Q3 2024 Karat Packaging Inc Earnings Call
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Speaker Change: I'll now turn the conference over to Roger Palmdale. Please go ahead Sir.
Roger Palmdale: Thank you operator, good afternoon, everyone and welcome to curate packaging.
Speaker Change: 2024 third quarter conference call I'm, Roger Pinedale with Honda Wilkinson carat packaging <unk> Investor Relations firm, who will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan you and its Chief Financial Officer, Jim go before I turn the call over to Alan I want to remind our listeners.
Speaker Change: 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 and copies of which are available on the Sec's website at Www Dot <unk> Dot Gov, along with other company filings made with the SEC from time to time.
Speaker Change: Actual results could differ materially from these forward looking statements.
Speaker Change: <unk> packaging undertakes no obligation to update any forward looking statements, except as required by law.
Speaker Change: Please also note that during today's 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.
Speaker Change: A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website and with that it is my pleasure to turn the call over to CEO Alan you Alan.
Thank you Roger Good afternoon, everyone. We are encouraged by our third quarter performance with net sales up nearly 7% and volume up approximately 10%. Despite some pricing pressure we experienced growth in most of our sales channels and our online business, which benefited from the inclusion of $3 million on my plan.
Speaker Change: Fees in the current quarter achieved a 33% increase over the prior year period.
Speaker Change: Terrorists reason expansion in each of the supermarket chain category is starting to generate positive results.
Speaker Change: The successful product sampling and trial orders, we began shipping customized bakery packaging containers for a major grocery chain customer in late September.
Speaker Change: Followed by the initiation of shipments on utensils to another major grocery chain in mid October we are now developing additional product offering and anticipating our sales effort in this sector.
Speaker Change: Sales of our eco friendly product.
Speaker Change: Increased 9% year over year and now represent 33, 4% of total sales in the third quarter.
Speaker Change: We believe demand for eco friendly and <unk>.
Speaker Change: <unk> single use disposable product will continue to increase and will contribute positively in the long term.
Speaker Change: We're focusing on new eco friendly product development to further enhance our competitive edge.
Speaker Change: By the end of fourth quarter, we expect to launch a new line of RPT Cup and lid to meet the rising demand that we're seeing in the marketplace.
Speaker Change: This new line of RPC product is made with more than 25% recycled material.
Speaker Change: Geographically, we continue to experience strong growth in the Midwest northwest and East coast compared with last year. Additionally, we see sales stabilizing, California, which is our biggest market.
Speaker Change: Following a sharp decline in the past few quarters.
Speaker Change: At the gross margin level, we achieved gross margin of 38, 6% in the third quarter versus 36, 9% in the prior year period, despite the impact from height Ocean freight rates in the first half of the quarter.
Speaker Change: Heading into the fourth quarter, we are encouraged by the positive momentum.
Speaker Change: And our focus on optimizing inventory sourcing and management.
Speaker Change: Controlling expenses and enhancing warehouse capabilities.
Speaker Change: From an inventory perspective, we implemented procedures to optimize <unk>.
Speaker Change: Sourcing and inventory management.
Speaker Change: Stephen what reduced domestic production and increased sales, we expect to be able to reduce inventory import volume in the fourth quarter of 2024 compared to the prior year.
Speaker Change: <unk> with decrease ocean freight rate and reduce vendor pricing in certain categories. We expect fourth quarter margin to remain at a higher level.
Speaker Change: Additionally, we recently implemented measures to further reduce labor and certain other operating costs and we expect such measures to yield benefits in the fourth quarter.
Speaker Change: We're also actively looking for a new distribution center in the southeast region to support anticipated business growth.
Speaker Change: Strong operating cash flow as well as the company liquidity solid balance sheet and positive long term outlook. Our board of directors again approve an increase in the quarterly cash dividend payment to <unk> 40 per share on November 5th <unk> 35 per share in the preceding quarter.
Speaker Change: I will now turn the call over to Jan <unk>, Our Chief Financial Officer to discuss company's financial result in greater detail Ken.
Speaker Change: Thank you Alan.
Jan: Net sales for the 2024 third quarter $112 $8 million up six 9% from $105 $5 million.
Jan: For the same quarter last year as Alan mentioned, our sales volume grew nearly 10% compared with the 2023rd quarter. Net sales also included a favorable impact from inclusion of $20 million in online platform fee.
Jan: Offset by a $5 $7 million.
Jan: Favorable year over year pricing comparison.
Jan: By channel compared with a year ago online sales for the 2020 for third quarter up 32, 8% benefiting in part from the inclusion of online platform fee mentioned earlier.
Jan: Retail and distributor channel sales increased nine 2% and three 3% respectively from the prior year quarter, our investments in sales force.
Jan: To come to fruition.
Jan: Sales to national and regional chains were essentially flat.
Jan: Cost of goods sold for.
Jan: For the 2020 for third quarter was $69 $3 million.
Jan: Compared with 66 $6 million in the prior year quarter.
Jan: The increase was primarily due to higher ocean freight and duty cost.
Jan: Given by elevated ocean freight rates, primarily in the first half of the quarter, coupled with increased volume along with the inclusion of production expenses related to machinery with Ta and net debt.
Jan: Gross profit for the 2024 third quarter increased 11, 7% to $43 5 million from $38 9 million last year.
Jan: Margin for the 2024 third quarter increased 170 basis points.
Jan: 38, 6%, which included a <unk>.
Jan: Net benefit contribution of 110 basis points from adjustments to net downs relating to online platform fees and production expenses and cost of goods sold as discussed earlier.
Jan: Gross margin also benefited from lower vendor pricing and increased imports as a percentage of total product mix, partially offset by higher ocean freight cost.
Jan: Operating expenses in the 2020 for third quarter was $32 $2 million compared with $27 6 million in the prior year quarter.
Jan: Operating expenses in the current quarter included online sales platform fee higher rent and warehouse expense increased shipping and transportation costs and higher online marketing spend.
Jan: Such increases were partially offset by the inclusion of production expense in cost of goods sold as discussed earlier and a decrease in professional expenses due to transaction costs in connection with the secondary offering during the 2023 third quarter.
Jan: Net income for the 2024 third quarter increased to one 3% to $9 $3 million from $9 1 million for the prior year quarter net.
Jan: Net income margin was eight 2% in 2020 for third quarter compared with eight 7% a year ago.
Jan: Net income attributable to Paris for both the 2024 and 2023 third quarter with $9 1 million.
Jan: All 45 per diluted share.
Jan: Adjusted EBITDA was $14 $7 million for the 2020 for third quarter compared with $15 2 million.
Jan: The prior year quarter.
Jan: Adjusted EBITDA margin was 13.0% for the 2024 third quarter versus 14, 4% in the prior year quarter.
Adjusted diluted earnings per common share was 47.
Speaker Change: Football and the 2024 and 2023 quarters.
Speaker Change: We generated operating cash flows of $19 $5 million in the third quarter.
Speaker Change: And ended the quarter with $115.6 million in working capital compared with $110 $5 million at the end of 2023.
Speaker Change: As of September 32024, we had financial liquidity of $75 $1 million with another $21 $5 million in short term investments.
Speaker Change: As Alan mentioned earlier, our board of Directors just approved another increase of our quarterly dividend to <unk> 40 per share.
Speaker Change: This is on top of the $23 million, we've returned to shareholders in the current year in regular and special dividend.
Speaker Change: We remain committed to a balanced capital allocation strategy between shareholder return and long term growth investments.
Speaker Change: We expect net sales for the 2020 for fourth quarter to increase by mid to high single digit over the prior year quarter. Our gross margin goal for the 2020 for fourth quarter is approximately 39% to 40%. We're also reaffirming.
Speaker Change: Our full year 2024 guidance today.
Speaker Change: And then I.
Speaker Change: We will now be happy to answer your questions and I'll turn the call back to the operator.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to Asia and Joanne. Thank you.
Speaker Change: If you would like to withdraw your question seems like Crestar one again.
Speaker Change: Okay.
And your first question comes from the line of Brian Nagel with Lake Street Capital markets. Your line is open.
Speaker Change: Hey, guys. Thanks for taking my questions.
Speaker Change: Jan just wanted to follow up and get a good understanding of what you said in regard to the guidance I'm thinking about the Q4 guide you guys called out an increase in sales of mid to high single digit percent, but because I believe back to last quarter sort of the implied Q4 number with the full year guidance I think we're looking for double digit growth rate I, just want to make sure I understand that correctly, if theres anything that I'm missing.
Speaker Change: Are you kind of help to walk through that.
Speaker Change: Yes, so Ryan. Thank you for the question, Yes, that's correct. So at this point, we do expect our fourth quarter sales growth to be mid to high single digit. We're also reaffirming our full year guidance as we mentioned in the in the prepared remarks.
Speaker Change: I do also wanted to call out if you recall right last Q4 of 2023 last year.
Q4, net sales amount actually included in that county Misclassification adjustment.
Speaker Change: A four year.
Speaker Change: The amount of a little over $60 million. So that was a benefit to Q4 2023, so that's going to cause I did a bit of.
Speaker Change: Apples to Orange comparison in this year, but with that impact we are still.
Speaker Change: Expecting to see mid to high single digit year over year growth in Q4.
Speaker Change: Okay got it.
Speaker Change: That makes sense and then just thinking about you know the national and regional chain segment looks like revenue was flat year over year.
Speaker Change: Most of that pricing or is there anything else kind of to call out there. It looks like you know volume across the business is pretty strong, but just to get an understanding of kind of that segment itself. It would be helpful.
Speaker Change: Youre talking about the <unk> segment.
Speaker Change: Yeah, correct, because I know you know over the past handful of quarters you guys have obviously made some emphasis of rolling out into new regional change, whether it's with salespeople or additional products, but just kind of get a good feel for that that line item.
Speaker Change: Yeah sure I can start and I'm sure Alan can add additional detailed data so for some of the China comes I mean that that is right. What you said, Brian as far as the pricing adjustments.
Speaker Change: We wanted to make sure that we remain competitive.
Speaker Change:
Speaker Change: Even though our value proposition with our with our customers. So we do.
Speaker Change: We do have.
Speaker Change: We did have some some price adjustments in the past quarter.
Speaker Change: I also wanted to point out.
Speaker Change: Mentioned in our prepared remarks, we started shipping yet.
Speaker Change: Some of the 4448 major supermarket chain customer we started shipping to this particular customer in the very last week of September which was a little later than what we previously anticipated. However.
Speaker Change: We are at a full.
Speaker Change: Annualized volume with this particular customer now and we do expect to get.
Speaker Change: The benefit in the fourth quarter.
Speaker Change: In that chain segment, Alan anything else do you want to add.
Speaker Change: Sure first of all Brian.
Speaker Change: To your first quite earlier question about the double digit growth that we expected if you look at the.
Speaker Change: And Jim mentioned that.
Speaker Change: If you were to take out the $6 million from last year fourth quarter revenue would have been $89 million total, but we added $6 million and $95 million now if we were to take out of the $96 million with $89 million compared to what we are.
Speaker Change: The guidance right now, it's a little bit over 14%, which is double digit growth year over year, that's what Jan said towards compared to Apple to Apple.
Speaker Change: Growth will be double digit 14% now in terms of what John just mentioned to you in terms of additional national chain account. We yes, we just started the supermarket chain accounts, which is very.
Speaker Change: Very rapidly very recognizable reputable company in Texas as well.
Speaker Change: Another national supermarket chain that we're focusing and we started shipping.
Speaker Change: Of course, there are other national chain that we're working on that.
Speaker Change: And are hopeful that we'll start shipping in the fourth quarter, maybe later of the fourth quarter of this year or earlier first quarters.
That is our goal and in terms of additional growth that we're seeing as online sales.
Speaker Change: We're seeing strong online sales as I mentioned earlier in our conference call, we're already seeing at 33% growth year over year, which in the fourth quarter.
Speaker Change: We will we will rely heavily on online sales because we're gonna be promoting more marketing towards that in the third quarter, we actually invest a lot more in terms of online marketing advertisement, which will come through application in the fourth quarter.
Speaker Change: Okay got it that makes sense, yeah that the commentary on the guidance in that $6 million impact from last year that's helpful.
Speaker Change: Awesome. Thank you for taking my questions.
Speaker Change: Thank you right Brian.
Ryan: Thanks Ryan.
Speaker Change: Next question comes from the line of Jake <unk> with <unk> Securities. Your line is open.
Speaker Change: Great. Thanks for taking the questions.
Speaker Change: My first one is just on the supermarket opportunity. Alan you mentioned this new account that you for two new accounts you brought on.
Speaker Change: My question is how big an opportunity this is ya.
Speaker Change: Obviously, you're focusing on it on the press release in the call today, but how much of an opportunity really is it per carat.
Speaker Change: Maybe in the near in and also the long term.
Speaker Change: And then also what makes it well suited for this business.
Speaker Change: It seems like your business you hadn't pursued in the past or maybe you hadn't just haven't had success with it but what makes this a good business for procure to be getting into at this point.
Speaker Change: Well.
Speaker Change: With the initial number of forecast projected by the customers. Our initial annual annualized revenue will be around $5 million or more.
Speaker Change: Over 5 million to $6 million.
Speaker Change: We are currently working on additional project with the same.
Speaker Change: Counts that should bring us to an annualized revenue of $15 million. So far this morning accounts.
Speaker Change: And also for another supermarket chain, it's about around half a million a million dollars to start with and it can grow even larger.
Speaker Change: Especially what is special about the going after the supermarket chain is that we realized.
Speaker Change: Supermarkets.
Speaker Change: They have less skus and they use higher volume and this is more catering towards the bakery products section.
Speaker Change: In the past our focus where we're have been in the cup business in the restaurant business in the drinking business, but now our focus is going to the phase III business. So it's from the supermarket, where while also wanting to get into the deli business.
Speaker Change: There's a lot of paper opportunities in.
Speaker Change: The bellies and supermarket bakeries like the paper containers. The paper bags. So these are the things that we really wanted to shift into a business that we have the focus in the past in the past is always the hot tub the Cold Cup. They pick a coke coffee <unk> tea Cup proportion cut now as we shift into this business.
Speaker Change: As we see that the opportunity is.
Speaker Change: Much greater and the potential of.
Speaker Change: Higher than what we have been doing it they are selling the path with a cup business.
Speaker Change: Okay.
Speaker Change: Right.
Speaker Change: The eco friendly side nice to see the continued growth there I'm trying to understand what the implications are for the new <unk>.
Speaker Change: <unk> products that youre going to be launching in the fourth quarter, but how big a deal is that how much could that.
Speaker Change: Could that be adding to the eco friendly product growth in 2005 and beyond.
Speaker Change: Well.
Speaker Change: We're actually starting to ask the corrugated box takeout container business. If you were to go out into bakery stores and some of these changed just trying to stretch away from the plastic takeout containers into the corrugated board box.
Speaker Change: As well as the bakeries.
Speaker Change: You can see all these.
Little corrugated boxes, they treat contain that paper containers with the plastic openings.
Speaker Change: Before it was all plastic or styrofoam.
Speaker Change: Paperback Sos back those are the things that we want to get into and there is different size of the <unk>. It's not just the shopping bag. What we're looking to the RPT business is that we've been asked by a lot of our some of our chains that they want us to reduce the use of Virgin material.
Speaker Change: We utilize the use of the recycled material.
Speaker Change: So we use less plastic as well as more recycled material.
Speaker Change: In Europe basically be banned all plastic definitely if you were to mix with 25% or more of the recycled content material. So this is more of a future just how we started the pls business back in 2007 if.
Speaker Change: If we have if companies still have to use plastic which was more functional.
Speaker Change: They want us to at least they want the company to start using less version materially more recycled content material, that's part of that as far as the corrugated box business.
Speaker Change: It's not just for the packaging that's now for the food container take all as well.
Speaker Change: Okay and then my last question, maybe I'll jump back in.
Speaker Change: With another later, but.
Speaker Change: Is the gross margins obviously, the gross margins have been much.
Speaker Change: Stronger.
Speaker Change: And initially expected maybe a couple of years ago. My question is and then also continued to remain very strong obviously with the guidance in the fourth quarter. My question is how sustainable that is what portion of this margin expansion versus 231% you were running two years ago, you know youre looking on.
Speaker Change: On.
Speaker Change: Pace for 39% in 2024 so.
Speaker Change: The gains.
Speaker Change: Should we think about it as a long term gain what's what's sustainable for this business long term from a gross margin perspective.
Speaker Change: As Martin as Jan just mentioned earlier in my call. We're seeing are I'm not sure if we will.
Speaker Change: We mentioned that our gross margin guidance for the fourth quarter, we're looking at 39% to 40% versus our last quarter 38, 5%. So we're still seeing this margin in the high Thirty's and the low Forty's is this sustainable while we believe it is because as.
Speaker Change: As we mentioned earlier.
Speaker Change: Focusing more on online sales on our revenue online revenue generally carry a larger higher amount of.
Speaker Change: Margin basically profit margin.
Speaker Change: And we are already at 33% growth, which is about 17% to 18% of overall revenue. We do I do expect that to continue to grow into the twenty's or the low twenty's.
Overall revenue on the online sales.
Speaker Change: Possibly 25% or more for the alloy sales compared to our overall revenues that's going to help us to boost our.
Speaker Change: Our overall margin as well as our ocean freight we do continue to see that ocean freight it's not going to spike up we're seeing that it's stabilizing is dropping for the for the remaining of the year and possible very likely the first quarter. So these will also help.
Speaker Change: In terms of reducing our costs and increase our gross margin. So we're doing everything we can in terms of selling online, which online would generate more higher margin for us that is going to offset us in terms of <unk>.
Speaker Change: Growing our volume in the distribution side of the business. There is pricing pressure on the distribution side of the business, but that is helping us with the sales volume, we're looking at volume potentially up to a year over year, 20% growth in volume wise overall volume wise in the fourth quarter.
Speaker Change: Starting with the volume just about last come into volume from the distributors in the fourth quarter were overall, you expect the mix to be very high volume in terms of what's driving sales.
Speaker Change: Overall volume grew to 20% higher.
Speaker Change: In the fourth quarter.
Speaker Change: Okay.
Speaker Change: Got it thanks, a lot I appreciate it.
Speaker Change: Okay.
Speaker Change: Oh.
Speaker Change: Last comment Jake.
Speaker Change: While I have you on the phone.
Speaker Change: We have not seen double digit growth for the past 18 months.
Speaker Change: Basically where it was seen that exit very hopeful sign that our goal is we do want to continue to be the double digit growth in the future.
Speaker Change: Future.
Speaker Change: Yeah.
Speaker Change: Next question comes from the line of Brian Butler with Stifel. Your line is open.
Okay.
Speaker Change: Good afternoon, and thank you for taking the question I guess, Alan just to kind of kind of follow up on that double digit growth kind of in the future you have it looks like very good momentum and it seems like the market's improved with California kind of flattening at least not being down more.
Speaker Change: And then you move into Submarkets as well as new products, how do we think about fourth quarter being high or mid single digit.
Speaker Change: Revenue growth when you look at 25 whats the early thoughts on where that can be could that be double digits again or is it really more of a mid single digit until maybe some of the macro kind of get more of a tailwind.
Speaker Change: Well Brian.
Speaker Change: As I mentioned earlier.
Speaker Change: Answered <unk> question.
Speaker Change: Fourth quarter, if we're comparing to apples to apples it already double digit growth in revenue wise, if we take out the $6 million that that was it.
Speaker Change: We added $6 million from online platform fee from the January through December. So that's why that's why we're expecting to see hopefully we're expecting to see a accurate we are expecting to see a double digit growth in the first quarter of 2025 based on that trajectory right now.
Speaker Change: And our goal is historically or in the past year prior to the Covid, we have been growing double digit year over year and this is basically where it seems like we're on the right track back through our trajectory double digit growth organically.
Speaker Change: Okay, Great and then on the cost side operating costs again.
Speaker Change: The operating cost included the platform fees when do we anniversary that and when you think about 2025.
Speaker Change: How much how fast did that grow if you're growing top line kind of double digits.
Speaker Change: Okay.
Speaker Change: We are going to.
Speaker Change: But I would call that this is more of an investment in terms of advertisement for future additional sales online.
For online business in order to continue to grow well.
Speaker Change: Basically acquiring pain spending advertisement to acquire new business for that.
Speaker Change: So they can continue this week by week.
Speaker Change: And by our product.
Speaker Change: Recurring basis.
So basically our goal is to grow our business.
Speaker Change: Increased by 50%.
Speaker Change: Currently this year of 70 to 75 million to $125 million next year, we are going to see more.
Speaker Change: Expenses spent on the advertisement for the online expense, but at the same time, it's definitely going to help us increase our revenue faster.
Speaker Change: Then it was in the past 12 months.
Speaker Change: Okay, and then on kind of generating that growth.
Speaker Change: What type of capital expectations, you have for from a spending perspective on what has to be.
Speaker Change: Outlaid to support kind of that double digit growth can you give some color there.
Speaker Change: In terms of capital expenditure, we won't be spending as much basically we do set a budget in terms of how much online growth and how much we spend on the online advertisement.
Speaker Change: We haven't really been pushing a little bit higher, but we're not going to go crazy on that and.
Speaker Change: So that's why I don't see it.
Speaker Change: Capital expansion on that park, except with the exception that we are looking to expand additional warehouse space that is where are we going to see the capital expenditure on additional warehouse space and in the South East region, where we definitely want to build a mega center for the odd but to support our growth.
Speaker Change: It could be in the millions on that part.
Speaker Change: Definitely we have the cash flow on hand to support that already.
Speaker Change: Okay and then my last one just you had reported.
Speaker Change: A data breach in the third quarter do you have an update on where that that kind of stands and what that impact might have been or it might be in the future here.
Speaker Change: We actually based on our initial investigation.
Speaker Change: There were no material data breach.
Speaker Change: A little bit more cautious in terms of.
Speaker Change: Some some it was more of a.
Speaker Change: Employee.
Speaker Change: A couple of employee they click off the attachment which.
Speaker Change: Hackers hacking.
Speaker Change: <unk>.
Speaker Change: In our system.
Speaker Change: And at the same time.
Speaker Change: We hired a third party investigator to investigate initial investigation came out that there were no material data breach.
Speaker Change: There are continued falling through and see if there's any issue of that park in terms of monetary damages there were no monetary damages.
Speaker Change: <unk> spend is very nominal very non material.
Speaker Change: Great. Thanks for taking the questions.
Speaker Change: Thank you. Thank you.
Speaker Change: Yeah.
Speaker Change: Again, if you would like to ask a question press star one on your telephone keypad.
Speaker Change: Okay.
Speaker Change: There are no questions at this time I will turn the call back over to Alan you for closing remarks.
Speaker Change: Thank you operator, and thanks to all of you for joining US today. We appreciate your continued support we remain confident about <unk> future and we look forward to keeping you appraised of our Congress.
Speaker Change: Progress have a great evening and a wonderful Thanksgiving holiday season. Thank.
Speaker Change: Thank you all bye bye.
Speaker Change: And this concludes the meeting thank you all for your participation you may now disconnect.
Speaker Change: Okay.
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Speaker Change: Hello, and thank you for standing by at this time I'd like to welcome everyone to the Carrot packaging, Inc. Third quarter, so that it's ready for earnings conference call.
Speaker Change: Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed they didn't number one on your telephone keypad. If you would like to withdraw your question Press Star one again.
Speaker Change: Thank you that's it for me.
Speaker Change: This call is being recorded.
Speaker Change: Ill turn the conference over to Roger Palmdale. Please go ahead Sir.
Roger Palmdale: Thank you operator, good afternoon, everyone and welcome to care packaging.
Roger Palmdale: <unk> 2024 third quarter conference call I'm, Roger Palmdale, with Honda will consent, Karen packaging <unk> Investor Relations firm, who will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan you as Chief Financial Officer, Jim go.
Roger Palmdale: 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 <unk>.
Roger Palmdale: <unk> 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 and copies of which are available on the Sec's website at Www Dot <unk> dot.
Roger Palmdale: Dot Gov, along with other company filings made with the SEC from time to time.
Roger Palmdale: Actual results could differ materially from these forward looking statements.
Speaker Change: Packaging undertakes no obligation to update any forward looking statements, except as required by law.
Speaker Change: Please also note that during today's 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.
Speaker Change: A reconciliation of the most directly comparable GAAP measures.
Speaker Change: GAAP financial measures is included in today's press release, which is now posted on the company's website and with that it is my pleasure to turn the call over to CEO Alan Alan.
Alan Alan: Thank you Roger Good afternoon, everyone. We are encouraged by our third quarter performance with net sales up nearly 7% and volume up approximately 10%. Despite some pricing pressure we experienced growth in most of our sales channels, our online business, which benefited from the inclusion of $3 million online.
Alan Alan: Fees in the current quarter achieved a 33% increase over the prior year period.
<unk> expansion into the supermarket chain category is starting to generate positive results.
Alan Alan: After a successful product sampling and trial orders, we began shipping customized bakery packaging containers for a major grocery chain customer in late September.
Alan Alan: Followed by the initiation of shipments on utensils to another major grocery chain in mid October we are now developing additional product offering and intensifying our sales effort in this sector.
Alan Alan: Sales of our eco friendly products.
Alan Alan: We increased 9% year over year and now represent 33, 4% of total sales in the third quarter.
Alan Alan: We believe demand for eco friendly.
Alan Alan: <unk> single use disposable product will continue to increase and will contribute positively.
Alan Alan: The long term.
Alan Alan: We're focusing on new eco friendly product development to further enhance our competitive edge.
Alan Alan: At the end of fourth quarter, we expect to launch a new line of RPT Cup and lids to meet the rising demand that we're seeing in the marketplace.
Alan Alan: This new line of RP key product is made with more than 25% recycled material.
Alan Alan: Geographically, we continue to experience strong growth in the mid west northwest and East coast compared with last year. Additionally, we see sales stabilizing, California, which is our biggest market.
Alan Alan: Following a sharp decline in the past few quarters.
Alan Alan: At the gross margin level, we achieved gross margin of 38, 6% in the third quarter versus 36, 9% in the prior year period, despite the impact from height Ocean freight rate in the first half of the quarter.
Alan Alan: Heading into the fourth quarter, we are encouraged by the positive momentum and our focus on optimizing inventory sourcing and management controlling expenses and enhancing warehouse capabilities.
Alan Alan: From an inventory perspective, we implemented procedures to optimize sourcing and inventory management.
Speaker Change: Evan what reduced domestic production and increased sales, we expect to be able to reduce inventory import volume in the fourth quarter of 2024 compared to the prior year.
Speaker Change: Additionally, with decrease ocean freight rate and reduce vendor pricing in certain categories. We expect fourth quarter margin to remain at a higher level.
Speaker Change: Additionally, we recently implemented measures to further reduce labor and certain other operating costs and we expect such measures to yield benefits in the fourth quarter.
Speaker Change: We're also actively looking for a new distribution center in the southeast region to support anticipated business growth.
Speaker Change: Strong operating cash flow as well as the company liquidity solid balance sheet and positive long term outlook. Our board of directors again approve in the increase in the quarterly cash dividend payment to <unk> 40 per share on November 5th <unk> 35 per share in the preceding quarter.
Speaker Change: I will now turn the call over to Jan <unk>, Our Chief Financial Officer to discuss company's financial result in greater detail Ken.
Speaker Change: Thank you Alan.
Jan: Net sales for the 2024.
Speaker Change: Well why don't get $12 $8 million up six 9%.
Speaker Change: $105 $5 million.
Speaker Change: For the same quarter last year as Alan mentioned, our sales volume grew nearly 10% compared with the 2023 third quarter. Net sales also included a favorable impact from inclusion of $3 million in online platform fee, partially offset.
Speaker Change: A $5 7 million.
Speaker Change: Unfavorable year over year pricing comparison.
Speaker Change: By channel compared with a year ago online sales for the 2020 for third quarter.
Speaker Change: Up 32, 8% benefiting in part from the inclusion of online platform fee mentioned earlier retail and distributor channel sales increased nine 2% and three 3% respectively from the prior year quarter as our investments in <unk>.
Speaker Change: Fourth started to come through flotation cells.
Speaker Change: Sales to national and regional chains were essentially flat.
Speaker Change: Cost of goods sold for the 2020 for third quarter was $69 $3 million.
Speaker Change: Compared with 66 $6 million in the prior year quarter.
Speaker Change: The increase was primarily due to higher ocean freight and duty cost.
Speaker Change: Even by elevated ocean freight rates, primarily in the first half of the quarter, coupled with increased import volume along with the inclusion of production expenses related to machinery repair and net.
Speaker Change: <unk>.
Speaker Change: Gross profit for the 2024 third quarter increased 11, 7% to $43 5 million from $38 9 million last year.
Speaker Change: Margin for the 2024 third quarter increased 170 basis points.
Speaker Change: 38, 6%, which included a net benefit contribution of 110 basis points from adjustments to net downs related to online platform fees and production expenses in cost of goods sold as discussed earlier.
Speaker Change: Gross margin also benefited from lower vendor pricing and increased imports as a percentage of total product mix, partially offset by higher ocean freight cost.
Speaker Change: Operating expenses in the 2020 for third quarter was $32 $2 million compared with $27 6 million in the prior year quarter.
Speaker Change: Operating expenses in the current quarter included online sales platform fee higher rent and warehouse expense increased shipping and transportation costs and higher online marketing spend.
Speaker Change: Such increases were partially offset by the inclusion of production expense in cost of goods sold as discussed earlier and a decrease in professional expenses due to transaction costs in connection with the secondary offering during the 2023 third quarter.
Speaker Change: Net income for the 2024 third quarter increased to one 3% to $9 $3 million from $9 1 million for the prior year quarter net.
Speaker Change: Net income margin was eight 2% in the 2020 for third quarter compared with eight 7% a year ago.
Speaker Change: Net income attributable to Paris for both the 2024 and 2023 third quarter with $9 1 million.
Speaker Change: All 45 per diluted share.
Speaker Change: Adjusted EBITDA was $14 $7 million for the 2020 for third quarter compared with $15 2 million for the prior year quarter.
Adjusted EBITDA margin was 13.0% for the 2024 third quarter versus 14, 4% in the prior year quarter.
Speaker Change: Adjusted diluted earnings per common share was 47.
Speaker Change: Hopeful that 2024 and 2023 third quarters.
Speaker Change: We generated operating cash flows of $19 $5 million in the third quarter.
Speaker Change: And ended the quarter with $115.6 million in working capital compared with $110 5 million at the end of 2023.
Speaker Change: As of September 32024, we had financial liquidity of $75 $1 million with another $21 $5 million in short term investments.
Speaker Change: As Alan mentioned earlier, our board of Directors just approved another increase of our quarterly dividend to <unk> 40 per share. This is on top of the $23 million. We've returned to shareholders in the current year in regular and special dividends.
Speaker Change: We remain committed to a balanced capital allocation strategy between shareholder return and long term growth investments.
Speaker Change: We expect net sales for the 2020 for fourth quarter to increase by mid to high single digit over the prior year quarter. Our gross margin goal for the 2020 for fourth quarter is approximately 39% to 40%. We're also reaffirming.
Speaker Change: Our full year 2024 guidance today.
Speaker Change: Alan and I.
Speaker Change: We'll now be happy to answer your questions and I'll turn the call back to the operator.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to Asia and enjoying the acute issue would like to withdraw your question seems like Crestar one again.
Speaker Change: And your first question comes from the line of Ryan <unk> with Lake Street Capital markets. Your line is open.
Speaker Change: Hey, guys. Thanks for taking my questions just wanted to follow up and get a good understanding of what you said in regards to the guidance I'm thinking about you know the Q4 guide you guys called out an increase in sales of mid to high single digit percent, but because I believe back to last quarter sort of the implied Q4 number with the full year guidance I think we're looking for double digit growth rate just wanted to make sure I understand.
Speaker Change: And that correctly, if theres anything that I'm missing that would be kind of help walk through that.
Speaker Change: Yeah. So Ryan. Thank you for the question, Yes, that's correct. So at this point, we do expect our fourth quarter sales growth to be mid to high single digit. We're also reaffirming our for yoga our guidance as we mentioned in the in the prepared remarks.
Speaker Change: I do also wanted to call out if you recall right last Q4 of 2023 last year. Our Q4 net sales amount actually included in that county, a misclassification adjustment.
Speaker Change: A four year amount of a little over $60 million. So that was a benefit to Q4 2023, so that's going to cause a little bit of a apples to orange comparison in this year, but with that impact we are still expecting to see mid to high single.
Speaker Change: Year over year growth in Q4.
Speaker Change: Okay got it.
Speaker Change: That makes sense and then just thinking about you know the national and regional chain segment looks like revenue was flat year over year.
Speaker Change: Most of that pricing or is there anything else kind of to call out there. It looks like you know volume across the business is pretty strong, but just to get an understanding of kind of that segment itself. It would be helpful.
Speaker Change: Youre talking about the chain segment.
Yeah, correct, because I know you know over the past handful of quarters you guys have obviously made some emphasis of rolling out into new regional change, whether it's with salespeople or additional products, but just kind of get a good feel for that that line item.
Speaker Change: Yeah, So I can start and I'm sure Alan can add additional detail there. So for some of the chain accounts I mean that that is right. What you said, Brian as far as the pricing adjustments.
Speaker Change: We wanted to make sure that we remain competitive.
Speaker Change: In all our value propositions with with our customers. So we do.
Speaker Change: We do had a we did have some some price adjustment in the past quarter.
Speaker Change: I also wanted to point out.
Speaker Change: Mentioned in our prepared remarks, we started shipping yet in some of the 4448 major supermarket chain customer we started shifting to this particular customer in the very last week of September which was.
Speaker Change: A little later than what we previously anticipated. However, we are at a full.
Speaker Change: Annualized volume with this particular customer now and we do expect to get a benefit in the fourth quarter.
Speaker Change: In that chain segment, Alan anything else you want to add.
Alan Alan: Sure first of all Brian.
Alan Alan: To your first quite earlier question about the double digit growth that we expected if you look at the.
Alan Alan: And Jim mentioned that.
Alan Alan: You want to take out the $6 million from last year fourth quarter revenue would have been $89 million total we added 6 million also $95 million now if we were to take out of the $96 million with $89 million compared to what we are.
Alan Alan: The guidance right now, it's a little bit over 14%, which is double digit growth year over year, that's what Janssen, which.
Alan Alan: Compared to Apple to Apple.
Real real growth will be double digit 14% now in terms of what John just mentioned to you in terms of additional national Chinnock, how we yes. We just started the supermarket chain accounts, which is very.
Alan Alan: Very retro, it's a very recognizable reputable company in Texas as well.
Alan Alan: Another national supermarket chain that we're focusing as we started shipping.
Of course, there are other national chain that we're working on that.
Alan Alan: We are hopeful that we'll start shipping in the fourth quarter, maybe later of the fourth quarter of this year or earlier first quarters.
Alan Alan: That is our goal and in terms of additional growth that we're seeing as online sales.
Alan Alan: We're seeing strong online sales as I mentioned earlier in our conference call, we're already seeing at 33% growth year over year, which in the fourth quarter.
Alan Alan: We will we will rely heavily on online sales because we're gonna be promoting more marketing towards that in the third quarter, we actually invest a lot more in terms of online marketing advertisement, which will come to fruition in the fourth quarter.
Speaker Change: Okay got it that makes sense, yeah that the commentary on the guidance in that $6 million impact from last year. It was helpful. And then it gets it gets about the awesome. Thank you for taking my questions.
Brian Butler: I think you're right Brian.
Brian Butler: Thanks Ryan.
Speaker Change: Next question comes from the line of Jake Bartlett with Chewy Securities. Your line is open.
Jake Bartlett: Great. Thanks for taking the questions.
Jake Bartlett: My first one is just on the supermarket opportunity Alan.
Jake Bartlett: You mentioned this new account that you for two new accounts you brought on.
Jake Bartlett: My question is how big an opportunity this is.
Jake Bartlett: Obviously, focusing on it on the press release in the call today, but how much of an opportunity really is it per carat.
Jake Bartlett: In the near end and also the long term.
Jake Bartlett: And then also what makes it well suited for this business.
Jake Bartlett: It seems like your business you hadn't pursued in the past, where maybe you hadn't just haven't had success with it but what makes this a good business for procure to be getting into at this point.
Jake Bartlett: Well with.
Jake Bartlett: The initial number forecast projected by the customers. Our initial annual annualized revenue will be around 5 million that will more or a little bit over $5 million to $6 million.
Jake Bartlett: And we are currently working on additional project with the same accounts.
Jake Bartlett: Accounts that should bring us to an annualized revenue of $15 million. So far this morning accounts.
Jake Bartlett: And also for another supermarket chain, it's about around half a million <unk> million dollars to start with and it can grow even larger.
Jake Bartlett: What special what what is special about the going after the soup market changes that we realize supermarkets have.
Jake Bartlett: They have less skus and they use higher volume and this is more catering towards the bakery products section I mean.
Jake Bartlett: In our cost our focus where we're have been cut.
Please and supermarket and bakeries like the paper containers. The paper bags. So these are the things that we really wanted to move shift into a business that we hadn't been focused in the past in the past it's always the hot tub the Cold Cup the paper Coca Tea Tea Cup portion come now as we shift into this business.
Jake Bartlett: We see that the opportunity is much greater.
Jake Bartlett: And the potential it's a lot higher than what we have been doing it they are selling in the past with a cup business.
Jake Bartlett: Okay.
Jake Bartlett: Great.
Speaker Change: Well, let me eco friendly side nice to see the continued growth there I'm trying to understand what the implications are for the new product or products that you are going to be launching in the fourth quarter, but how big a deal is that how much could that.
Speaker Change: Could that be adding to the eco friendly product growth in 'twenty five and beyond.
Speaker Change: Well.
Speaker Change: We're actually starting to ask the corrugated box takeout container business. If you were to go out into bakery stores and some of these changed just trying to switch away from the plastic takeout containers into the corrugated board box.
Speaker Change: As well as the bakeries.
Speaker Change: See all these.
Speaker Change: Little corrugated boxes, they treat container paper containers with the plastic openings.
Speaker Change: Before it was all plastic or styrofoam.
Speaker Change: Paperback Sos back those are the things that we want to get into and there is different size of the <unk>. It's not just the shopping bag and what we're looking to the RPT business is that we've been asked by a lot of our some of our chains that they want us to reduce the use of a version material how can we utilize the use of the <unk>.
Speaker Change: Fecal material, so that it will use less plastic as well as more recycled material.
Speaker Change: In Europe basically they.
Speaker Change: I'll pass it definitely if you were to mix with 25% or more of the recycled content material. So this is more of a future just how we started the pls business back in 2007 if.
Speaker Change: If we have if companies still have to use plastic which is more functional.
Speaker Change: They want us to at least they want the company to start using less version materially more recycled content material, that's part of that as far as the corrugated box business.
It's not just for the packaging that's now for the food container take all as well.
Speaker Change: Okay and then my last question, maybe I'll jump back in.
Speaker Change: With another later, but.
Speaker Change: Is the gross margins obviously, the gross margins have been much.
Speaker Change: Stronger.
And initially expected maybe a couple of years ago. My question is also continuing to remain very strong and obviously with the guidance in the fourth quarter. My question is how sustainable that is what portion of this margin expansion versus 231% you were running two years ago. Now you are looking on.
Speaker Change: On pace.
Speaker Change: Pace for 39% in 2024 so.
Speaker Change: The gains.
Speaker Change: Should we think about it as a long term gain what's what's sustainable for this business long term from a gross margin perspective.
Speaker Change: As Martin as Jan just mentioned earlier in my call. We're seeing are I'm not sure if we will.
Speaker Change: We mentioned that our gross margin guidance for the fourth quarter, we're looking at 39% to 40% versus our last quarter 38, 5%. So we're still seeing this margin in the high Thirty's and the low Forty's is this sustainable while we believe it is because as.
Speaker Change: As we mentioned earlier.
Focusing more on online sales on our revenue online revenue generally carry a larger higher amount of the.
Speaker Change: Margin basically profit margin.
Speaker Change: And we're already at 33% growth, which is about 17% to 18% of overall revenue. We do I do expect that to continue to grow into the <unk> or the low twenty's.
Speaker Change: Overall revenue on the online sales.
Speaker Change: Possibly 25% or more for the <unk> sales compared to our overall revenues, that's going to help us to boost our.
Speaker Change: Our overall margin as well as our ocean freight we do continue to see that ocean freight, it's not going to spike up we're seeing it stabilizing is dropping for the for the remaining of the year and possible very likely the first quarter. So these will also help.
Speaker Change: In terms of reducing our costs and increase our gross margin. So we're doing everything we can in terms of selling online, which online would generate more higher margin for us that is going to offset us in terms of <unk>.
Speaker Change: Growing our volume in the distribution side of the business. There is pricing pressure on the distribution side of the business, but that is helping us with the sales volume, we're looking at volume potentially up to <unk>.
Speaker Change: Year over year, 20% growth in volume wise overall volume wise in the fourth quarter.
Speaker Change: Starting with the volume just to that last comment the volume from the distributors in the fourth quarter were overall you expect the mix to be very high for volume in terms of what's driving sales.
Speaker Change: Overall volume grew to 20% higher.
Speaker Change: In the fourth quarter.
Speaker Change: In our core okay.
Got it thanks, a lot I appreciate it.
Speaker Change: Okay.
Speaker Change: Oh last last last comment Jake.
Speaker Change: While I have you on the phone.
Speaker Change: We have not seen a double digit growth for the past 18 months.
Basically where it was seen that exit very hopeful sign that our goal is we do want to continue this to be the double digit growth in the future.
Speaker Change: Yeah.
Speaker Change: Next question comes from the line of Brian Mcveigh with Stifle your line is open.
Brian Mcveigh: Good afternoon, and thank you for taking the question I guess, Alan just to kind of kind of follow up on that double digit growth kind of in the future.
Brian Mcveigh: It looks like very good momentum and it seems like the market's improves with California kind of flattening.
Brian Mcveigh: Not being down more.
Brian Mcveigh: And then you move into Submarkets as well as new products, how do we think about fourth quarter being high or mid single digit revenue.
Brian Mcveigh: <unk> growth when you look at 25 whats the early thoughts on where that can be could that be double digits again or is it really more of a mid single digit until maybe some of the macro kind of get more of a tailwind.
Speaker Change: Well Brian.
Speaker Change: As I mentioned earlier.
Speaker Change: Answered <unk> question.
Speaker Change: Fourth quarter, if we're comparing to aqua backward it already double digit growth in revenue wise.
Speaker Change: The $6 million that.
Speaker Change: We added $6 million from online platform fee from the January two.
Speaker Change: Remember so that's why that's why we're expecting to see hopefully we're expecting to see a accurate we are expecting to see a double digit growth in the first quarter of 2025.
Speaker Change: Based on that trajectory right now and our goal is historically or in the past year prior to the Covid, we have been growing double digit year over year and this is basically where it seems like we're on the right track back through our trajectory double digit growth organically.
Speaker Change: Okay, Great and then on the cost side operating costs again.
The operating cost included the platform fees when do we anniversary that and when you think about 2025, how much how fast did that grow if you're growing top line and kind of double digits.
Speaker Change: Okay.
Speaker Change: We are going to.
Speaker Change: But I would call that this is more of an investment in terms of advertisement for future additional sales online.
Speaker Change: Yes.
Speaker Change: If for online business in order to continue to grow.
Speaker Change: We're basically acquiring pain spending advertisement to acquire new business for that.
Speaker Change: So they can continue the three.
Speaker Change: Our recurrent and buy our products.
Speaker Change: Claim basis.
Speaker Change: So if basically our goal is to grow our business increased by 50% from currently this year of 70 to 75 million to $125 million next year, we are going to see more.
Speaker Change: Expenses spent on the advertisement for the online expense, but at the same time, it's definitely going to help us increase our revenue faster.
Speaker Change: Then it was in the past 12 months.
Speaker Change: Okay, and then on kind of generating that growth.
Speaker Change: What type of capital expectations, you have for from a spending perspective on what has to be outlaid to support kind of that double digit growth can you give some color there.
Speaker Change: In terms of capital expenditure, we won't be spending as much basically we do set a budget in terms of how much online growth and how much we spend on the online advertisement.
Speaker Change: We haven't really been pushing a little bit higher, but we're not going to go crazy on that.
So that's why I don't see it.
Speaker Change: Our capital expansion on that park, except with the exception that we are looking to expand additional warehouse space that is where are we going to see the capital expenditure on additional warehouse space and in the South East region, where we definitely want to build a Mega center for the.
Speaker Change: To support our growth.
Speaker Change: It could be in the millions on that part, but definitely we have the cash flow on hand to support that already.
Speaker Change: Okay and then my last one just you had reported.
Speaker Change: A data breach in the third quarter do you have an update on where that that kind of stands and what that impact might have been or it might be in the future here.
Speaker Change #100: We actually based on our initial investigation.
Speaker Change #100: There were no material data breach.
Speaker Change #100: A little bit more cautious in terms of.
Speaker Change #100: Some.
Speaker Change #100: More of a.
Speaker Change #100: Employee.
Speaker Change #100: A couple of employee they click off the attachment which.
Speaker Change #100: The hackers hacking.
Speaker Change #100: Hacking.
Speaker Change #100: In our system.
Speaker Change #100: At the same time.
Speaker Change #100: We hired a third party investigator to investigate initial investigation came out that there were no material data breach.
Speaker Change #100: Continued falling through and see if there's any issue of that park in terms of monetary damages. There were no monetary damages amongst spend is very nominal very material.
Speaker Change #101: Great. Thanks for taking the questions.
Speaker Change #101: Thank you.
Speaker Change #101: Thank you.
Speaker Change #101: Yeah.
Speaker Change #101: Again, if you would like to ask a question.
Speaker Change #101: Star one on your telephone keypad.
Speaker Change #101: Okay.
Speaker Change #103: There are no questions at this time I will turn the call back over to Alan you for closing remarks.
Speaker Change #101: Okay.
Alan Alan: Thank you operator, and thanks to all of you for joining US today. We appreciate your continued support we remain confident about care its future and we look forward to keeping you appraised of our Congress.
Alan Alan: Have a great evening, and a wonderful Thanksgiving holiday season.
Speaker Change #104: Thank you all bye bye.
Speaker Change #105: And this concludes the meeting thank you all for your participation you may now disconnect.