefited by a significant decline in ocean freight cost, which amounted to $6, 2% off net sales in the 2023 second quarter compared with 18.0% often that south of that here.
Operating expenses in the 2023 second quarter were $28 $5 million or 26, 2% of net sales compared with $26 $2 million or 22, 8% up net sales in the prior year quarter.
Operating expenses in the current quarter included an impairment expense and loss on disposal machinery of $2.5 million out of which $2 $4 million was due to our scaling back manufacturing instead have location.
Excluding this impact our <unk>.
Run rate operating expenses in the 2023 second quarter were $26 $1 million or 24.0 per setup, nacelle, which reflected reduced shipping and transportation costs and bad debt expense.
Partially offset by work force expansion higher marketing expense to support online sales growth and higher rental expense from the additional leased warehouses.
Net income for the 2023 second quarter rose, 48.3% to $10.7 million.
$7.2 million for the same quarter last year net.
Net income margin advanced to nine 8% in the 2023 second quarter from six 3% a year ago.
Net income attributable to carriage in the 'twenty to 'twenty, three second quarter rose to $10 $5 million.
53 cents per diluted share from.
$6 $3 million or 32 cents per diluted share in the prior year quarter.
Adjusted EBITDA and <unk>.
non-GAAP measure increased to $21.1 million in the 2023 second quarter from $11.8 million in the prior year quarter.
Consolidated adjusted EBITDA margin expanded to a company record of 19.4% of net sales from 10, 3% for the 2022 second quarter.
Adjusted diluted earnings per common share rose to 16 nine cents per share from.
Some 34 cents per share a year ago.
We finished the quarter with $110.3 million in working capital up from $84 $5 million at the end of 2022.
Hi financial liquidity.
$56.0 million with another 28.0 a million dollars in short term investments.
Well, even further into 2023 we're forecasting net sales for the third quarter to be down approximately 3% to 4% year over year.
We are anticipating strong topline growth of 10% to 15% for the fourth quarter.
Overall market conditions for our industry remains deflationary, but we believe we are towards the tail end of the price cuts.
The year over year expected decline in revenue in the third quarter, primarily reflects that delayed operation of our two new warehouses.
And all anticipated implementation delays by certain new chain account Cleveland.
That was signed earlier this year.
That said, we anticipate a strong fourth quarter with shipments to start the delayed ciena com, an additional warehouse capability can be fully operational.
Accordingly, we expect net sales to be up by approximately 10% to 15% over the prior year quarter. While also raising our 2023 full year gross margin goal to be at around 36% to 37% versus.
31.2% by 2022 as our current operating and growth initiatives continue to benefit our performance.
And I will now be happy to answer your questions and I'll turn the call back to the operator.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Michael Hoffman with Stifel. Please go ahead.
Hi.
Hey, John .
Just to be clear the down three Q as it is.
Is about delays and then incremental price pressures related to resetting of.
Raw materials and freight.
It's not a decline in activity, it's a delay in an upside in activity.
Yes, we do see the these the sales momentum is very strong, especially in the east coast in.
In Atlanta, Florida region.
Texas region, Oklahoma and in Chicago people are waiting for us to get the warehouse up and running and also the same as Houston, we were looking to have an operational mid July but what do you permitting delays and rack and delays in training. So we're shooting for a September and what's on that customer.
Hang on tight and we'll get it ready and because we don't have enough every one of our warehouse currently as its overloaded already South Carolina warehouse, we even have to stop shipping product because it's just overloaded.
Okay.
So I'll just repeat myself that youre not seeing a reduction in demand.
Timing issue related to your ability to fulfill the warehousing.
Startup.
Michael I wanted to and reemphasize. Our there is no did a reduction in demand in the Midwest and east coast, but we have seen softening in the west coast.
Okay, Alright fair enough.
And then.
Just to do the quick math.
And just so it helps us sort of a level set models are we settling in somewhere around 435 to 440 million in sales that gets you that sort of low single digit and then if gross margin play out the way you're describing it that sort of $1 55 to $1 60.
I'm, assuming G&A, there's nothing unusual going on for the rest of the year. So all of that upside in gross margins should come through in EBITDA as well.
Jackie you answered this question.
Yeah, I can take that Mike talked about.
From the modeling that's there if I hear correctly that top line.
Well, we did the math the total full year revenue.
We will probably see a modest low single digit.
Okay.
I think overall.
The SG&A leverage that you're all well.
Sure.
That's.
Oh yeah.
Exactly.
Going to be fairly consistent with last year, although we are.
Obviously, it will provide our prepared remarks.
The updated guidance on that as well.
That doesn't say Oh our.
Oh guidance on gross margin for the whole year so that.
We are seeing we are expecting.
Our adjusted EBITDA margin and higher than that.
Right. So just to be clear that there's about 10 or $11 million of incremental gross margin coming through the model based on the sales outlook.
Yeah.
We should expect most of that to translate into EBIT and EBITDA.
But there's not a big step up in SG&A is what I think I heard you say that.
Apologize for the background that's correct.
Okay, Okay alright.
Alright, that's what I needed those two things.
Thank you Michael.
The next question comes from Ryan Meyers with Lake Street Capital. Please go ahead.
Hey, guys. Thanks for taking my questions first one for me I know investment in our sales team has been a priority in the past. So just kind of curious what the sales team looks like right now and how that ramp up has gone as we look to accelerate growth here in Q4.
Yes, we have a reasonably just a higher.
Oh, three sales reps in the Midwest and we are looking two more two to three more in the east coast and also the northwest. So we are on track on the additional sales reps.
Crewman.
Got it that's helpful. And then some of the weakness that you're seeing on the West Coast. Just wondering if you could unpack that a little bit more you know was that kind of broad based across the business as you know eco products performing well on the west coast, just kind of help us kind of understand what are what you guys are seeing there.
What I'm seeing and through the street.
The West Coast, where we are seeing some softness in the distribution channel, especially those stars catering to the mom and pop restaurants, we walked the streets in Los Angeles, and we heard that the street in San Francisco, Northern California restaurants are closing at eight o'clock versus there was closing at 10 11 P M and <unk>.
After six P. M people are not going out eating anymore and dining and also there is a many restaurants have basically shut the doors are indeed, our west coast region, especially California, where we're seeing a lot of declining in activity in that part, but the chain stores are they have remained strong so basically this.
What we're seeing to support at even the West coast, the mom and pop restaurants are closed aimed at raising prices or costs or cost of goods. So it's gone up the rent has gone up but the change to what has been able to maintain their.
The strength in terms of outgrowing yourselves numbers.
Got it that's super helpful. Thanks for taking my questions. Thank you Ryan.
The next question comes from Ryan Merkel with William Blair. Please go ahead.
Yeah, Hey, Thanks, I wanted to ask about the change in sales in the second half Alan is the the delay. It then the national chain accounts and your warehouse delay are those are those the same things are those separate issues.
These are separate issues normally what we understand is dealing with a national chain account, there's always on the the setting up the item cozy the timing and also if there there was a wash switching over from another there switching over from another vendors and there might be some left over inventory they need to deplete.
So it's always an issue like that for the change so even though if we were to anticipating deal like for example on August 1st to start date, it might be pushed back to October 1st or September 15th now with the warehouse. That's a keep another key problem is that were seeing that because of warehouses. So overloaded.
This is the same issue we had last year. That's why we increased our warehouse space in California, and also we're adding new spaces are in the other locations is that when the when the warehouses overloaded, we tend to be floating customer items and delayed shipment to the product because or we have this move like changed the location.
The product to ship them, Oh, originally whereas the South Carolina or two Texas, Oh, we have to shut down a couple of days of shipment because we have to move around the product and organize it and and also transfer out product into different warehouses. So right now, we're using Chicago and Houston as a storage facility for the overloaded warehouse in South Carolina and.
In California, and New Jersey, and we're waiting for the rack to be a racking up the entire warehouse with the all the existing warehouse as well as the the new warehouse Chicago was just fully Iraq, and they're getting started to be get.
Operation next week, but Houston, we have rack and delayed because the ocean freight from the vendors. They have delays in that so this is why I see that's why we're rushing into getting another warehouse in Florida.
And as it was Arizona that because we know even though that that was originally part of the end of the year ago objective, but what kind of pushing for because we know that even if we start looking now it might be end of the year when that really happens.
Yeah.
Okay got it.
And then you mentioned that expanding import items that helped gross margins are you, primarily talking about California, and shutting down the facilities, there and just replacing it with imports that how we should be thinking about it.
Well in California, we scaled back in manufacturing.
It would be a increase in labor, increasing electricity cause and rental facilities. So we scaled back in California already and we moved a lot of these product into overseas and that's what all of US will bring actually new items eco friendly items. For example people are looking for a different type of lacoste product, they're looking for a different type of P O.
And also we are just about to introduce our one that only the person only paperless in place of P. L. A so a lot of cities are considering P. L. A is still part of plastic you can decompose it until it what were they up unless you have a commercial comp with sites. So with paper lids. It can basically.
You know just put on the ground or decompose. So what we're looking at new different items that are compulsive and eco friendly and also we're looking at going through D. Even went to plastic we're looking to start using the recycled content plastic added to our existing version classes, so that the cups or defense container.
I mean at least with 25% recycled content. So these are the things that where we're focusing and moving forward to new items.
Okay Alright. Thank you. Thank you Ryan.
The next question comes from Jake Bartlett with choice Securities. Please go ahead.
Great. Thank you so much for taking the question.
It might have been on the gross the gross margins in the guidance I believe I'm, just kind of back into it here it isn't that implies about little over 34% gross margins in the back half of the year. One just correct me if I'm wrong on that.
But also you know is that the right level to expect going forward or is that still you know benefiting from unusually low freight costs for instance, our ocean freight costs trying to figure out kind of what the you know the gross margins have diverged so much from kind of original expectations trying to figure out what the right normalized gross margins are going.
Forward.
And then I have a follow up.
Yeah.
Well, Jake Here's a thing.
We mentioned earlier in our Ah Ah Ah report that we're benefiting from a super low ocean freight in the past that in second quarter, but we're seeing the ocean freight coming back up a pretty fast but.
But that's not as much as it was back in 2022, but it has gone up 30%, we're anticipating the ocean freight to go up even more starting August 15, that's what we've been told for example, while we were paying $1100 Ocean freight and it is going to go up to be 2000 2500.
It was nearly double our in certain areas. So basically we don't know how long that's going to sustain because in the in the three or four months ago are the cost of Ocean freight went up in two weeks it was not sustainable and it fell down again, so we're still in the in the you know really sensitive matter of timing things that we don't know.
The Ocean freight is gonna be which also is a big.
Chunk of our cost of goods. So so there's really not much who can say, where it's going to be a normalization right now.
Got it Okay, and then and I think given that commentary, we should expect higher gross margins in the third quarter and then it comes down in the fourth you know from from that level.
Is that the right way to think about the cadence here.
At this current moment, yes third quarter, we should see a higher gross margin fourth quarter, it's unknown.
Okay, and then I wanted to dig in on the comments about volumes and I think you mentioned that the core foodservice disposable packaging volumes were up 5% what was the overall volume just up across the business I'm trying to kind of figure.
What what else might have been a drag more volume.
No.
Well here's the thing.
Our core business is our packaging disposable packaging as well as food items that segment has gone up 5%. The segment that has dragged our AR number down is the the shipping and also logistics service the surface that we had in the past pulling containers from the port for other nearby neighbors.
That has dropped significantly in the past quarters.
Okay.
Okay, and you you've talked about I think for a couple of quarters now we've had you've had visibility on the chain accounts that you've signed on and this is a matter of getting those up and running and you know some delays there, but it's going to happen, which is encouraging my question is whether.
There is more in kind of process like you've signed I mean have you signed additional chain accounts that we might expect in 'twenty four just trying to understand the pipeline of new business that you've been generating.
Yes, we have a list of pipeline that we generated a beginning of this year and also in the second quarter and we are seeing more and more in our pipeline are not just the national chain account also supermarket, we are targeting convenience stores after at doing.
During the starting to fourth quarter. This year, but first of all we need to do is we need to increase our capacity in terms of warehouse storage, we understand out without the warehouse storage, we will not be able to service our customer are in the correct manner.
Okay and then last question is.
Is your you initiated a dividend you are a growth company as well. So you know is this a is this the kind of maybe an indication that you're not actively seeking to acquire another company, maybe do generate capacity that way how should we look at you know you're returning.
Cash to shareholders, but at the same time being pretty fast growth company.
Yes, where we're returning dividends to the shareholder one is that we're accumulating a lot of cash and one of the reason we're accumulating cash is that we have decided not to invest more in equipment to manufacture product in the past two years, we invested over $50 million or more.
The past two year consecutively. This year, we mentioned earlier in the first in the first quarter and the first quarters, our capex expenses kind of dropped significantly, but what that's even with the returning of dividends our cash to the shareholder we're still holding off significantly cash on hand that we're putting into our.
Deposit account as well as we have line of credit we utilize anytime if there is a strategic partner that could become available that we can acquire.
Acquire a could be a warehouse distribution center or that we need in the strategical location or clientele or something but definitely not a manufacturer.
Got it. Thank you so much I really appreciate it thank.
Thank you Jake.
This concludes our question and answer session I would like to turn the conference back over to Alan <unk> for any closing remarks.
Yeah.
Thank you everyone for joining our carrier packaging conference call for our second quarters, and we look forward to be sharing from all of you again in our third quarter conference call again. Thank you very much for your participation have a nice day bye bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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