Karat Packaging Inc.

Good day and welcome to the Carrot Packaging 2021 fourth quarter and year-end conference call. All participants will be in a 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 a touch-tone phone. 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, Pondell Wilkinson, Carrot Packaging Investor Relations Firm. Please go ahead, sir.

Good afternoon, everyone, and welcome to Carrot Packaging's 2021 fourth quarter and year-end conference call. I'm Roger Pondell with Pondell Wilkinson, Carrot Packaging's Investor Relations Firm. It will be my pleasure momentarily to to introduce the company's Chief Executive Officer, Alan Yu, and Carrot's new Chief Financial Officer, Jan Goh. Before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control. including those set forth in the risk factor section of the company's IPO registration statement and its most recent Form 10-Q 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 CARAT packaging undertakes no obligation to update any forward-looking statements except as required by law. Please also note that during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most directly comparable gap measures to the non-gap 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 Yu. Alan? Thank you, Roger.

Good afternoon, everyone. We're pleased to be here with all of you today. Our business continued to grow at a robust pace. as we gain wallet share with our existing customers and expand our customer base. Earlier today, we reported record fourth quarter net sales and continued margin expansion. Despite ongoing global supply chain challenges and tight labor conditions, fourth quarter 2021 results reflect exceptionally strong demand for our product, and market trend remains favorable. As we continue to provide new, innovative offerings, Our sales were somewhat constrained by the delay of certain shipments to customers from December to January due to inventory shortages resulting from port congestion and labor challenges. We continue to manage the labor environment through increasing recruiting efforts and shifting distribution to other facilities in our supply chain. Online sales again posted the highest percentage increase, 56% year over year in the fourth quarters. as we are placing greater emphasis on this category of our business, which commands higher margins. In addition to sales from our own online channels, we experience excellent growth through eBay, Walmart, and Amazon. Our distributor channel and national and regional chains also post a very strong result. During the year, we added more than 50 new regional restaurant chain accounts, as well as national chain accounts. As noted in the press release, we've achieved our gross margin goal in the 2021 fourth quarters, increasing 360 basis points to 31% over the same quarter last year, despite higher inventory and ocean freight expenses. This demonstrated our ability to improve productivity and operational efficiency, as well as successfully passing through inflation-related cost increases. Gross margin also benefited somewhat from higher lender costs capitalized in the fourth quarters compared to the third quarters, mainly freight duty and custom brokerage fees. Our positive business momentum is progressing in 2022. The food service sector is continuing to experience steady increase in consumer spending. Moreover, demand for environmentally friendly products continue to grow, which boasts wealth of carrot as a leading industry providers. As a result of favorable outlook, we are currently targeting net sales for the 2022 first quarter to be in the range of $101 million to $103 million, up about 35% at the midpoint of the range over the same period last year. For the full 2022 year, we expect sales to grow 17% to 19% over 2021. Lastly, as part of our plan to expand our third-party logistics services, We have just leased 14 trucks and trailers. This is in addition to the previously announced orders of 10 Tesla semi-trucks that we expect to arrive in 2023. We want to leave adequate time for questions, so I will stop here and turn the call over to Jen Gao, our new Chief Financial Officer, who joined Carrot in February to discuss our financial results in greater detail. Jen?

Thank you, Alan. I am very pleased to have joined the CARAT team at this exciting time in the company's growth and development. Our 2021 fourth quarter results reflect strong top-line growth from existing and new customers and improved margin as we continue to enhance our operating efficiency. We delivered $10.9 million of adjusted EBITDA or a 11.9% adjusted EBITDA margin. Now let me provide more color on our operating results starting with revenue. Net sales for the 2021 fourth quarter increased 30% over the same quarter last year to $91.3 million. Net sales for the full year 2021 increased 23% over 2020 to $364.2 million. Net sales in 2020 included $38.1 million of PPE products, principally during the height of the pandemic in the second quarter of 2020. Net sales of PPE products decreased to $2.7 million in 2021, or less than 1% of net sales. Sales to distributors For the 2021 fourth quarter, our largest channel grew 33%, and sales to national and regional chains expanded 27%. Online sales rose 56% for the quarter, reflecting strong demand and our continued investment in this critical channel. Sales to the retail channel decreased 4% from the same quarter last year, with some sales having shifted, to other channels and the fourth quarter typically being slower on the retail side. We implemented minimum shipping requirements in the second half of 2021 to better manage tight labor conditions, which shifted a portion of our sales from retail to distributors and enabled us to better utilize staffing resources. Gross profit increased 47% to $28.3 million for the 2021 fourth quarter do import from the strong sales growth in our higher margin channels and products along with improved operating efficiencies and better management of freight expenses. Growth margin for the 2021 fourth quarter expanded to 31.0% from 27.4% for the same quarter last year and 29.0% in the 2021 third quarter. Operating expenses for the 2021 fourth quarter were $21.2 million or 23% of net sales compared with $17.2 million or 24% of net sales in the prior year quarter and $24.4 million or 24% of net sales in the 2021 third quarter. The reduction in operating expenses as a percentage of net sales from both the prior year and the sequential quarter demonstrated the company's improvement in cost leverage. Specifically, we are gaining efficiencies in facilities, shipping, and labor costs. Provision for income taxes was $1.1 million for the 2021 fourth quarter versus a benefit of $224,000 for the same period last year. Net income increased more than threefold to $6 million for the 2021 fourth quarter from $1.6 million for the same quarter last year. Net income attributable to Carrot Packaging Inc. was $5.6 million or 28 cents per diluted share for the 2021 fourth quarter compared with $922,000 or six cents per diluted share for the same quarter last year. Adjusted EBITDA on a consolidated basis advanced to $10.9 million for the 2021 fourth quarter from $4.5 million a year ago. Consolidated adjusted EBITDA margin was 11.9% in the fourth quarter compared with 6.4% for the same quarter last year. Adjusted diluted earnings per common share rose more than fivefold to 32 cents from 6 cents per share in the prior year quarter. Net cash provided by operating activities increased to $9.9 million for the 2021 fourth quarter from $2.2 million for the same quarter last year, reflecting the higher net income and favorable changes in working capital and non-cash adjustment. We finished the quarter with $72.1 million in working capital compared to $36.6 million at the end of 2020. In October 2021, we refinanced our line of credit with improved pricing and more flexibility in a financial covenant. We believe we are better positioned to execute on our future growth strategy. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jake Bartlett with Truist Securities. Please go ahead.

Thanks for taking my question. My first is for you, Alan, or others. The question is, fourth quarter revenue came in a bit below the guidance that you had provided in early November, and you've mentioned the supply chain bottlenecks. as well as I think in the script you mentioned staffing. And that was in December and January. So I just want to make sure I understand kind of what happened there and also, most importantly, how confident you are that those bottlenecks are now easing or have eased or will ease.

Thank you, Jake. Well, yes. The fourth quarter, we've experienced a lot of shortages in product that we have due to container arriving late from the port and due to shortage in labor due to holiday. We have a lot of employees that were sick or calling sick that didn't come and show up. So warehouse, we're short staffed. Even if we have product on the floor, we were not able to ship everything in timely manner. and the containers, trying to get the container from the port to the warehouse. And also, we had to shut down a day and a half, almost two days, toward the end of the year for inventory counting. One of the main causes of that would be the fulfillment rate. Our fulfillment rate, especially in December, was close to around 50%. And we see that fulfillment rate improve significantly in the first quarter. to your question do I see the bottleneck is getting better yes the port is getting a lot better they used back in December November of last year it took it took a ship a container about three months or even four months from the factory to our warehouse right now I'm seeing two months 45 days a little bit more over two months to get containers into California So it is much faster and also we don't have this kind of a delay at the port as we had before in December. Right now, the delay could be only about no more than two weeks. Back in December and November, the delay could have been over. Even the container came in offloaded in a dead area, it would take us about 45 days to get the container into our warehouse. So we do see a lot of these issues that we had in the fourth quarter away. And also in the first quarters, we've improved our efficiency in terms of hiring more people, especially after January. We were able to hire more people and also work over the weekend to get our order filled. I think the biggest challenge back in the last four quarters was trying to get the order fulfilled. We have no problem getting purchase order from the customers. The demand was high. It's just that we couldn't fulfill as much as we want to due to labor shortages and shortages of supply.

Great, great. And it sounds like you mentioned sick time, and that would coincide with the spike in Omicron that we've heard others talk about. Is that the right way to think about it, that Omicron spike impacted your staffing in those kind of sick days and your productivity as well?

Yes, I would say that not only us, we've spoken with a lot of customers. I mean, the COVID started back in 2020. We have been very well in control of the employees that have COVID. But during the spike in Omicron, we've experienced the most amount of labor shortage of employees catching the COVID. At one point, 50% of each one of our departments were out sick. So it's really a challenging time during that period. to get people to come to work, especially when everyone's having a gathering, and then after the gathering, they catch this COVID.

Great. That makes a lot of sense. The next question is about the outlook for sales in 2022, the 17% to 19% growth. I'm hoping you can maybe break that down in a few different buckets in the contribution to that growth. One is the price increases that you've taken throughout 2020. 21, how much is just increased pricing of what you're selling contributing to that 17% to 19% growth? The other part is how much of that growth you think is going to be coming from existing customers, and then how much is dependent on getting new customers? Maybe some of those new customers, as I understand it, you've signed on some but haven't really turned them on, so maybe you have very good visibility on that. But I'm just curious to to understand kind of what the main drivers of this 17% to 19% growth is.

Sure. I would say 5% to 7% will be coming from increasing prices. The reason being there are some prices on certain products where you raise our prices, and also there are certain products where you decrease our prices. So it kind of offsets each other's. And I would think that the majority of our increases, such as I would say 5%, It will be coming from increasing new customers and also new product line that we're bringing in. We are seeing that we have been adding more product line. Last year, we added approximately 100 to 200 SKUs. This year, I will see that adding additional 100 to 200 SKUs, mainly for online sales. Where we see online will be a big driver. That would give us additional customers. $10 million to $15 million, possibly even more in revenue, because we do foresee that our online sales could possibly increase by 50% to 75% year over year this year.

Great. And then last question for me. The missing piece in terms of 22 guidance, the missing piece to get to EBITDA is the operating costs. And I'm just wondering if you could give us some of the big moving pieces there and whether we should expect leverage on operating costs you know, in 22, and, you know, perhaps if you can kind of just help us understand, you know, how much leverage, if we expect leverage, but just some of the moving pieces there. I know there's shipping, there's labor costs, potentially maybe lapping some of the one-time kind of costs you incur in 21, but just any help on the operating costs and how we should think of that in 21. 22 would be helpful. Sure. Sure.

I would think we are seeing the operation costs to be fairly increased, not insignificantly compared to our revenue growth. Mainly that we, starting just this month, starting next month, we actually stopped all the outside brokerage sales force that we have. So we terminated all the outside sales agreements. Everything will be done in-house, corporate, by our corporate sales people. And also that we've seen that on the inventory side. We've seen an increase in dollars. That says it's favorable to our cost of purchase from overseas, as well as we've seen that we've been utilizing more on the shipping side. We used to ship 28 pallets on the truckload. Now we can ship 30 to 32 pallets on the truckload. So we're maximizing the shipments. And also we've seen the domestic local shipping truckload price reasonably just drop versus an increase in the LTL. So we're pushing our customers, asking them to ship more in the full truckload with more SKU that we bring in. That also increases our efficiency in the operational cost. Same with the laborers. We are hiring more people that we're seeking more efficiency out of our staffing. That is another increase in our efficiency and cutting our operating costs as well.

Got it. So just the message is that you do expect, you know, leverage margin, the operating cost to contribute to margin expansion overall in 2022?

Correct.

Great. I'll pass it on. Thank you so much.

Thank you, Jake.

Our next question will come from Ryan Markell with William Blair. Please go ahead.

Hey, good afternoon, everyone, and congrats on the quarter and a strong guide. My first question is on gross margin for 22. Alan, is the primary driver of higher margins, is it mix? Or what are the other puts and takes that we should be thinking about?

We see the primary driver of the gross margin is, one, a strong dollar. Two, we're selling more eco-friendly product that we are offering. Hawaii, we actually really better utilize our Hawaii operation, and also we're expanding our Hawaiian operation, which has a high demand for eco-friendly product, composable ESG product line. And we do see that with the economy opening up, and more and more cities and restaurants are asking, calling for the environmentally packagings, such as bagasse plate, bagasse hinge containers, PLA straws or composable straws, and also, more importantly, we're able to increase our online sales in Amazon, eBay, Walmart, not only our e-commerce stores. We are looking to increase our staffing in our e-commerce side by double in terms of pushing our – that will definitely help our online sales. Our goal for online sales for this year, 2022, versus last year is 50% to 75% or even more on the growth side for the online sales. Online sales generates a much higher growth margin than than our traditional sales to the distribution channels or retail channels. So this is where we see a strong driver for our close margin in 2022. Yep.

Okay. Makes sense. And then the share gain in 21 was really impressive. 50 new accounts. Can this continue in 22 or, you know, was 21 a unique year because of the shortages and you were able to outservice your peers? Or do you think you can continue to share gains at this sort of accelerated pace?

We believe in 2021, our sales actually really didn't go out to look for customers. So we believe in 2022, we will be able to increase even more than 50 new accounts, especially in the Midwest market. This market where we see that, like I said, we have been strong in the West Coast. We have been weak, very weak in the Southeast region. in the eastern part of the U.S., even in the Midwest. So we've seen there's so many opportunities out there that we haven't tapped into. So we do see an even bigger opportunity in 2022 versus 2021 on new customer sites, on the regional chain accounts.

Got it. Okay. That's great to hear. And then just lastly for me, you know, Alan, I think your domestic OEM competitors were out of capacity recently. I think that was the case in 21. Where do we stand now? I assume they're expanding capacity. Are they starting to ramp up a bit? Could that competition heat up a little bit?

I have been hearing that the domestic manufacturer, they have expanded their operation. But in 2021, the shortage was not caused by the lacking of the capacity. It was more of lacking of the labor for everybody, including ourselves. At a certain point, I mean, there are certain days in a month that we can only have less than 10% of our staff can come to work doing the Omicron, the height of the Omicron. And that's what I heard from the competitor as well. Everyone's having a hard time finding labor. Even until today, it's not they don't have equipment. They just can't find enough people to come to work and consistently, you know, instead of working for 10 days and quit. So that is the challenge, and we still see that challenge as of today. That challenge has not gone away. Okay.

Well, thanks for the call, and I'll pass it on.

Thank you.

Again, if you have a question, please press star then 1. Our next question will come from Brian Butler with Stifel. Please go ahead.

Thanks for taking my questions, Brian. You guys hear me? Yes, we can hear you, Brian. Okay, great. So just at a high level, How do you view kind of the risk of, you know, hyper or very high inflation in food costs with the current, you know, Russia-Ukraine situation? What kind of risk to the model is that for you guys?

Well, we've seen the raw material increase on the plastic side, resin side, by nearly 50%. The paper side increased even more by almost 70%. And we've seen even the raw material, the food ingredients that we import have also increased, aluminum increased. Everything has spiked up. What we've done is we have to protect our margin and make sure that we're in a profitable business. So we pass on most of these increases onto our customers. And our customers basically also pass on the increases to their customers as well. So we've seen... Basically, the consumer seems to be taking these passing of inflation costs fairly well. Well, even this year, I don't see much more of increases coming along. I mean, I think everything has stabilized, but we are skeptical holding in terms of making sure that if there's even more increases because there's a lot of uncertainties with the war going on. on the shortage of raw material, especially aluminum and paper. So we're more cautious on that part. If it happens, we just have to do what we can to protect the margin.

Okay. And then you mentioned the ESG products or the environmental products. Can you give us some color on the mix that was in 2021 and what the expectation is for 2022? Sure. In 2021,

For example, the state of Hawaii mandated all restaurants to use composable takeout packaging, not only in straws, in lids and cups, and also takeout containers. That has kind of got delayed and then moved into 2022. So I've been hearing a lot of these national chain accounts looking for these composable products because they're out of the deadline. And we see that's going to grow in that area. And also we've seen Even in our neighboring country like Mexico and Canada, customers are asking for a composable product. Seattle, San Francisco, California, New York, Maryland, most of these areas, these states and local regulations are actually requiring restaurants and businesses to use 100% composable product, not like just a recyclable product but composable product. So we started the Composable line back in 2007, and we're one of the leading manufacturers of importer of that product line. So we've seen really large increases on the sale of this aspect on the product line. And we do see in 2022, it will continue to grow even faster pace in 2021. And this is where we see the challenges, finding more sources. I would say that this is a challenge for everybody. even our competitors, is trying to find more sources for these composable products because it's not that easy to make these composable products versus a regular plastic container or paper containers. It is much harder to make one. And also, they're not produced. Most of them are producible overseas, none from domestic manufacturing. So this is our challenge, and we're looking to do everything we can to find more sources to ensure that our customers are able to get these products from us.

On those years, how much more profitable is the environmental compostable products versus your standard plastic products or just regular paper?

I would say 15% to 25% more profitable than our standard product.

Okay, that's helpful. On the freight costs and those coming down in kind of 2022 versus 2021, any color on how that trends through the quarter? I mean, are we going to see a big difference in the first quarter and then it kind of evens out the rest of the year, or is there some other volatility in there?

The information that we receive and the contract we just recently signed indicated the ocean freight has gone up 35% from last year, starting in May 1st versus coming down. The freight coming down is domestic shipping so far. That is over the road from, for example, California to Dallas or to Texas, to Las Vegas, Arizona. That domestic shipping has come down a little bit with the truckload orders. But for the LTL, it has actually gone up. So it kind of offset each other's.

Okay. And when you think about kind of the demand that you're seeing for 2022, is there a rebuild of inventory for your customers? And what does that do for your working capital needs to meet that 17% to 19% revenue growth?

For our company, basically, we've not only invested in more inventory, and this is one of the reasons that we see our stronger first quarter versus the fourth quarter last year, is we've built up a lot more inventory this quarter than last quarter, so our fulfillment rate is much better, which we see that actually will give us a better result in terms of revenue-wise. In terms of equipment-wise, we've also ordered a lot more equipment this year versus last year, which they're all coming in, so that will also increase our capacity-wise. On our financial needs, currently, we're actually pretty good in terms of financial needs right now with our net margins, proceeds from our profit margins.

So is working capital going to be a use of cash again in 2022? Is that the right way to think about it? You're going to be up or spending? Yes. And what about CapEx? Do you have any outlook on what the CapEx number should be?

We're still looking at the 5%, as we previously announced before, on the CapEx.

Okay, 5% of revenue? Yes. And a couple more on the modeling side. What's the right tax rate to think about for 2022, as well as what's going to be the interest expense?

I'm going to leave that to Jen on this question.

Yeah, sure. Hi, this is Jen. So in terms of the income tax rate, I think high level 2022 income tax will be tax rate, effective tax rate will be fairly comparable to what we have seen in 2021. And then the other question, I'm sorry, the other question is about the... What's the right interest expense to be looking at?

I mean, assuming rates don't change materially from where we are right now.

Yeah, sure. In terms of the interest expense, if you're looking at the core carrot business without the interest rate swap, it's probably going to be fairly comparable to the second half of 2021. On the overall consolidated carrot packaging as a consolidated group, we are looking to have some fairly significant gain from the change in a fair value of the interest rates swamp that we have. High level, we haven't had, we paid down because of the pay down from the proceeds in 2021, we significantly reduced the amount, we delivered significantly reduced the amount of the outstanding debt, but that should be the overall outlook for 2022.

Okay, that's helpful. And then one last one. Just what's the outlook for M&A in 2022? What thoughts of growth there?

Well, we've actually made several requests and also seeking for M&A in 2021. And it has been very challenging because the market has been very, very hot in terms of there's a lot of acquisition and the price basically that we've seen 13 to 17 times EBITDA, it's just definitely not something that we're looking to do. So we're also waiting to see is there any manufacturing out there that could complement our needs in terms of what we can acquire or we can work with them jointly. I would say that something will be definitely in the pipeline. We have a couple things in the pipeline. And definitely within the next 30 to 60 days, there should be something that we've actually finalized on that part.

Okay, great. Thank you very much for taking my questions.

Our next question is a follow-up from Jake Bartlett with Truist Securities. Please go ahead.

Thanks for taking the follow-ups. Just a couple quick ones. My first was just on the gross margin outlook for 22 and I think the drivers, Ellen, you mentioned the reasons why that's so, seem to be kind of somewhat long-term, could be considered long-term. So the question is, before, I think we were thinking about 29% to 31% long-term gross margins for the model. Should we be moving that up long-term, or is 22 kind of just somewhat abnormal?

We... Well, with the current situation that we're progressing with the increase in online sales and also eco-friendly ESC product line, I do see that the overall average of the 2022, it's still going to be around 31%. Definitely be higher than the 2021 in the previous years. We found different ways of increasing our gross margins, especially we've seen that online selling channel has been very lucrative. and also the ESG product line, and also the new product that we were currently bringing in, they have offered us, giving us the higher profit margin. And also for the year 2022, we see a strong dollar. The key thing about strong dollars is the product that we import will have a higher margin, even with the increase from overseas, because we have seen costs of product overseas have risen significantly in the past year. three months. Every country has raised their price due to inflation. But the past two weeks of the gain in dollars really offset some of those increases. So we do expect the dollars to continue to grow, be strong or even stronger for the next six to nine months. So as of 2022, we think this is a good model for the 31 to 32 percent growth margin. In terms of the long term, we're still thinking that if we can continue, that's our goal, increase in online sales, I would say that this will be a long-term gross margin guidance in terms of going forward.

Got it. So it would move up. The model could be higher margin given the next shifts that you're targeting. Is that the right way to think about it? Yes, it is. Okay. And then I just had also a question on the environmentally – friendly products. And it was asked, but I'm not sure if you answered, but the percent of sales in 2021 that you consider environmentally friendly, that'd be helpful just because it's such a big part of the story is to be able to track that.

I'll leave this to Jan to answer the question. We should add some numbers.

Great.

Yeah, sure. So overall, it stays about... about close to 20% in the high teens of the overall total sales for 2021.

Great. And then the last question is your exposure to or how much you're importing from China. I know that you've been diversifying your import, your supply sources and geographies where you're supplying from. As we think about production shutdowns and disruption from COVID case spikes. How should we think about the risk there? And just, you know, it'd be helpful to understand, you know, what percentage of your imports are coming from China these days?

Sure. I believe in our previous conversation or previous conference calls that we mentioned that we have been moving from import from China into other part of the country like Vietnam, Malaysia, and Taiwan. And our depend are actually most of our product are now shipping out of Taiwan, even with the eco-friendly product line of product that was mainly produced out of China, now there's more companies are moving those into Vietnam and Indonesia, as well as Taiwan. I would say that in the past, we mentioned that it was about over 30%, 40% dependency in China, and then we went down to all the way to 25%. Our goal is still to import only 20% or less out of China versus the other countries.

Okay. And is the production halt or disruption that's going on right now, will that affect you and your ability for that 20% to 25% that you get from them now? Is that a material risk to your outlook?

No. This is a good thing. Most of the vendors that we order from China, they set up manufacturing out of Vietnam as well. And this is just in case that there's a disruption in China. Like a few months ago, there was some shutdown in the Nepal port. We have to rely 100% out of Vietnam and Taiwan. And currently, almost everything that we purchase from China, we have a backup plant in Taiwan or Vietnam and Malaysia. And even now we're looking at Indonesia as well.

Great. And really the last question, gas prices, diesel prices. Just remind us where they are. How much is your exposure as diesel prices have gone up? Is that material for the model? I want to make sure we understand that.

I don't believe we have much exposure to the gas prices. I know that our fleet have locked into a really pretty good price range. for the past three months versus the diesel gas in the marketplace. So from our perspective, we do not see there's a really high risk in terms of gas prices. That's what I mentioned earlier. The increase in gas prices increased LTL shipping costs. The UPS and FedEx, they have implemented surcharges, few surcharges. Same with the LTL carrier. But the truckloads, This is where we actually gain a margin in terms of pushing customers to order by the truckload. Those costs have come down. The independent trucking company or the trucker have absorbed the increase in gas prices due to a reduction in demand in the truckload request on the marketplace recently.

Great. Great. Thank you so much.

Thank you, Jake.

This concludes our question and answer session. I would like to turn the conference back over to Alan Yu, CEO, for any closing remarks.

Well, thank you, everyone, for joining us today. And I hope that we were able to answer everyone's questions. And I look forward to your next conference call next quarter. And have a nice day, everyone. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.