Q3 2023 Karat Packaging Inc Earnings Call
Good afternoon.
And welcome to the Carrot packaging, Inc. Third quarter 2023 earnings conference call.
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I would now like to turn the conference over to Roger Palmdale Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone and welcome to care packaging as 2023 third quarter conference call I'm, Roger Pinedale with Thunder of Wilkinson sword packaging <unk> Investor relations firm and it will be my pleasure of momentarily to introduce the company's Chief Executive Officer Alan you.
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.
W. W <unk> SEC.
SEC Dot Gov, along with other company filings made with the SEC from time to time.
Actual results could differ materially from these forward looking statements.
Eric 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 Diluting earnings per share, which are non-GAAP financial measures as defined by SEC regulation G. A reconciliation.
Alleviation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release.
Now posted on the company's website.
I will turn the call over to CEO Alan Alan.
Thank you Roger Good afternoon, everyone. We are proud to deliver a strong third quarter with revenue in line with our expectation and sustain meaningful improvement in margin.
Sales volume increased approximately 7% over the prior year period.
Although total revenue was again impacted by unfavorable year over year pricing comparison, along with lower revenue from logistics service and shipping charges as anticipated.
Sales of our eco friendly product continue to improve this category grew 15% in the third quarter over the prior year quarter and represented approximately 33% of total sales.
For the quarter, we achieved a 49% increase in net income from the prior year quarter and.
And we're able to sustain an elevated gross margin even with the industry wide deflationary environment gross margin in the third quarter continued to benefit from our strategy of scaling back manufacturing operation and significant lower ocean freight costs versus last year.
Sales for manufactured products in the third quarter were 22% of total net sales compared with to approximately 27% last year, which generated labor product cost saving of one point or $1 billion. We expect gross margin to remain at a higher level because of our initiatives and the <unk>.
<unk> strong U S dollar.
Now into the fourth quarter of 2023 and heading into 'twenty 'twenty four we will continue to implement asset lights initiatives at our other U S locations and will concentrate more on import and distributions.
We see a long runway for margin expansion, given our objectives of having manufactured products to be up approximately 10% to 15% of total sales.
We're also focusing on new product development to further enhance our competitive strengths fill customer demand and add to revenue growth, our new Chicago and Houston distribution centers, which became fully operational in September are expected to contribute to new geographic market penetration entering hence our fill rates.
Together with the recent expanded National sales force, we are growing market shares in the east coast, North East and Midwest regions.
We soon expect to double the size of our Washington State distribution center with the move into a new 100000 square foot distribution center. Additionally, as part of our strategic growth plan. We're looking to open smaller satellite warehouses in 'twenty 'twenty, four and select regions to support online sales growth as well as deploying new AI technologies to further improve.
Operating inefficiencies.
Based on geographic sales from our distribution center for the third quarter compared with the prior year quarter, The East Coast, North East region increased 41% and Western Texas region improved 7% year over year.
These improvements were offset by softer sales from California, which declined by 16%, reflecting a weaker condition in the restaurant sector throughout the states.
The successful execution of our strategic initiatives is also evidenced by.
By our sustained strong operating cash flow as well as the liquidity and balance sheet position accordingly.
We announced earlier this week our board of directors authorized an increase in the quarterly cash dividend payment 20 cents per share from 10 cents per share.
The board's action reflects its confidence in <unk> long term future and commitment to returning value to shareholders I will now turn the call over to Jan <unk>, Our Chief financial officer to discuss the company's financial results in greater detail Jan.
Thank you Alan and good afternoon, everyone.
Net sales for the 2023.
Hey.
That did decrease full point of 1% to $105 million, but $110 million in the prior quarter.
<unk> volume increased 7% over the prior year quarter, which was offset by unfavorable year over year pricing comparison, as well as lower logistics services and shipping Robin now.
Now all favorable year over year pricing comparison.
But did impact from the multiple rounds of price reductions. It's amendment I'm not really around late 2022, and the first half of 'twenty three as we proactively paused all savings from ocean freight and raw material cost to customers.
But no it doesn't.
Harrison to the prior year quarter.
So distributors, our largest channel with lower by 4.0%, what the 2023 third quarter.
So to national and regional chain decreased two 3%.
To the retail channel decreased 19, 3% and our offline channel sales were up by one 6%.
We are encouraged by the volume growth in our business as well as by the strong momentum in it as well all of the Eagle family products and the geographic region that we're starting to penetrate including the east coast North East.
Gross profit increased 14%.
$38 9 billion for the 2023 third quarter from 30.
$34 $2 million in the prior year quarter.
Gross margin increased 580 basis points.
36, 9% in the 2023 third quarter from 31, 1%.
For the prior year quarter.
By the unfavorable year over year pricing comparison gross margin benefited from our continued actually scaled back manufacturing operation.
Strong U S dollar and a significant decline in ocean freight rates, which amounted to seven 9% of net sales in the 2023 third quarter compared with 14, 8% of net sales last year.
Operating expenses in the 2023 third quarter with $27 $6 million or 26, 1% omnicell compared with $26 3 million or 23, 9% of net sales in the prior year quarter.
Current quarter operating expenses included approximately $450000 in transaction costs incurred in connection with the secondary offering which was completed during the quarter.
Other increases in operating expenses included work for expansion.
Adoption, but increase the warehouse pet count fire Waukegan expenses, just a point on myself and.
And higher rental expense.
Pension up our warehouse footprint the increase in operating expenses was partially offset by savings in shipping and transportation costs due to lower rates.
Net income for the 2023 third quarter Rose 48, 5%.
$9 1 million.
From $6 $2 million.
Accordingly, net income margin event at eight 7% in the 2023 third quarter.
From five 6% in the prior year quarter.
Net income attributable to parent in the 'twenty to 'twenty, three the corner well not quite $1 million.
45.
Sure Bob.
Quite $1 million or 31 cents per diluted share in the prior year quarter.
Adjusted EBITDA.
And now that measure increased.
Pinpoint to a million dollars in the 2023 third quarter about $11.7 million in the prior year quarter.
EBITDA margin rose to 14.
4% of net sales.
10, 7%.
The prior year quarter adjusted diluted earnings per common share rose to 47 cents per share from 33 cents per share in the prior year quarter.
Turning to liquidity.
With $12 million of net cash from operating activities in the third quarter of 2023 with finished the quarter with $113 million and working capital up from $85 million at the end of 2022, even on a total of 16 nine.
Dividends paid during the first nine months, that's about a year.
September 30th 2023, we have financial liquidity.
The $4 $4 million with another 18 quite $1 billion and short term investments.
I will now close with our fourth quarter outlook, we are revising our net sales forecast for the fourth quarter it could be up a.
Approximately two 5% year over here based on our current restaurant conditions in California.
The competitive environment.
With that robust volume growth of 10% to 15%, partially offset by unfavorable year over year pricing comparison, our Cogs lock and protection for the 2023 fourth quarter and into the first quarter of 'twenty 'twenty four remain at approximately 30.
38% with a current protection for Ocean freight cost.
Fairly consistent.
As Alan mentioned earlier.
We're expanding our market penetration into the east coast.
And that's what's needed.
Well I'll have a strong sales pipeline and our growth initiatives are expected to continue to enhance our performance.
Alan and I will now be happy to answer your question 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 one on your Touchtone phone.
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At this time, we will take our first question, which will come from Ryan Merkel with William Blair. Please go ahead.
Hey afternoon, everyone and thanks for taking the question.
Maybe Alan can you just talk about fourth quarter and why you guys are lowering the revenue there it sounds like California, maybe price down a little bit more than you thought last quarter, just unpack that for us.
Yes, actually California has been ourselves in California has been reducing dropping and we're seeing that the restaurant condition. It's not just the the price drop in the California area of competitiveness, it's all actually.
Earlier, our volume growth is looking at 10% to 15% volume wise growing in third quarter was only 7%, but in volume I look wearing moral but in California. The restaurants, we're seeing more restaurants, shutting down and we're seeing restaurant conditions pretty bad. The overall environment is it's not very good the change are doing well the the independent rep.
Strong Theyre closing early you don't we don't see much of foot traffic, we talked to the restaurant owner they don't see people coming in after seven P. M. At night time, they used to people used to pack the restaurant and also do a take out even after nine P. M. But right now crime is increasing primary is going up it's not safe to be out there people just.
Dining out right now so we're seeing California out down and we don't see any any revision upward in California for the near term and that's why we're focusing met west and East coast right now.
Got it okay and it.
It looks like price will be down roughly 10% in the fourth quarter.
Did that surprise, you or is that consistent with what you thought last quarter.
This is actually a concern.
What we saw because everything's coming down ocean freight scrapping.
Have gone up a little bit in third quarter. So third quarter, we saw our gross margin declined a little bit because of the ocean freight went up for a couple of months and then went back down again, so we're seeing that the fourth quarter, our gross margin coming back to normalized.
Got it okay.
Maybe just lastly, just talk about the AI that you're going to be including into warehouses what.
What are you doing there and what's the what's the benefit can be.
Well, we're seeing that the overall a payroll has gone up throughout the U S, especially in California, and what we want to do is we wanted to reduce our staffing we wanted to realize utilize more AI technology to to finish to complete the work that are we done redundancies.
But it certainly worked more simple works like customer service purchasing placing pillows, placing sales waters, well generating sales for waters as well as warehousing are using AI to monitor each staff efficiency. So far we've already tested our customer service online customer service, 98% of our inquiries are.
<unk> handled by our AI technology, and what we're trying to do is reduce our purchasing account payable accounting department at least 70% of the workflow simplified workflow so that with this with the existing staff. We can run actually the increase of revenue with existing stop or even lesser staff that we have right now.
Got it.
Okay very good I'll pass it on thanks.
Thank you Frank.
And our next question will come from Michael Hoffman with Stifel. Please go ahead.
Hi, Joe how are you Hey, Michael question.
Could you just share a little bit I know you don't give a lot of detail at the regional mix, but just so we appreciate what percentage of revenues is California versus other major areas like Texas northeast or northwest or southeast.
Yeah.
California right now, it's approximately I was saying.
30% of overall revenue.
Jan would you is that it's all cause he got to validate that.
We actually I called that out.
Thank you Amy.
Yes go ahead Jim.
Yeah, that's about right, it's a little older but that's roughly right yes.
Okay.
And then the next biggest region would be sort of the Texas area Midwest and northeast is that how we think about it.
Correct.
Okay Alright.
And then when you think about it.
No, we're not giving guidance yet, but I just wanted to figure out what I'm, what I'm, taking out 23 into 'twenty four would I have to sort of consider like so theres been this pricing mix shift based on changes in raw material inventory freights all through the latter part of this year and the early part of the next latter part of last year into this year.
What what's my rollover effect of that what how do I think about rolling over of the pressures that have been in California versus the opportunity for either new customer wins or expansion of wallet of existing based on things like adding Houston or Chicago or the capacity expansion in Washington State.
Can you help us with how to think about the top line in 'twenty four.
Yes, we do feel that we have a we have several new regional chain, that's where we're focusing on in terms of the Midwest and east coast as well as supermarket chains for 'twenty, 'twenty, four and and I believe Jan do we I would see that our 'twenty 'twenty four we are looking at increasing the revenue.
Wise in terms of what our pipeline converting these pipeline also new distribute distributors because we're adding last quarter I believe we added over 30 around 30, new distributors and chain accounts in the last quarter and now we're seeing that perhaps 35 or more distributors in the fourth quarters are in and moving forward in 2024.
Approximately.
So we do see an upside in terms of increasing revenues I believe that our archive are we with the do we guide our revenue up on 'twenty 'twenty four gen.
We haven't we will provide a the 'twenty 'twenty four revenue guidance in our fourth quarter 2023 call, but to Alan's point, we do see some great Michael to answer your question on growth opportunities in terms of that top line in <unk>.
124, so I know Alan already touched on where we are seeing a roughly <unk> Inc.
Increased all scan mid sized.
Distributor.
The beauty channel, which is I don't think I can always janky old way each month, so and now we are getting very close on some of that pipeline in our new business. That's why they expanded business in our chain channel as well so we'll be providing an update on our 2020 for revenue guidance next quarter.
Yeah fair enough and I am truly not trying to get guidance as much as I just.
We all have to build a model and I've got to put a number out there I want to make sure I'm in the right neighborhood as opposed to something silly.
What I think I'm hearing is that you've got enough.
New business opportunities between the distributors new business growth in chains that theres, a low single digit ish.
Organic growth overcomes any things like weakness in California, Rolling over and then.
<unk> had <unk> been joined so it Mike is that the right way to think about it sort of low mid single digits without getting it into a hard range.
I won't make you Miss one thing it's not just a new accounts and also mentioned that we're gonna be adding new products are there several a hot item that would be adding that will increase our revenue organically for the next year or 'twenty 'twenty four right.
But if we're being conservative sort of mid to low single digits is a good place to start without getting too aggressive.
It is conservative yes, Okay, and then you got a very good gross margin here you took the gross margin outlook up meaningfully from the original 32 to 36 38, but I presume we settled back a little bit then you settle back to a higher LOE than history or more like a 34 36 is that the right.
Way to think about gross margins and 24.
Or or if you're at the well if we're going to guide a we shouldn't guy right now, but we're hoping that we are our gross margin stay around 35 to 37 that is correct that is sorry go ahead.
Alright.
Alright.
And then you know.
Clearly have demonstrated part of your capital allocation is the dividends. So this has been a meaningful increase in it how should we think about dividend growth from this point, you've stepped up quite nicely, but 80 cents a year, but how do I think about how to model of dividend growth.
On a go forward basis.
Well here should we see a we won't be going very light asset in terms of a 'twenty 'twenty four and 2021 'twenty two 'twenty one 'twenty two you your 'twenty two we actually spend a lot of money on Capex investment. This year 24th quarter of this year, we're probably seeing zero and very little capex to spend.
Richer and 'twenty 'twenty four we're seeing a very very low capex expenditure as well so with all the money that.
We save it we are looking at possibly increasing our dividend or special dividend every semiannual or annually and that par and also as well as and U S.
<unk> that we were discussing the Paas, we believe in 'twenty 'twenty four is very likely because the market condition is actually are allowing people to looking to sell their business why they can't right now because there are a lot of business are actually not struggling I would say, they're not growing and they won't be they haven't grown.
The past year and they were not looking to sell at a reasonable price, but I think that Ah in next year, a more and more businesses looking to consolidate and also to sell the business and there are more opportunity will be out there for 'twenty 'twenty four for strategic ways, basically where I mean, we mentioned earlier that we're looking for smaller warehouses satellite warehouses not necessarily open.
Oh warehouse, but also acquiring a small business that hasn't weyerhaeuser location that we can just take on that additionally, and out onto the business that will also on top of the organic growth. This will be our acquisition growth in terms of the 'twenty 'twenty four.
Okay, great. Thank you very much for taking the questions. Thank you Michael.
And our next question will come from Ryan Meyers with Lake Street Capital. Please go ahead.
Hey, guys. Thanks for taking my question first.
First one for me you know how do you think about the pricing environment in 2024, and do you feel like you've seen enough here.
So the last couple of quarters that it's stabilized a little bit.
We're seeing the pricing stabilized right now except for California, California has been very competitive in terms of our pricing wise, but one thing is the labor, where we don't see a labor increase across the board every industry and that is going to we're going to see how that plays out in terms of a price decrease of price increase.
Going forward, our warehouse prices going up labor is going up every seven going up in California, cashes going out delivery going up so so far we were seeing it stabilize but we'll have to see wait till the first quarter to see what happened for 'twenty 'twenty four.
A lot of changes in 2024.
Got it makes sense and then obviously during the quarter you guys. You know what the expansion of five new sales reps I'm. Just wondering if you can talk a little bit about the productivity that you've seen there how that ramp up has gone.
Yes, and as I mentioned earlier that in the past like first two quarter of this year. We only came about around a low single digit new distribute every month, but right now we're getting double digit new distribution are adding coming aboard every month right now and these T cells trip are basically mainly targeting towards the Midwest and east coast.
And we're seeing meaningful distribution converting to our account in the op started placing orders and that's why we're.
We're heavily increasing our inventory in those sectors, which are to warehouse all they say, it's fully packed that picked up right. Now. So we're looking to open up new warehousing that area not in California, what are they looking to scale back in California also another one of the major message that where we're looking to increase or maintain our current gross revenue is scaling back more.
Our manufacturing in the U S. As we mentioned early in our earnings releases that 22 currently 22% of the overall revenue what produced by and at by our manufacturing for the U S. Our goal is just to produce 12% to 15% well, maybe 10% to 12% over our revenue from U S that would increase our gross margin.
<unk>.
Great. Thank you for taking my questions.
And our next question here will come from Jake Bartlett Truest Securities. Please go ahead.
Great. Thanks for taking the question.
I just wanted to build on the last question about the pricing.
You've seen the menu pricing decelerating.
Over the last few quarters can have Ethan even as you start to lap lower lower prices a year ago and so I guess the question is you know how confident are you Alan debt that you're reaching a point where pricing is stabilizing.
Is it I mean, how much of a risk do you see that that just continues in 'twenty for us.
Fly chain.
He's in your competitors can maybe better more easily compete on price.
Well, here's so here's what we see in the past year historically, we would actually do better in an environment like this because we're always competitively against our domestic manufacturers like packages and solo dark and fabric house and other manufactured out there in the U S, where where we actually we moved faster quicker so doing just price competitive environment.
We're actually getting new more new accounts.
Versus losing accounts.
Do you see this actually as a positive thing in terms of next year that are that's why we're increasing our sales or sales for network that we're able to take out more accounts more new customers versus we have no space. We have no no capacity. So right now we're building on new warehouses, so that was in Pla.
<unk> increased our inventory our inventories and also serve as new customers and right now we're already in the pipeline. We do have a poll a pipeline bliss full of accounts that is about to start opening up and start Oh.
Turning their business over that's where we see that very strong growth in terms of positiveness in the 'twenty 'twenty four.
Okay great.
The other question is about this kind of this awareness gross margins land and I'm trying to kind of.
First to that obviously your freight costs are very lower our shipping costs are.
Ocean freight costs are very low right now and.
That should probably go up but then you'll have a benefit from having less manufacturing so.
I heard the 35% to 37% kind of longer term target.
But how do you get there versus what we were talking about kind of maybe a year or two ago and specifically how much is just moving from a.
A mid 20% to.
To kind of you know call it low teens on manufacturing mix, how much does that alone.
Support or boost gross margins well, what we saw in the first quarter second quarter. This year, especially the second quarter. This year. We saw gross margin increased significantly and that was mainly due to the fact that we scale back reduced manufacturing, California.
California manufacturing has been very costly and we saw that and we actually we went on a monthly production output of 145000 units to just around 45000 units and that'll boost alone boosted our margin by at least four basis points three basis points and.
Now we're scaling back in Hawaii, and also Texas in terms of scaling even more back in California. So that were important but what are you putting more product from overseas, whether it's lower cost versus a U S manufacturer of Cogs into cost continued increase here. So we're seeing that this and we started just this quarter and to scale them.
Back in order for cell manufacturing facility. So I wanted to see that benefit fully realized in the first quarter of 'twenty 'twenty four and that's where I said that we will see after the first quarter of 'twenty 'twenty four where our gross margin is going to really lie on for the remainder of the years.
Got it okay, great and then the last question is just on operating costs and G&A, there was a pretty big increase quarter to quarter.
In the G&A and kind of you been recurring.
Is that level of.
Somewhere close to $19 million is there.
At the right level to build from or is there anything kind of abnormal.
In G&A costs in the third quarter that would recur just trying to figure out whether this is the right run rate to grow from.
It leaves us questions Jan Jan.
Yeah, Let me take that question. So you can kind of oxy to me.
G&A as we mentioned earlier, we did this number does include about 550000.
A secondary offering related transaction costs, which we don't expect to recur in the fourth quarter of 2023, I think we previously talked about if we look at our cost structure I think our yeah in terms of the split between fixed and variable opex at about half and half.
I think the way that we think about the fourth quarter, if you take roughly.
So all they run rate SG&A off what we incurred in the third quarter and then apply.
It seems like Oh.
Leverage of the percentage to Covid.
Variable, Washington, I think that will get you to.
Two very close to what we expect the fourth quarter Opex number it's going to be we are obviously continue to look into the area.
Two to improve our leverage I'll I'll pass the language and there are definitely areas that we're focusing on so we do hope to come in with and efficiency in the fourth quarter.
Got it okay. Thank you so much I appreciate it.
Thank you Jake.
And this concludes our question and answer session I would like to turn the conference back over to Alan <unk> for any closing remarks.
Thank you operator, and thanks to all of you for joining US today. We appreciate your continued support we remain confident about carrots future and we look forward to keep you appraised on our progress.
Have a great evening and a wonderful Thanksgiving. Thank you very much bye bye.
Yeah.
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