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spk03: Good afternoon and welcome to the CARAT Packaging Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Roger Pondell with Pondell Wilkinson, Investor Relations for Carrot Packaging. Please go ahead.
spk02: Thank you, Andrea, and good afternoon, everyone. Welcome to Carrot Packaging's 2021 Third Quarter Earnings Call. I'm Roger Pondell with Pondell Wilkinson. We're Carrot Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and its Interim Chief Financial Officer, Peter Lee. But before I turn the call over to Alan, I need to remind everyone today that our 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 factor section of the company's IPO registration statement and in its most recent form, 10Q, 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 SEC from time to time. Actual results could differ materially from these forward-looking statements, and carrot packaging undertakes no obligation to update any forward-looking statements except as required by law. Please also note that during today's call, management will be discussing adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures as defined by SEC Regulation G. Any reconciliation of non-GAAP financial measures to the most recently or the most directly comparable GAAP measures is included in today's press release, which is now posted on the company's website. And with that, it's my pleasure to turn the call over to CEO Alan Yu. Alan?
spk04: Thank you, Roger. Good afternoon, everyone. We're pleased to be here with all of you today. Our business continues to grow at a robust pace. Earlier today, We reported solid third quarter net sales growth that reflect exceptionally strong demand for our product and continued expansion in our customer base. Market trend remains favorable, particularly for the environmentally friendly product and solution that carrot packaging provides. For the third quarter, net sales were in line with the guidance range that we have increased just last month, growing at a pace of 35% year-over-years. Sales in our distributor, online, and national channel were particularly strong, excluding the personal protective equipment products that we sold in the third quarter last year during the height of COVID-19 pandemic. Our rate of comparative sales growth for the third quarter was 43%. Online sales rose 64% year-over-year in the third quarter as we continued to shift our sales mix towards its high-margin channels. Sales through national and distributor channels also increased at a double-digit pace. Our sales were somewhat constrained by inventory shortages resulting from tight labor conditions and port delays in the third quarter. We are managing the labor environment through increased recruiting effort, the use of temporary labor, and targeted overtime, and shifted distributions to other facilities in our supply chain. Gross margin in the fiscal 2021 third quarter declined year-over-year primarily due to the increasing freight costs in which every company is experiencing, ocean freight rate again rose in the third quarter relative to the last year, although they have begun to ease and stabilize recently. Despite the sequential improvement, we expect these rates to remain at the current highest level compared with last year. In addition, world's margin was affected by increased landed costs, which include freight and duty and custom brokerage fee of approximately 1.8 million versus a benefit in the same quarter last year and in preceding 2021 second quarter. These increased fees were capitalized into inventory in the prior quarter, resulting in a higher inventory cost in the third quarter. Subsequently, as the company sold its higher cost inventory, resulting from increased landed costs capitalized from the second quarter, it negatively affected growth margin. The landed cost varies from month to month, especially due to the extreme cost fluctuation of ocean freight this year. We will likely see a benefit for the fourth quarter based on the current inventory being sold that carries a lower landed cost. To respond to the current inflationary pressures and product shortages, and to protect our margins, we instituted multiple price increases in September and again in November without any pushback. As a result, we expect our gross margin to improve sequentially in the fourth quarter. Our positive business momentum is continuing into the fourth quarter with the secular tailwind we've seen this year in consumer spending for services and adoption of environmentally friendly products helping to drive demand and support for our business. We're currently targeting net sales to be in the range of 93 million to 96 million in the 2021 fourth quarter, up about 34% at the midpoint of the range, compared with the same period last year. This sequential decline is consistent with normal seasonality. We expect our sales to result for the full 2021 year in the range of 366 million to 369 million. Growth in High margin online sales and actions we've taken to pass on higher free calls also give us confidence in our ability to improve our gross margin in the fourth quarter. We want to leave adequate time for questions, so I'll stop here and turn the call over to Peter to discuss our third quarter result in detail. Peter?
spk07: Thank you, Alan. Our 2021 third quarter results reflect strong top line growth, although gross margin declined. and expenses increased, primarily due to higher freight, shipping, and labor costs. Net sales increased 35% over the prior year to $103 million in the 2021 third quarter. During the height of the pandemic last year, we shifted quickly to import PPE products to meet a critical need. Sales of these products in the last year's third quarter totaled $5 million, Since they peaked in the second quarter of last year, PPE sales, as expected, have declined and represented less than 1% of total sales in this year's third quarter. Excluding PPE products, sales for the 2021 third quarter rose 43% year over year. Sales to distributors, our largest channel, grew 44%, and sales to national chains expanded 24%. primarily due to more business with existing customers. Online sales rose 64% for the quarter, reflecting strong demand and our continued investment in this critical channel. Sales to retail channel fell 14% from a year ago, with some sales shifted from retail to online channel. We also increased minimum shipping requirements to better manage our tight labor conditions, which shifted a portion of our sales mix from retail to distributors, which enabled us to better utilize staffing resources. For reference, the tables in our earnings release issued earlier this afternoon break out sales of our traditional products, excluding PPE by channel. Gross profit increased 29% to $30 million for 2021 third quarter, primarily due to the strong sales growth for the quarter, partially offset by a decline in gross margin. Our gross margin was 29% for 2021 third quarter, a decline of 120 basis points compared to 30.2% for the same period last year. The gross margin decline primarily reflect higher freight costs, which have begun to ease and stabilize in the fourth quarter. even as we continue to take actions to pass through our higher costs through a series of price increases. Although our gross margin was slightly lower sequentially for the third quarter, we expect to see improvement in the fourth quarter and likely to see additional benefit from the freight and duty capitalization, as Alan mentioned earlier. Operating expenses for the third quarter increased 53% year-over-year to $24 million. principally reflecting higher shipping costs, payroll expenses associated with workforce expansion, increases in facility and transportation costs, higher professional fees, and stock-based compensation of 0.8 million. Operating income declined 24% to 5 million for the 2021 third quarter. operating margin was 5.2% compared with 9.2% for the same period last year. This is primarily due to pressure from higher freight and shipping costs. Provision for income tax expense was $1 million for 2021 third quarter, slightly lower than our provision for the same period last year. Our effective tax rate was 24% for both periods, and we continue to expect our effective tax rate for 2021 to be in the mid 20% range. Net income amounted to 4.1 million for the 2021 third quarter compared with 4.6 million for the same period last year. Net income attributable to care packaging was 3.8 million or 19 cents per diluted share for the 2021 third quarter compared to 4.1 million or 0.26 or 26 cents per diluted share last year. Adjusted EBITDA on a consolidated basis was 8.2 million for the 2021 third quarter compared with 9.1 million a year ago. Consolidated adjusted EBITDA margin was 8% in the third quarter compared with 11.9% for the same period last year. Adjusted EBITDA attributable to care packaging was $7.3 million for 2021 third quarter. Adjusted EBITDA attributable to care packaging was 7.1%. Net cash used in operating activities was $3.6 million for the 2021 third quarter compared with net cash provided by operating activities of $3.6 million for the same period last year. The decline primarily was due to change in working capital, in particular, decreasing accounts receivable and our line of credit balance. I will now turn the call back to Alan for closing remarks, then we'll be happy to answer any questions you may have. Alan?
spk04: Thank you, Peter. Our business continues to thrive as we capture a positive secular trend in the food service industry. As a nimble supplier of a wide range of products, carrier packaging is able to respond more quickly to market conditions than to competition, which we believe gives us a tremendous advantage. Our 2021 third quarter delivers solid growth in sales as we proactively work through our cost pressures. We're pleased that demand continues to be strong, which we believe will contribute to another solid sales performance in the fourth quarter. With that, I'll turn the call over to the operator. Operator, for Q&A.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Jake Bartlett of Truist. Please go ahead.
spk05: Great. Thanks for taking the question. Alan, my first question was on the supply constraints or the ability to service customers. It sounds like demand is higher than really you can accommodate right now. So I'm wondering two questions on that. One, whether that makes the seasonality less. So demand goes down in the fourth quarter, but demand should be, it sounds like it's higher than you can even supply now. So shouldn't kind of, if your ability to supply stays the same, shouldn't, and demand is kind of higher in the third quarter than you could meet, you know, shouldn't that lessen the impact of seasonality in the fourth quarter?
spk04: Jake, that is correct. And that's why I mentioned that we're not going to see a large seasonality in the fourth quarter. Normally, In the past, historically, the company's sales has dropped in the fourth quarter, starting in October and November and December. The primary reason for that is toward the end of December, most of the distributors stopped purchasing products. They stopped taking out inventory due to inventory tax purposes or adjusting their inventory or year-end inventory count. So they would stop reducing inventory. And most likely toward the end of the year, the last week basically, it's really hard to find any distributor buyers that it's actually working, most of them on vacation. Except for the national chain account, they've already stocked up. So in the past, we see a bigger change in terms of difference in seasonalities. But this year, due to the lack of supply, we are having just enough hard time to catch up with the demand. It's like every single case of cup that we offload the container, it's gone the next day. Every single case of product that we produce in all of our facilities are basically purchased, bought out. We even have to ship product from Hawaii to Chino at a pretty high shipping rate, and they're gone immediately by the time they land in California. That's how the demand is right now in the market. And even with that, I would say every manufacturer in the marketplace is experiencing the same thing. And I would say anywhere you go in the U.S., you'll find people who say, hey, sorry, we might not have a lid. We might not have a straw. We might not have a cup. We'll use a substitution cup. And you won't be surprised if you go to any national chain and they're using a plain white or clear cup, not a branded cup anymore. I mean, even on the plane, you'll probably see people substituting the traditionally airline local cups versus a clear cup. This is how high the demand is in the market right now, and it's very strong. It has been strong in the third quarter, and we see this hasn't stopped, and it's gotten even worse now.
spk05: Got it. Great. That's helpful. And, you know, Alan, if you think forward to 2022 – It sounds like demand should remain strong, but how comfortable are you that supply is going to improve so that your sales can grow with that demand? Or do you think that really sales growth is just going to be constrained just because of all the challenges that you just mentioned?
spk04: We have been informed by the supply manufacturer, raw material manufacturer, the supply will be even tighter in the year 2022, especially with paper products. because more and more cities and states are requiring companies to go ESG. And the only way to go that is either bagasse or multi-fiber product or paper. And there has already been an allocation of paper, of raw material, and we've been told that by 2022 it's going to get even worse. And as well as the composable raw material, During 2020, there was more supply in 2020 during the COVID period. But starting now, it has tightened up. Their demand has – even until 2024, the PLA Risen has been basically pre-purchased already.
spk05: Got it. So just the implication, if I'm hearing that right, is that you would expect the supply constraints to crimp the sales growth for you in 2022? Yes.
spk04: What we've done is we import, we're actually ordering more product from overseas. We're supplying more inventory from overseas and to reduce our, basically increase our sales revenue because there's a demand out there. And we've seen that more and more customers are coming toward us. So to mitigate that, we have actually found more vendors in overseas in different countries to bring product in, so that we can protect our revenues for the year 2022. Got it.
spk05: Great, great. That's helpful. And then, just a last question on gross margins for the fourth quarter, and then going forward. But can you quantify, you know, the impact of 1.8 million, you know, ding that you had in the third quarter, and you expected that to reverse in the fourth? Can you help us by quantifying what that portion could be? And then separately, as you think about gross margins, if we were to assume that freight costs kind of stay where they are now in the fourth quarter and into 22, and then you think about the pricing that you just took, what would gross margins look like in that scenario? So given your pricing and then just assuming that freight costs stay where they are.
spk04: Well, here's the thing. Our gross margin is 29%. That's part of the main reason because we have a freight and duty capitalization of $1.82 million that we basically book in the third quarter. And during the second quarter, we actually had a freight and duty capitalization of gain of more than $1.8 million. It's actually north of $1.8 million. So we actually enjoyed the benefit of the freight and duty capitalization when we imported more product at a higher ocean freight rate in the second quarter So now in third quarter, when we reduce our inventories and lowered our freight costs from the second quarters, we're actually booking negatively on the $1.8 million. In the fourth quarter, we're already seeing that we won't see that $1.8 million negative affecting our gross margin, and we're actually looking at potentially an increase, a gain, of freight and duty capitalization in the fourth quarter. How much? I wouldn't say, but We are expecting a gain in the freight duty capitalization in the fourth quarter, but for sure it's not going to be a negative $1.8 million like in the second quarter. So with that said, it definitely will be north of 29.5%, just like we did in the third quarter at 29.7%, because the favorable gain that we'll be booking in the fourth quarter plus the increase that we had September 15th which had a fairly large increase, September 15, and some of the customers requested an extra one week to take an effective pricing because they had the purchase orders in. So those increases have not reflected in this third quarter. And on top of that, the September 15 increase, we instituted another large increase in November 1st across almost all the most hot, basically the hottest item that we're selling, carrying, including the cuts, basically, that is going to help us pretty nicely on the fourth quarter gross margin. With reduction in the freight and duty costs, improvement in sales, we do see a very healthy fourth quarter. That potentially helping us to reach our goal of 31%. I mean, that's our goal we set in the beginning of the year. So basically, we're We're hoping to see that go, basically.
spk08: Great. Thank you very much. I appreciate it.
spk03: The next question comes from Ryan Markle of William Blair. Please go ahead.
spk01: Hey, thanks. So first off, Alan, I just wanted to get your view high level. What are you hearing from restaurant customers? How are traffic levels? And then are you still seeing the delivery and takeout at a very high rate?
spk04: Yes, I do see the restaurant delivering takeout at a high rate because the demand for our night-by-night takeout food containers from all of our restaurant chain customers, and not only that, on the new customers, and some of our national chain accounts are telling us they are seeing a 30% to 40% increase in the holiday season for the takeout. Mainly, most of them are doing promotions. One of my chains, a large chain that we've been working with, they were working only with DoorDash. Now they're adding UberEat and other channels of selling the product. And it's seasonality for the chains. I would say that the best month will be the holiday season for most of these chains that we work with. And also this time of the year, recently we added actually half a dozen or more new chain customers' accounts that came aboard with us. And I'm sharing that the restaurant is still robust, especially in takeout. One of the main reasons that they're focusing on takeout is they're lacking staff to service the dining area. So it costs them less. just to serve as takeout. And by the way, they don't have people to actually work on the floor for the indoor dining.
spk01: Yeah, that's interesting. Makes sense. Okay. Good to hear. And then second question, you've had a lot of price increases this year. Can you just give us a sense of where is year-over-year price inflation right now? And I got to think there's a lot that carryovers next year. If you could just help us with maybe a range on what that might be.
spk04: Yes, we instituted at least five price increases this year, and then most of them are from the last six months, from past six months basically. Primary reason, inflation really shot up, labor costs really skyrocketed. It's really tough to get people, employees, to retain employees nowadays. Not to mention ocean freight. Domestic logistic freight cost has also nearly doubled in the past 12 months versus last year. And are we seeing any price stability? No, we have not seen price stability. Primarily, there is a major factor that we're waiting to see how that's going to play into our costs for every importer in the U.S., We've been notified by all of our shipping carriers. Starting November 15, the Port of Los Angeles will be penalizing shippers if there's a container that's not pulled out of the shipyard. But the problem is the shippers are telling the importers they will pass on these penalties into the importers. And, of course, the importer will pass on these penalties to the consumers. And in the past, we were told that Right now, it's not that the import doesn't want to get these containers out of the port. It's the port issue. The port doesn't have enough employees to get these containers onto the chassis to get to the truck. I mean, there's truckers. Basically, these truckers, they want to take these containers out. So there is no such thing as shortage of truckers. The only reason that there's a shortage of truckers is because it's taking three times the amount of time to get a container out of the port due to shortage and labor in the port. So ultimately... We're just waiting if this penalty is really going to go through. Because if it goes through, we're going to see an even larger inflation because all these penalties are going to pass on to the consumer immediately.
spk01: Yeah, it's definitely an interesting situation with the penalties there. Okay, thanks. I'll pass it on.
spk03: Once again, if you would like to ask a question, please press star, then one on your telephone. And our next question will come from Michael Hoffman of Stiefel. Please go ahead.
spk06: Hey, Alan, Peter. Thank you. Alan, you began this year going public with a guide that was 9 to 11 EBITDA margins. Based on how you're framing the fourth quarter. How do we stand there? I'm assuming we're at the low end, but are we going to still be inside 9 to 11?
spk04: We are still projecting 9 to 11 EBITDA margin. As we mentioned that the fourth quarter, we do see a strong margin due to the favorable aspect that we're going to see that we already took a hit. Actually, we subtracted in third quarter the freight and duty capitalization and we're going to see a favorable freight and duty capitalization, which is going to also with the price increases and improvement in sales, that 9 to 11 is still our target for the year end.
spk06: Okay. And you're expecting both margin and dollars of EBITDA to be better sequentially? Yes. Right. Okay. And just to be clear for everybody, so your freight duty was high in 2Q, got buried in your inventory. hurt your sales in 3Q. You've worked all of that inventory out, so it's all gone? Or most of it's gone? How much of it's gone?
spk04: Our inventory level is at the lowest I've seen in this year currently.
spk06: Okay. All right. So that 1.8 that was built into inventory that put pressure on the gross margin in 3Q is now out. So unless there's incremental freight duty customization costs in 3Q, over or above what you were thinking, doing the same thing on short-term or inventory turns, I'm going to be okay. We're going to be okay.
spk07: Yes. Alan, if I may. So our inventory turns a little bit above 60 days. Following that guideline, to answer your question, yes, it would have all turned. But there are different degrees of turns for each different SKUs. But on average, yes, it would have turned. And then your assumption would be correct in that the sales in the fourth quarter would have a lower cost inventory.
spk06: Got it. You have talked numerous times of moving more and more supply out of China into other vendors, and you were being aggressive about doing that given some of the rolling blackouts that were going on in China. What progress did you make on that? Can you share that with us?
spk04: Sure. We, I would say that right now, we're getting a lot more product out of China into Taiwan. Earlier in my conference call, I mentioned that we added several new vendors, and most of these vendors are in Taiwan, vendors on the cup side, on the lid side, on some of these, most of our items that we added, and from Vietnam. Particularly, we wanted really, move away. The political stability of China is really uncertain, especially right now with the COVID. Basically, there are a lot of actually increasing COVID cases in China, and more and more provinces are shutting their city down for banning interstate, intercity travels and telling their citizens, residents to stay put. restaurants are doing bad because they're only doing takeout and most of the restaurants are shutting down due to COVID. And we're concerned that if this continues, I mean, they just started two, three weeks ago, this escalation of COVID cases spiking. We're just concerned that during the wintertime, it will escalate even more into the, more people will catch COVID in China and there'll be more shutdown in that state area. and also the blockout period. Even though most of the factories that we work with are back to 80%, we don't know if any time they could shut them down, and we don't want to take that risk. So by doing so, we move more product into Taiwan and also Vietnam.
spk06: Okay, so you were about, I think if I remember correctly, about 20% out of China, so we're below 20% now?
spk04: I don't have that number, but definitely I can give you – after the call, we can look into the numbers, see how much we are actually importing from China versus other countries or how much we reduce.
spk06: Okay. That would be helpful. And then you've been giving us all along through the year the percent of total REVs that were eco-friendly, and the trend's been very favorable. What was it in the third quarter?
spk08: Peter, do you have the number? I think I saw the number was 18% for eco-friendly products.
spk07: Yes. Sorry.
spk04: Sorry.
spk07: I was on mute. It's 18.7 million, which takes about 18.2% of the total revenue.
spk06: Okay. And so that's, I think I'm doing it off of memory. Um, that sounds sequentially on a percentage basis. Is that correct?
spk07: Uh, 0.2%. Yes. So Q2 was 17 million, 18% of total revenue. Uh,
spk04: increased to a point so it's better on okay better on total dollars but a little less on percent so leveling off a little bit and is that mostly a supply issue is you could have sold more if you could have gotten it it actually it is true uh it's more and mostly mostly on supply issue and also we are stocking up more on the composable product line right now right now we're doing the stocking up in our hawaii facility and our chino facility mainly We know that January 1st, Bill Foley will pass through. We're already stocking up all of our national chain accounts on their compostable lids, on their compostable clear cup, basically, and our takeout containers. That's something that will start to turn on. Basically, Hawaii will force every restaurant, every national chain, to start using compostable takeout products. So we should start moving those out mid-December. In Hawaii.
spk06: Okay. Okay. And if my memory serves, and I always forget the AB, whatever it is, but there's a new content rule coming in in California. How is that disrupting the whole model at this point? And disrupting might be positive, but how is it impacting the model?
spk04: I'm sorry. What was it that you mentioned? That was a new something that was coming in.
spk06: California has got a content, a recycled content, a food packaging content rule coming in. I believe in 2022. And I was wondering how that is influencing buying behavior of your customers or your ability to meet the demand side given what's happened with the content role change.
spk04: I'm not sure which content you're referring to, recycling content you're referring to. I know that California is actually asking people not to serve straws or utensils in open public. They're asking them to put behind the bar and restaurants to be made upon a request and I know that I believe that some of the cities are actually putting more pressure in terms of for the restaurants operators to use the compostable product versus paper and plastic that's what I know it's been going on and they're just actually tightening up the rules and adding more product to the list that they've already stated in the past and that's That basically, it's going to really push more customer restaurants and start sourcing for composable product. And we, just the past quarter, we actually created or actually brought in more composable product line so that we can serve as additional customers.
spk06: Got it. Last two for me. Where are you in adding manufacturing capacity either in California or Texas to And then I want to come back to this November 15th freight fines.
spk04: Well, when we noticed the freight and ocean freight and everything really began to rise and the demand of these cups began to rise, as well as the demand for composable straws was getting increased on that part, we purchased, based on what we mentioned in our IPO that we're using, I believe, was a certain percentage of our revenue to purchase 5% or something on the $5 million, I would say, to purchase equipment. We already ordered several paper machines, plastic machines, additional straw machines, and take-out container machines. And on top of that, we are looking to order some automated robotic packaging machines. They will start to come in December, which is next month, and January and February, all the way to the end of next year. We are looking to add additional, much more capacity. I would say additional 20-30% of our existing capacity. The biggest challenge right now is training the people. Buying the equipment, it's not that hard. Getting it in, it's not that hard. The hardest thing is getting the people trained and getting people staffed. That's why we actually changed our policy in terms of the full-time only. We're taking the flexibility of the employee's schedule hours, so we're making it available for people to interview newly hired or newly interviewed staff. They can work part-time based on their flexible schedules, and then we can call them because we know during the holiday there's going to be a lot of employees calling out for a sick or calling on vacation and take out their annual leave. We want to make sure that it doesn't disrupt our service and shipping product out, So we're hiring more part-time seasonal workers on that part, also seasonal drivers. And most very importantly, we will start working on Saturday, adding one extra day each week as a working day, not for the only production because our production is 24-7. Our warehouse facility shipping used to be five days. We're adding an extra day so that we can catch up with the orders and shipping our product. I believe starting the third week of November.
spk06: Okay. And then on this November 15th fine that's coming from the ports, have you looked back at 3Q and said if that fine had existed during the quarter, what that would have been as an incremental cost?
spk04: I would estimate minimum half a million dollars a month.
spk06: Half a million a month. Okay. And are you hearing of other distributors and vendors and companies talking about any kind of legal action against the ports? Because this feels like a gouging issue when you think about it. I certainly can't understand how adding a compounding $100 where the second day it's $200, the third day it's $300, the fourth day it's $450. is going to influence moving containers faster if they're the bottleneck. So what's the legal sort of ramifications that all of the people like you who are sitting there on the gate waiting to get their containers out and the ports the bottleneck?
spk04: Well, this is how I feel. We're a small importer compared to Target, Walmart, or Costco. And if we're going to be hit with half a million dollars a month, these large companies are going to be hit with millions and basically, ultimately, they're going to be passing on to the consumers. I'm just sitting on the sideline to wait how this is going to play out because, like you said, the money will be made by the Port of Los Angeles. I mean, Port already making tons of money. They're paying these union workers a lot of money already to move these, to call sick or to I mean whatever is happening right now and like you said it's not going to help moving these containers because they just need to get more people into working working I mean President Biden said we're asking them to work 24 hours 7 yes you're asking them to work 24 hours 7 but they don't have people to manage to work 24 7 so you know you're requesting them to do it they don't have people to do it and That's an issue. And finding the shipper and ultimately finding the consumer, that is not going to help. We've already seen the highest inflation in the past month. Once this fine goes through, we're going to see even higher inflation down the road. And some of the importers might just abandon the containers. With my containers, it cost me already $15,000 for a container. If I'm going to be buying another $10,000 container, if I'm with importers, I'll just abandon it. I don't want to get it. It's not worth it. And that's going to create more bottleneck. When people start abandoning containers, where is the port going to put those abandoned containers at? Right.
spk06: Yeah, that's what I've been hearing from other distributors. All right, Alan, good luck. Interesting environment, hey? It's challenging. Never been before. Yeah.
spk04: Thank you, guys. Thank you. Thank you all.
spk03: Thank you, everyone. The next question is a follow-up from Jake Bartlett of Truist. Please go ahead.
spk05: Thanks for the follow-up. Just a couple of quick ones. Alan, the comment about kind of being able to hit at least the low end of that 9% to 11% EBITDA margins, one, I just want to confirm that that's kind of the ex-global wealth EBITDA, as you think about it. And, you know, just doing kind of some rough math, if you assume that you're at, you know, 31% gross margins, the revenue guidance, it would seem that some of the other costs would have to come down to hit, you know, the 9% for the year. And so, you know, those include shipping costs, you know, even if they come down as a state confidence percentage of sales, you'd be challenged to get there. So the other missing pieces or the other piece of the puzzle is recurring G&A or operating costs, which have been going up pretty significantly every quarter. Is there any reason to think that that cost might be coming down? Anything kind of abnormal that's been in the third quarter and the second quarter that would ease in the fourth?
spk04: Jake, you are correct. We are seeing the shipping costs coming down. as well as labor costs coming down. One of the things that really hit us in the second quarter is that due to labor shortages, we had to hire third-party lumber services, which was much higher than our normal services. We had to hire out temp agencies, which had to pay a premium for the temp agency staffing. So we managed to hire more direct people, employees, and also during the second quarter, we had to spend a lot of, actually I would say almost 70% more just to ship product over the road from California into Texas because there was so much product coming in, we overwhelmed the California warehouse, which we had to spend more money to transfer it into the other warehouse location, which we mitigated that and we effectively reduced that near the end of the third quarter and continuing to fourth quarter. So, yes, we will see domestic shipping coming down. We will see labor costs coming down. We will also see a major freight coming down because of us utilizing more of our contracted freight rate, ocean freight rate, versus the higher brokerage freight rate that we have to use in the third quarter, the second quarter.
spk05: Got it. Got it. That's really helpful. And then just another question on... And the national sales revenue, you know, it's not solidly year-over-year, but it didn't accelerate much from the second quarter, you know, into the third, you know, whereas distributor accelerated a bunch. All the other, you know, channels accelerated, I think, more. So just what is going on with national? Is there some reason why the sales there would be constrained, you know, in this environment? Maybe they're less likely to kind of look outside there, you know, maybe it's harder to get incremental customers for you. Just why isn't that channel growing quicker in this environment?
spk04: We have a lot of increase on these new national chain accounts. We've told them we don't have enough capacity, so we're asking them to give us more time to get ready to service them. One of the national chain that's well-known in Texas, We told them that we could start maybe in December once we stock up more in our inventory because we do have to service the existing national chain account first before we can take on new ones. On the distribution side, basically, we're selling them whatever we have in our inventory. There's no commitment to really have to fulfill their order 100%. And because there's a shortage in the entire market, we're getting distributors buying from everywhere, anywhere they can find products to service their their retail customers. But for national chain account, we can't just take our national chain account, I mean, knowing that we're going to be out of product.
spk05: Got it. That makes a lot of sense. I appreciate it.
spk04: Thank you, Jake.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Alan Yu for any closing remarks.
spk04: Thank you, Operator. And thanks to everyone who joined us today. We appreciate your support and interest in our company. You have our commitment to working hard and working smart toward achieving our collective goals of enhancing shareholder value. We look forward to speaking with you again soon. Goodbye.
spk03: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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