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spk14: Good day, and welcome to the Carrot Packaging, Inc. first quarter 2023 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, you may press star, then one on your telephone keypad. If you would like to withdraw your question, please press star, then two. Please note that today's event is being recorded. I would now like to turn the conference over to Roger Pondell, Investor Relations. Please go ahead, sir.
spk06: Thank you, Operator, and good afternoon, everyone. Welcome to Carrot Packaging's 2023 First Quarter Earnings Call. I'm Roger Pondell with Pondell Wilkinson, Carrot Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and its Chief Financial Officer, Jan Guo. Before I turn the call over to Alan, I want to remind all 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 most recently formed 10-K, as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the 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, 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?
spk02: Thank you, Roger. Good afternoon, everyone. Our first quarter performance reflected a strong execution of our 2023 business strategy. We were able to achieve a record gross margin of 39.8% and record adjusted EBITDA results since the company's IPO in 2021. Despite the industry-wide deflationary environment and multiple price reduction that we implemented, moving ahead with our growth strategy on improving inventory management and fill rate, we recently signed a lease for an 83,000 square feet distribution center in Houston. following the addition of a Chicago warehouse earlier this year. Our plans for geographic expansion on the East Coast and the Midwest region are progressing well. With the recent expansion of the sales team and additional marketing activity, together with the new contracts that were signed during the fourth quarter last year, we are expecting revenues to pick up again during the second half of this year. As a reminder, Revenue for the first half of 2023 is expected to be lower than the same period last year when pricing for inventory sold was at the peak level. In addition, order volumes during that time period last year were unusually high due to supply shortages. We continue to execute our asset-light business plan and are now scaling back manufacturing production in California. while increasing import items, focusing on higher margin product, during the past few months, we have significantly enlarged our sourcing network in Asia, giving us greater flexibility without additional overhead. To meet our growing demand for eco-friendly and compostable products, this category grew 17% in the first quarter over the prior year quarter. And demand remains strong. Our 2023 growth goals for the eco-friendly product category is to be around 35% of total sales. Due to multiple construction and regulatory approval delays in Taiwan and our recent strategy to shift toward imports and diversifying eco-friendly product sourcing, we decided to sell a portion of the joint venture Bagasse Factory to Keri Global Group. We are expecting the transaction to close within a three-month period or soon thereafter. with the selling price equal to our initial investment of about $6 million plus 5% interest. Lastly, we made a significant upgrade to our e-commerce platform and expanded our online support team. Sales to Canada and Hawaii are underway and proceeding well. We are now seeing some of the benefits of our online efforts with the business going in a positive direction. We again generated strong operating cash flows during the first quarter and continue to project positive cash flow throughout 2023, which is allowing CARE to generate excess capital and seek new opportunity. Accordingly, as announced on Tuesday, our board of directors declare another special dividend of 35 cents per common share. I will now turn the call over to Jan Gao, our Chief Financial Officer, to discuss the company's financial results in greater detail. Jan?
spk20: Thank you, Alan. Despite a challenging year-over-year comparison, first quarter 2023 results demonstrated our ability to adapt to the external business environment as we were able to significantly enhance margins and strengthen the company's liquidity position. Net sales for the 2023 first quarter, as anticipated, decreased 9.1% to $95.8 million from $105.4 million a year ago. This was slightly better than our original expectation. Last year's first quarter was a particularly strong revenue quarter with inventory price increases at the peak due to extraordinarily higher ocean freight and other costs and strong volume resulting from overall supply shortage in the industry. By channel, sales to distributors, our largest channel, was lower by 7.6% for the 2023 first quarter. Sales to national and regional chains decreased 14.2%, sales to retail channel decreased 21.7%, and sales from the online channel increased almost 1%. As Alan mentioned earlier, our investment and marketing efforts to support our e-commerce platform have begun to bear fruit. Sales of our eco-friendly products increased 16.8% for the first quarter. We continue to further strengthen our leadership position as carried experiencing strong growth from these products based in part on our enlarged sourcing network and expansion of our product offering as well as the evolving regulatory landscape. Eco-friendly products represented 33% of total sales in the 2023 first quarter compared with 25% a year ago. Growth profit increased 11.2% to $38.1 million for the 2023 first quarter from $34.3 million last year. We achieved record growth margin of 39.8% in the first quarter, an improvement of 730 basis points over the prior year quarter. Growth margin expansion benefited by a significant decrease in ocean freight costs, which amounted to 5.9% of net sales in the 2023 first quarter compared with 14.4 percent of net sales last year. Also, costs for certain raw materials were lower, and operating efficiencies and productivity are continuing to improve. Operating expenses in the 2023 first quarter were $25.4 million, or 26.5 percent of net sales, compared with $24.8 million or 23.5% of net sales in the prior year quarter. The increase was primarily due to workforce expansion, an increase in rental expense from the two additional warehouses added in May 2022, and higher marketing expense to support online sales growth. The increase in operating expenses was partially offset by decreases in shipping and transportation costs and bad debt expenses. Net income for the 2023 first quarter increased 15.6% to $9.2 million from $7.9 million for the same quarter last year. Net income margin was 9.6% in the 2023 first quarter compared with 7.5% a year ago. Net income attributable to CARAT for the 2023 first quarter was $9.0 million or 45 cents per diluted share compared with $6.7 million or 34 cents per diluted share in the prior year quarter. Adjusted EBITDA, a non-GAAP measure was $15.3 million for the 2023 first quarter compared with $13.0 million in the prior year quarter. Consolidated adjusted EBITDA margin expanded to 15.9% of net sales compared with 12.3% for the 2022 first quarter. Adjusted diluted earnings per common share rose to 46 cents per share from 36 cents per share a year ago. Carrot's consistent, solid growth has built a strong financial and liquidity position for the company. The company is well positioned to execute on its future growth strategies. We finished the quarter with $97.4 million in working capital, compared with $84.5 million at the end of 2022, and have financial liquidity of $62.1 million with another $10 million in short-term investment. Moving further into 2023, we are forecasting revenue for the second quarter to be down about 5% year-over-year. Moreover, we are reiterating net sales for the full year expected to increase by high single digits from new contracts, increased inventory fill rate with additional warehouse space, benefits from additional marketing efforts, and better pricing comparisons. As Alan mentioned, we are now scaling back manufacturing production in California, selling and disposing of equipment and raw materials that no longer will be needed to create more warehouse space for import products and to further improve inventory management and efficiency. Accordingly, We're currently expecting to record an impairment charge in a range of $2.7 million to $3.5 million in the second quarter of 2023, including approximately $1.5 million to $2 million write-off of inventory with the remaining write-off in operating expenses. We expect to benefit from this shift of strategy to more than offset the impairment charge. At the growth margin level, we believe the growth margin for the first quarter was exceptionally high and is not indicative of future quarters. We are reaffirming our 2023 four-year margin goal to be in the range of 32% to 33%, even with the expected impairment charge in the second quarter, as we expect to continue to benefit from the stabilized ocean freight and our efforts to increase import, shift towards high margin items and improve operating efficiencies. Ellen and I will now be happy to answer your questions and I'll turn the call back to the operator.
spk14: We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jake Bartlett with Truist Securities.
spk13: Please proceed.
spk10: Great. Thank you so much for taking the question. My first was on gross margin in the gross margin guide. I want to make sure that – so I think from your last comment that the 32% to 33% reiteration of the gross margin, that includes roughly $2 million in expenses. And were those expenses or were that right off, inventory right off? get backed out of adjusted EBITDA? I'm just trying to make sure what's going to be flowing through to your adjusted EBITDA.
spk02: That is also included. Okay. It has been included, yes.
spk10: Okay, but as you report your adjusted EBITDA, you won't back out those kind of impairments?
spk02: Jan, can you answer that question? I can answer the question that Our gross margin is basically $32.33 or higher. It's included in the adjusted impairment. But the other question, I would think that Jan could better answer that question.
spk20: Yeah. Hi, Jake. This is Jan. Thank you for the question. Yes. So we obviously will be working with our auditors on the second quarter adjusted EBITDA presentation, but we are thinking This is a non-recurring charge related to the scaling back of our production in California. So we'll consider the add-back to adjusted EBITDA as well as adjusted EPS for the write-off in the second quarter.
spk10: Okay, okay. So adjusted goes, Marvin, a little bit higher than I think maybe prior guidance implies is my read on that. And just to that point, there's such a strong gross margin expansion in the first quarter. It seems like you could have no gross margin expansion year over year for the rest of the year and be within that range. I mean, I guess help us understand, you know, you're still going to be benefiting from lower freight price, you know, freight costs. Is it just a matter of you're lowering prices that much that you wouldn't see a gross margin improvement year over year for the rest of the year?
spk02: We do see gross margin improvement. But our goal is, as we mentioned in the earnings announcement, that in the third and fourth quarter, we want to go out aggressively. So we will be able to balance out with the higher margin and lower margin chain account that we can be able to increase the volume and the revenues with some of the chain accounts that are looking for a much lower pricing. We're able to do so. We weren't able to do so because we didn't have warehouse space initially. But now that we're able to set up new additional warehouse space and making space in the existing warehouse, what we're doing right now is we're racking up all the existing warehouses or moving it to a larger warehouse and at the same time adding additional spaces. And with that, when it's done, basically we can go out. First of all, we can increase our inventory levels so we can increase the fill rate. At the same time, we can go out and go after the new accounts with a lower margin. We're just being somewhat conservative stating 32-33 at this point.
spk10: Got it. Got it. And maybe just a little more detail on the drivers to the back half of the year. Guidance obviously includes a very strong growth in the back half of the year, but Maybe if you can describe how spill rates have improved, maybe quantify maybe where some of that new business, how confident are you that that new business is coming online? Just give us some comfort that you're going to be able to kind of hockey stick the growth trajectory here, even as pricing remains aggressive, as you mentioned.
spk02: Well, one thing is our online business is definitely doing well. and we've realized that more and more people are looking for eco-friendly product online. We're looking to add additional 200 to 300 SKU on the fine line, more of an elegant, expensive line of bagasse and eco-friendly paper product coming in in third quarter. At the same time, we're focusing more on the high margin items such as custom printing product. It's not just the custom printing cup anymore. It's the takeout box, containers, and even paperlets, and also the custom bagasse plate and custom bagasse hinge containers, as well as we're looking to bring in pizza boxes, corrugated donut boxes. There are so many items that we're focusing just on the eco-friendly side because we've seen recently, especially the past 30, 45 days, more companies are coming to us they're saying that they're being forced to, by the cities, to move faster in terms of moving to eco-friendly products. So when we set our, right now, our annual goal to be 35% of our revenue coming from the eco-friendly product, I would think that would be a conservative number with the amount of additional product we're going to bring in at a higher margin versus the traditional product that we sell, the portion cup, the plastic cup. All the plastic items are they're basically saturated, the market, and the margin is limited because there's a lot more importer bringing the product cheap versus the eco-friendly items that we're not competing. There's really not much competition out there.
spk10: Okay, and then, sorry, last question is on the... Hey, Jake, can I maybe just to chime in real quick?
spk20: I think you were wondering how confident we feel about the sales trend pick up right in the second half of this year. And I would say I think Alan provided a lot of great color already. Maybe just to summarize, I think our level of confidence is pretty high and that comes from primarily a couple of things. One, we already signed some new warehouses. We are getting ready to move in towards around some of the warehouses in the second quarter or towards the end of the second quarter. So we know that's coming along and we're also adding to Alan's point, wrecking spaces in some of the existing warehouses. So that infrastructure is going to be ready pretty soon here. And then just one other thing I will point out, I think we touched on this in some of the earlier discussions as well, is a lot of, a big chunk of our business, we do have great visibility into what our volume is going to be from our pipeline, right? So some of the new contracts that we have previously signed that was sitting in our pipeline, we know we're going to start shipping towards the end of around the end of the second quarter starting also in the beginning of the third quarter. So we do have some great visibility into what that volume is. And that gives a lot of comfort, a lot of confidence right in our overall sales guidance.
spk10: And lastly, you know, can pulling out of the bagasse joint, the JB in Taiwan, or selling it. Does that I mean, how much does that that hurt your ability to, you know, go in eco friendly, I think that you had some excitement around that. Doesn't that? I mean, isn't that a headwind for those those plans? How do you kind of think about the exit of that of that? Jason?
spk02: Yes. We went into the joint venture last year when we people can travel, I couldn't travel overseas. And This year, I was able to go abroad, overseas. And also, of course, with the joint venture, we were able to get some market intel that domestic manufacturer, who has already started manufacturing Bagasse product in the US, are looking to shut down their production plant and going to source in OOC, because they came to our factory to source. And during the time that we started the Bagasse factory joint venture, I was not aware of so many bogus plants that are out there in Asia and also that are coming around in Asia with more product, better product, and better pricing and newer equipment. And when I was able to do so and find out that originally when we wanted to join the venture with overseas partners is that we didn't know that there was an abundance of these supplies out there in the market. Second, we didn't know We know that this bogus products will be a highly demanded product in the U.S., and we know that we want to also be one of the manufacturers to start production in the U.S., but we didn't know how challenging it was to start a manufacturing bogus plant in the U.S., which most of these larger manufacturers, our competitors, are looking to shut down this year. And one thing I heard that is the reason for them to shut down is they're supporting millions of dollars, and they've lost money And it's hard to maintain these equipment, finding the people domestically to produce these products with a higher quality. So now that, of course, because we signed a contract agreement that we can back out, of course, there was regulatory issues that the factory couldn't get permit. And that's one thing that made us decide not only to back out, at the same time we're scaling back manufacturing in California because the cost of manufacturing in California has risen. year over year comparably. And we heard that it's going to go even higher with the electricity cost going up, the labor cost going up, with more regulation toward manufacturing in California. It is actually going to be beneficial for us to reduce our manufacturing and just use the space, warehouse space, which their space has become more expensive. So now, with that said, without being committed to the factory in Taiwan, the joint venture, we're able to find even lower cost, higher premium product from different vendors. And that's why I mentioned in our earlier release that we're able to find additional sources in Asia, throughout Asia, because even India, they're starting to produce bagasse and use bagasse domestically. That's how widespread the Asian countries are going after in terms of eco-friendly product reducing plastic versus U.S.,
spk10: Great. Thank you so much. I appreciate it.
spk02: Thank you, Jake.
spk14: The next question comes from Ryan Myers with Lake Street Capital Markets. Please proceed.
spk11: Hey, guys. Thanks for taking my questions. First one for me, as you've taken price down pretty aggressively, do you feel like you've been able to gain market share versus some of your competitors?
spk21: Yes.
spk11: Got it. That's straightforward and that's easy enough. As we think about the sales team and the ramp here in the second half, how long typically does it take a new sales rep to get up to speed, add new customers, or how should we think about the investments you guys are making in sales right now and kind of your level of confidence, how new sales people online can help accelerate growth in the second half?
spk02: Well, right now we're looking for an experienced sales staff with our competitors looking to scale back in terms of operations with the demand scaling back in certain area, territory. So basically, we're able to pick up new sales reps. People are looking for new jobs. And we're actually picking up people in the similar industry. And also one thing is that the key difference between us and our competitors is that we have everything. We have different ways of selling products. And most of these new sales rep that we're interviewing are stating that basically they couldn't compete with us because they're limited. They're restricted to sell a certain price and they're only limited to a certain product. And the product might be store and manufacturing different facility they can consolidate versus the flexibility that we offer in our company that enables the sales rep to sell quickly, faster. Most of these companies, they have their structure in terms of regional. a city, a small territory. But for us, basically, our sales can go anywhere. They're very flexible. We're giving a lot of authority to our sales rep to go out and flexibility in terms of selling the product, the customers, and also pricing. So with that said, we see that it only takes about a couple months for the sales start to bring revenue in, new sales rep.
spk11: Okay, that's helpful. And then obviously we added the warehouse in Chicago, warehouse in Houston. Do you feel like that will be it for FY23 and then you'll look to evaluate more warehouse space in 24? How should we think about that for the rest of the year?
spk02: Our lease is up in Seattle end of August. We've already negotiating with the different facility to double our space in Seattle Northwest area. We're also looking to at different territorial throughout the U.S. because our goal is to increase our online visibility to service different type of customers. And also we're looking to go into the B2C commerce, party supplies. That basically we're able to sell to consumers directly. Lately we all heard that Party City went bankrupt and there is a high demand of birthday plates, cups, and napkins, and different type of anniversary type of consumer goods. That's something we're looking to get into as we grow our online team, and which just in the first quarter of this year, the past three months, we actually enlarged our online team members more than double. And we're looking to double in terms of adding additional staff to help us grow that business segment.
spk11: Got it. Thank you. Thanks for taking my questions. Thank you, Jake. All right.
spk14: Our next question comes from Ryan Hoffman with Spiegel. Please proceed.
spk09: I'm not sure who Ryan Hoffman is, but this is Michael. It's Michael. How are you? Hey, Michael. Don't even have a Ryan in the family, so whatever. I hope you have a good day. Can we get into a little bit about cadence? Jen, Ocean Freight was 14.4 a year ago, 5.9 this year. How do I think about that trend 2, 3, and 4Q? What am I comparing against?
spk20: Yeah. Hi, Ryan. Thank you for the question.
spk09: Brian, it's Michael.
spk05: It's Michael.
spk18: Sorry, I don't know why now I have Ryan stuck in my head. Sorry.
spk05: It's Michael Hoffman. Don't call me late for dinner.
spk20: Sorry, yeah. So you're absolutely right. So for the rest of the year, we actually think ocean freight as a percentage of sales is actually going to be pretty stable. It might come down even a little bit from first quarter we were at 5.9. So I think it's probably going to be in the 4% to 6% range for the rest of the year.
spk09: Okay, and I'm comparing 2Q through 4Q. It was averaging what?
spk20: I would say averaging maybe roughly 5%, give or take.
spk09: From last year. So this is against last year, I meant. You were 14-4 last year in the 1Q. What's the twin? I wasn't saying that very clearly. It's the Ryan thing got me all confused. Okay.
spk20: So it's going to come down when you're doing the year-over-year comparison, you'll see a significant drop. Last Q2, Q2 2022, we were at 18% of sales. And then that came down to about 15% in Q3 and almost 10% in Q4. What I'm saying is for the rest of the year, Q2, Q3, Q4, we think that this percentage is going to be pretty stable. It's probably going to be very close to the 5%, 4% to 6% in that range for the rest of the year.
spk09: Okay. So that leads you then to an interesting – I get being conservative, but it seems like it's really conservative if you stay with 32 to 33. So how do I think about what's creating – margin i mean effectively sequential margin compression to stay inside 32 to 33 because at 39.8 i take the midpoint at 32 and a half and you know and then do an average of what the remainder of the year would look like that's like 30 and yet it's a really steep savings and freight which helped drive the 39.8 so help me get comfortable how much cushion have we built in here
spk02: We're trying to build cushion, yes. I mean, me and Jen, we're trying to. We don't know how the market condition is because we've seen the market in the overall market general. It's with the increase in interest rate and restaurants shutting down and more import product coming through the U.S. And I don't know how competitive down the road it's going to be. So we just want to build some cushions, maybe a lot of cushions. So... So that we're competitive in the market in the third and fourth quarter, that's all.
spk20: And then, Michael, also just I do echo everything that Alan mentioned. Just a couple of additional items I wanted to mention. I think Alan touched on some of this already. So in the second quarter, we were also talking about we were expecting currently some write-off of inventory related to our scaling back of the production in California, right? So that's part of the overall picture when we think about the second quarter margin. And then we also previously discussed starting primarily from the third quarter going into the fourth quarter as we have the infrastructure in phase, the warehouse, you know, sales team, new sales members coming on board, and we start to really focus on pushing the volume we do expect to see the margin to come down as we might take additional price reductions to gain additional market share. So all of those are being considered in providing the four-year guidance of 32% to 33%.
spk02: And I want to ask something, Michael. Just FYI, for starting April, actually May 1st, we've reduced our highest moving item, portion cut, plastic cut, by 10%. And we just announced that we're looking to do another announcement in different categories on June 1st, also high moving volume categories. So we are looking to, we know that, we understand that our customers are looking for savings, and they see that price should be coming down, and we are actually, we have been doing so ever since last September, but not like, you know, one time a decrease where we've been doing it every monthly. So we have done at least four price reduction already since last September.
spk09: Okay. So just to understand how the market environment may play out, if you have this current business climate that you lived in in one queue, By all what I'm hearing is by all logic, you're going to end up at better than 32 to 33% margin. If the business climate deteriorates, which is what you've built in as the super conservatism and the numbers, you can stay in the 32 to 33 range, gain share, grow the business 5% to 8%, gain share. stay at 32 to 33, but if I have stable business environment, I'm probably going to be better. Is that a reasonable conclusion? I'm not trying to push your numbers out. I just want to understand if the business environment is like it is right now, I'll probably have upside to the margin.
spk02: Actually, I feel the business environment for our company is great. We're going out there. We're winning every bid that we go after. And NRA is actually this month, and we're expecting to increase additional 100 new chain account business coming aboard We've been waiting to go out. We've asked ourselves to hold back, not to go out and go quote because we have limited space. And now we're asking ourselves that we're ready to go. So we do see overall market environments are not good, but for our company, it's good.
spk19: And, Michael, I would say your statement is fair.
spk09: Okay. All right. So I get we're being conservative, but if – We could – there's more room for upside than there is downside.
spk02: There is a lot of room, I can say. There's a lot of room, yes, a lot.
spk09: Back in – I think – I can't remember if it was the third quarter or the fourth quarter, but we reintroduced the idea of maybe starting to do some M&A again. And you thought about that as something that might trickle into the second half. Where's your head around M&A versus organic and adding – like you're adding – warehouse through the organic method instead of buying things? Where are you on that?
spk02: Right now, at this point, after visiting the oversea manufacturing plant, comparing to domestic manufacturing, I do not think it is worth it to buy, to merge with a company that has old equipment domestically. A lot of these manufacturers domestically, I've seen that they will have a challenging year in terms of competing oversee vendors as manufacturer also at the same time that the most challenging will be hiring the technician to maintain the equipment and also maintaining these older equipments. We will see opportunity. So far we've been approached by different companies, capital investment group looking to represent certain company that they're looking to sell the company. Maybe two years ago they weren't looking to sell but now they're looking to sell manufacturers are some competitors, and even some distributors that they were looking to sell last year, but this year they're open-minded now. But we believe that right now it's not the time yet. Of course, as I mentioned, one of the key drivers that will enable us to look into a certain company is, will that give us strategic access to a particular location and clientele? That is something we're looking at. And of course, Given all of our PE ratio EBITDA multiples are low, we don't see companies out there looking to sell at the current rate of low EBITDA margin. They're still looking at 10 times multiple, which is not realistic.
spk08: Okay, that's fair enough. Thank you very much for taking the questions. Thank you, Michael.
spk14: The next question comes from Ryan Merkel with William Blair. Please proceed.
spk16: Hey, everyone. I haven't heard my name used that many times in a conference call in quite a while, but I like it. My first question is on second quarter revenue guidance coming in a little bit below the street. Are you saying that the reason that it's coming in a little bit light is because you're having to cut price more? or is there also maybe some underlying demand weakness from your customers? Just want to be clear on that.
spk02: There is no underlying demand, lower demand from our customers. We're seeing that because we lowered our prices by 10% to 20%, and we're seeing that possibly that the volume will go up very likely, but the revenue might come down. But, of course, at the same time, as I mentioned, that we do want to be a little bit conservative in terms of revenue guidance and profit margin guidance nowadays. We do feel that there is a lot of room to grow, both in revenue and gross margin, but we just want to be a little bit comfortable in terms of conservative.
spk16: Understood. Makes sense. Okay. And then I wanted to follow up on gross margin. Alan, I think you said you want to be aggressive with the national accounts because you have inventory now. Are you saying that you're going to cut prices below market to take market share, or is it more of a mixed impact that impacts the gross margins in the second half?
spk02: No, I wouldn't say that we're going to cut prices. We just want to be fair in prices because everyone knows that the raw material has come down. And it's not fair for the customers to not receive any benefit at all. That's something we believe that at least they should be receiving the market pricing information, market intel on that part. And also at the same time, we're offering a different type of product. A lot of the customers that we're approaching are people that are stretching it from styrofoam into paper or plastic, as well as stretching from paper or plastic into compostable product. And that's something that we're able to go after, these customers. Creating new ideas, brainstorming with them, new packaging. One of the things that our competitor has been doing, selling more, is Styrofoam. And that is, they're hitting a, basically, they're hitting a wall on that part. There is really no room to grow in the Styrofoam business. And with that, all of a sudden we see a demand driven toward the eco-friendly side of the business. And traditionally, most of the company out there are buying, just bringing in the traditional product. But there are a lot of new, smaller chains, they're looking for a higher-end compostable product. That's something we're looking to go into more. Even though we're going to continue to bring in the traditional product, we're also looking to bring the higher-end, different, unique type of compostable product, such as Out in the market, I don't believe there is a paper lid in the market for your soda cup or a paper lid for your food containers. That's something we just started to bring in, and it will display to that NRA show. A 100% compostable paper lid, not a plastic, not a bagasse, but a paper product.
spk04: Got it. Thanks for the caller.
spk03: Thank you, Ryan.
spk14: At this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Alan Yu for any closing remarks.
spk02: Thank you, everyone, for joining me in the earnings call and tweeting session, and I look forward to all of you on the next earnings call.
spk03: Thank you very much, and have a wonderful day. Bye-bye.
spk14: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect. Thank you.
spk01: Thank you. you music Bye.
spk00: Thank you. Thank you. Amen.
spk14: Good day, and welcome to the Carrot Packaging, Inc. first quarter 2023 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, you may press star, then one on your telephone keypad. If you would like to withdraw your question, please press star, then two. Please note that today's event is being recorded. I would now like to turn the conference over to Roger Pondell, Investor Relations. Please go ahead, sir.
spk06: Thank you, Operator, and good afternoon, everyone. Welcome to Cared Packaging's 2023 First Quarter Earnings Call. I'm Roger Pondell with Pondell Wilkinson, Carrot Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and its Chief Financial Officer, Jan Guo. Before I turn the call over to Alan, I want to remind all 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 most recently formed 10-K, as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov. along with other company filings made with the 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, we will be discussing adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most directly comparable GAAP measures 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 Yu. Alan?
spk02: Thank you, Roger. Good afternoon, everyone. Our first quarter performance reflected strong execution of our 2023 business strategy. We were able to achieve a record gross margin of 39.8% and record adjusted EBITDA results since the company's IPO in 2021. Despite the industry-wide deflationary environment and multiple price reduction that we implemented, Moving ahead with our growth strategy on improving inventory management and fill rate, we recently signed a lease for an 83,000 square feet distribution center in Houston, following the addition of a Chicago warehouse earlier this year. Our plans for geographic expansion on the East Coast and the Midwest region are progressing well. With the recent expansion of the sales team and additional marketing activity, together With the new contracts that were signed during the fourth quarter last year, we are expecting revenues to pick up again during the second half of this year. As a reminder, revenue for the first half of 2023 is expected to be lower than the same period last year when pricing for inventory sold was at the peak level. In addition, order volumes during that time period last year were unusually high due to supply shortages. We continue to execute our asset-light business plan and are now scaling back manufacturing production in California. While increasing import items, focusing on higher margin product, during the past few months, we have significantly enlarged our sourcing network in Asia, giving us greater flexibility without additional overhead. To meet our growing demand for eco-friendly and compostable products, This category grew 17% in the first quarter over the prior year quarter. And demand remains strong. Our 2023 growth goals for the eco-friendly product category is to be around 35% of total sales. Due to multiple construction and regulatory approval delays in Taiwan and our recent strategy to shift toward imports and diversifying eco-friendly product sourcing, we decided to sell a portion of the joint venture Bagasse Factory to Cary Global Group. We are expecting the transaction to close within a three-month period or soon thereafter. With the selling price equal to our initial investment of about $6 million plus 5% interest. Lastly, we made a significant upgrade to our e-commerce platform and expanded our online support team. Sales to Canada and Hawaii are underway and proceeding well. We are now seeing some of the benefits of our online efforts with the business going in a positive direction. We again generated strong operating cash flows during the first quarter and continue to project positive cash flow throughout 2023, which is allowing Cary to generate excess capital and seek new opportunity. Accordingly, as announced on Tuesday, Our Board of Directors declare another special dividend of $0.35 per common share. I will now turn the call over to Jan Gao, our Chief Financial Officer, to discuss the company's financial results in greater detail. Jan?
spk20: Thank you, Alan. Despite a challenging year-over-year comparison, first quarter 2023 results demonstrated our ability to adapt to the external business environment. as we were able to significantly enhance margins and strengthen the company's liquidity position. Net sales for the 2023 first quarter, as anticipated, decreased 9.1% to $95.8 million from $105.4 million a year ago. This was slightly better than our original expectation. Last year's first quarter, was a particularly strong revenue quarter with inventory price increases at the peak due to extraordinarily higher ocean freight and other costs and strong volume resulting from overall supply shortage in the industry. By channel, sales to distributors, our largest channel, was lower by 7.6% for the 2023 first quarter. Sales to national and regional chains decreased 14.2%. Sales to retail channel decreased 21.7%. And sales from the online channel increased almost 1%. As Alan mentioned earlier, our investment and marketing efforts to support our e-commerce platform have begun to bear fruit. Sales of our eco-friendly products increased 16.8%. for the first quarter. We continue to further strengthen our leadership position as carried experiencing strong growth from these products based in part on our enlarged sourcing network and expansion of our product offering as well as the evolving regulatory landscape. Eco-friendly products represented 33% of total sales in the 2023 first quarter compared with 25% a year ago. Growth profit increased 11.2% to $38.1 million for the 2023 first quarter from $34.3 million last year. We achieved record growth margin of 39.8% in the first quarter, an improvement of 730 basis points over the prior year quarter. Growth margin expansion benefited by a significant decrease in ocean freight costs, which amounted to 5.9% of net sales in the 2023 first quarter, compared with 14.4% of net sales last year. Also, costs for certain raw materials were lower, and operating efficiencies and productivity are continuing to improve. operating expenses in the 2023 first quarter were $25.4 million, or 26.5% of net sales, compared with $24.8 million, or 23.5% of net sales in the prior year quarter. The increase was primarily due to workforce expansion, an increase in rental expense from the two additional warehouses added in May 2022, and higher marketing expense to support online sales growth. The increase in operating expenses was partially offset by decreases in shipping and transportation costs and bad debt expenses. Net income for the 2023 first quarter increased 15.6% to $9.2 million from $7.9 million for the same quarter last year. Net income margin was 9.6% in the 2023 first quarter, compared with 7.5% a year ago. Net income attributable to carrot for the 2023 first quarter was $9.0 million, or 45 cents per diluted share, compared with $6.7 million, or 34 cents per diluted share, in the prior year quarter. Adjusted EBITDA, a non-GAAP measure, was $15.3 million for the 2023 first quarter compared with $13.0 million in the prior year quarter. Consolidated adjusted EBITDA margin expanded to 15.9% of net sales compared with 12.3% for the 2022 first quarter. Adjusted diluted earnings per common share rose to 46 cents per share from 36 cents per share a year ago. Carrot's consistent solid growth has built a strong financial and liquidity position for the company. The company is well positioned to execute on its future growth strategies. We finished the quarter with $97.4 million in working capital compared with $84.5 million at the end of 2022 and have financial liquidity of $62.1 million with another $10 million in short-term investment. Moving further into 2023, we are forecasting revenue for the second quarter to be down about 5% year over year. Moreover, we are reiterating net sales for the full year expected to increase by high single digits from new contracts, increased inventory fill rate with additional warehouse space, benefits from additional marketing efforts, and better pricing comparisons. As Alan mentioned, we are now scaling back manufacturing production in California, selling and disposing of equipment and raw materials that no longer will be needed to create more warehouse space for import products and to further improve inventory management and efficiency. Accordingly, we're currently expecting to record an impairment charge in the range of $2.7 million to $3.5 million in the second quarter of 2023, including approximately $1.5 million to $2 million write-off of inventory with the remaining write-off in operating expenses. We expect to benefit from this shift of strategy to more than offset the impairment charge. At the growth margin level, we believe the growth margin for the first quarter was exceptionally high and is not indicative of future quarters. We are reaffirming our 2023 four-year margin goal to be in the range of 32% to 33% even with the expected impairment charge in the second quarter as we expect to continue to benefit from the stabilized ocean freight and our efforts to increase import, shift towards high margin items and improve operating efficiencies. Ellen and I will now be happy to answer your questions and I'll turn the call back to the operator.
spk14: We will now begin the question and answer session. As a reminder, 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. If you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jake Bartlett with Truist Securities.
spk13: Please proceed.
spk10: Great. Thank you so much for taking the question. My first was on gross margin in the gross margin guide. I want to make sure that... So I think from your last comment that the 32% to 33% reiteration of the gross margin, that includes roughly $2 million in... Will those expenses or will that regulatory write-off get backed out of adjusted EBITDA? I'm just trying to make sure what's going to be flowing through to your adjusted EBITDA.
spk02: That is also included. Okay. It has been included, yes.
spk10: Okay, but as you report your adjusted EBITDA, you won't back out those kind of impairments?
spk02: Jan, can you answer that question? Because I can answer the question that our gross margin, it's basically 32 to 33 or higher. It's included in the adjusted impairment. But the other question, I would think that Jan could be better at answering that question.
spk20: Yeah. Hi, Jake. This is Jan. Thank you for the question. Yes. So we obviously will be working with our auditors on the second quarter adjusted EBITDA presentation, but we are thinking This is a non-recurring charge related to the scaling back of our production in California. So we'll consider the add-back to adjusted EBITDA as well as adjusted EPS for the write-off in the second quarter.
spk10: Okay. Okay. So adjusted goes, Marvin, a little bit higher than I think maybe prior guidance implied is my read on that. And just to that point, there's such a strong gross margin expansion in the first quarter. It seems like you could have no gross margin expansion year over year for the rest of the year and be within that range. I mean, I guess help us understand, you know, you're still going to be benefiting from lower freight price, you know, freight costs. Is it just a matter of you're lowering prices that much that you wouldn't see a gross margin improvement year over year for the rest of the year?
spk02: We do see gross margin improvement. But our goal is, as we mentioned in the earnings announcement, that in the third and fourth quarter, we want to go out aggressively. So we will be able to balance out with the higher margin and lower margin chain account that we can be able to increase the volume and the revenues with some of the chain accounts that are looking for a much lower pricing. We're able to do so. We weren't able to do so because we didn't have warehouse space initially. But now that we're able to set up new additional warehouse space and making space in the existing warehouse, what we're doing right now is we're racking up all the existing warehouses or moving it to a larger warehouse and at the same time adding additional spaces. And with that, when it's done, basically we can go out. First of all, we can increase our inventory levels so we can increase the fill rate. At the same time, we can go out and go after the new accounts with a lower margin. We're just being somewhat conservative stating 32, 33 at this point.
spk10: Got it. Got it. And maybe just a little more detail on the drivers to the back half of the year. Guidance obviously includes a very strong growth in the back half of the year, but Maybe if you can describe how spill rates have improved, maybe quantify maybe where some of that new business, how confident are you that that new business is coming online? Just give us some comfort that you're going to be able to kind of hockey stick the growth trajectory here, even as pricing remains aggressive, as you mentioned.
spk02: Well, one thing is our online business is definitely doing well. and we've realized that more and more people are looking for eco-friendly product online. We're looking to add additional 200 to 300 SKU on the fine line, more of an elegant, expensive line of bagasse and eco-friendly paper product coming in in third quarter. At the same time, we're focusing more on the high margin items such as custom printing product. It's not just the custom printing cup anymore. It's the takeout box, containers, and even paperlets, and also a custom bagasse plate and custom bagasse hinge containers, as well as we're looking to bring in pizza boxes, corrugated donut boxes. There are so many items that we're focusing just on the eco-friendly side because we've seen recently, especially the past 30, 45 days, more companies are coming to us they're saying that they're being forced to, by the cities, to move faster in terms of moving to eco-friendly products. So when we set our, right now, our annual goal to be 35% of our revenue coming from the eco-friendly product, I would think that would be a conservative number with the amount of additional product we're going to bring in at a higher margin versus the traditional product that we sell, the portion cup, the plastic cup. All the plastic items are they're basically saturated, the market, and the margin is limited because there's a lot more importer bringing the product cheap versus the eco-friendly items that we're not competing. There's really not much competition out there.
spk10: Okay, and then, sorry, last question is on the... Hey, Jake, can I maybe just to chime in real quick?
spk20: I think you were wondering how confident we feel about the sales trend pick up in the second half of this year. And I would say I think Alan provided a lot of great color already. Maybe just to summarize, I think our level of confidence is pretty high and that comes from primarily a couple of things. One, we already signed some new warehouses. We are getting ready to move in towards some of the warehouses in the second quarter or towards the end of the second quarter. So we know that's coming along and we're also adding to Alan's point, wrecking spaces in some of the existing warehouses. So that infrastructure is going to be ready pretty soon here. And then just one other thing I will point out, I think we touched on this in some of the earlier discussions as well, is a lot of, a big chunk of our business, we do have great visibility into what our volume is going to be from our pipeline, right? So some of the new contracts that we have previously signed that was sitting in our pipeline, we know we're going to start shipping towards the end of around the end of the second quarter starting also in the beginning of the third quarter. So we do have some great visibility into what that volume is. And that gives a lot of comfort, a lot of confidence right in our overall sales guidance.
spk10: And lastly, you know, kind of pulling out of the bagasse joint, the JB in Taiwan, or selling it? Does that? I mean, how much does that that hurt your ability to, you know, go in eco friendly? I think that you had some excitement around that. Doesn't that? I mean, isn't that a headwind for those those plans? How do you kind of think about the exit of that of that? Jason?
spk02: Yes. We went into the joint venture last year when we people can travel, I couldn't travel overseas. And This year, I was able to go abroad, overseas. And also, of course, with the joint venture, we were able to get some market intel that domestic manufacturer, who has already started manufacturing Bagasse product in the U.S., are looking to shut down their production plant and going to source in OOC because they came to our factory to source. And during the time that we started the Bagasse factory joint venture, I was not aware of so many bagasse plants that are out there in Asia and also that are coming around in Asia with more product, better product, and better pricing and newer equipment. And when I was able to do so and find out that originally when we wanted to join the venture with overseas partners is that we didn't know that there was abundant of these supplies out there in the market. Second, we didn't know We know that this bogus products will be a highly demanded product in the U.S. and we know that we want to also be one of the manufacturers to start production in the U.S., but we didn't know how challenging it was to start manufacturing bogus plants in the U.S., which most of these larger manufacturers, our competitors, are looking to shut down this year. And one thing I heard that is the reason for them to shut down is they're supporting millions of dollars and they've lost money And it's hard to maintain these equipment, finding the people domestically to produce these products with a higher quality. So now that, of course, because we signed a contract agreement that we can back out, of course, there was regulatory issues that the factory couldn't get permit. And that's one thing that made us decide to not only to back out, at the same time we're scaling back manufacturing in California because the cost of manufacturing in California has risen. year over year comparably. And we heard that it's going to go even higher with the electricity cost going up, the labor cost going up, with more regulation toward manufacturing in California. It is actually going to be beneficial for us to reduce our manufacturing and just use the space, warehouse space, which their space has become more expensive. So now, with that said, without being committed to the factory in Taiwan, the joint venture, we're able to find even lower cost, higher premium product from different vendors. And that's why I mentioned in our earlier release that we're able to find additional sources in Asia, throughout Asia, because even India, they're starting to produce bagasse and use bagasse domestically. That's how widespread the Asian countries are going after in terms of eco-friendly product reducing plastic versus U.S.,
spk10: Great. Thank you so much. I appreciate it.
spk02: Thank you, Jake.
spk14: The next question comes from Ryan Myers with Lake Street Capital Markets. Please proceed.
spk11: Hey, guys. Thanks for taking my questions. First one for me, as you've taken price down pretty aggressively, do you feel like you've been able to gain market share versus some of your competitors?
spk21: Yes.
spk11: Got it. That's straightforward and that's easy enough. As we think about the sales team and the ramp here in the second half, how long typically does it take a new sales rep to get up to speed, add new customers, or how should we think about the investments you guys are making in sales right now and kind of your level of confidence, how new sales people online can help accelerate growth in the second half?
spk02: Well, right now we're looking for the experienced sales staff with our competitors looking to scale back in terms of operations with the demand scaling back in certain area territory. So basically, we're able to pick up new sales reps. People are looking for new jobs. And we're actually picking up people in the similar industry. And also, one thing is that the key difference between us and our competitor is that we have everything. We have different ways of selling product. And most of these new sales reps that we're interviewing are stating that basically they couldn't compete with us because they're limited. They're restricted to sell a certain price, and they're only limited to a certain product. And the product might be store and manufactured in different facilities they can consolidate versus the flexibility that we offer in our company that enables the sales rep to sell quickly, faster. Most of these companies, they have their structure in terms of regionals. a city, a small territory. But for us, basically, our sales can go anywhere. They're very flexible. We're giving a lot of authority to our sales rep to go out and flexibility in terms of selling the product, the customers, and also pricing. So with that said, we see that it only takes about a couple months for the sales start to bring revenue in, new sales rep.
spk11: Okay, that's helpful. And then obviously we added the warehouse in Chicago, warehouse in Houston. Do you feel like that will be it for FY23 and then you'll look to evaluate more warehouse space in 24? How should we think about that for the rest of the year?
spk02: Our lease is up in Seattle end of August. We've already negotiating with the different facility to double our space in Seattle Northwest area. We're also looking to and different territorial throughout the U.S. because our goal is to increase our online visibilities to service different type of customers. And also we're looking to go into the B2C commerce, party supplies. Now that basically we're able to sell to consumers directly. Lately we all heard that Party City went bankrupt and there is a high demand of birthday gifts plates, cups, and napkins, and different type of anniversary type of consumer goods. That's something we're looking to get into as we grow our online team, and which just in the first quarter of this year, the past three months, we actually enlarged our online team members more than double. And we're looking to double in terms of having additional staff to help us grow that business segment.
spk11: Got it. Thank you. Thanks for taking my questions. Thank you, Jake.
spk14: Our next question comes from Ryan Hoffman with Spiegel. Please proceed.
spk09: I'm not sure who Ryan Hoffman is, but this is Michael. Hey, Michael. Don't even have a Ryan in the family, so whatever. I hope you have a good day. Can we get into a little bit about cadence? Jen, Ocean Freight was 14.4 a year ago, 5.9 this year. How do I think about that trend 2, 3, and 4Q? What am I comparing against?
spk20: Yeah. Hi, Ryan. Thank you for the question.
spk05: Brian, it's Michael. It's Michael.
spk18: Sorry, I don't know why now I have Ryan stuck in my head. Sorry.
spk05: It's Michael Hoffman. Don't call me late for dinner.
spk20: Sorry, yeah. So you're absolutely right. So for the rest of the year, we actually think ocean freight as a percentage of sales is actually going to be pretty stable. It might come down even a little bit from first quarter we were at 5.9. So I think it's probably going to be in the 4% to 6% range for the rest of the year.
spk09: okay and I'm comparing 2Q through 4Q it was averaging what I would say averaging maybe roughly five percent give or take from last year so this is against last year I meant you were 14.4 last year in the 1Q what's the twin I wasn't saying that very clearly it's the Ryan thing got me all confused
spk20: So it's going to come down when you're doing the year-over-year comparison, you'll see a significant drop. Last Q2, Q2 2022, we were at 18% of sales. And then that came down to about 15% in Q3 and almost 10% in Q4. What I'm saying is for the rest of the year, Q2, Q3, Q4, we think that this percentage is going to be pretty stable. It's probably going to be very close to the 5%, 4% to 6% in that range for the rest of the year.
spk09: Okay. So that leads you then to an interesting – I get being conservative, but it seems like it's really conservative if you stay with 32 to 33. So how do I think about what's creating – margin i mean effectively sequential margin compression to stay inside 32 to 33 because at 39.8 i take the midpoint at 32 and a half and you know and then do an average of what the remainder of the year would look like that's like 30 and yet it's a really steep savings and freight which helped drive the 39.8 so help me get comfortable how much cushion have we built in here
spk02: We're trying to build cushion, yes. I mean, me and Jen, we're trying to. We don't know how the market condition is because we've seen the market, overall market general, it's with the increase in interest rate and restaurants shutting down and more import product coming through the U.S. And I don't know how competitive down the road it's going to be. So we just want to build some cushions, maybe a lot of cushions. So... So that we're competitive in the market in the third and fourth quarter, that's all.
spk20: And then, Michael, also just I do echo everything that Alan mentioned. Just a couple of additional items I wanted to mention. I think Alan touched on some of this already. So in the second quarter, we were also talking about we were expecting currently some write-off of inventory related to our scaling back of the production in California. So that's part of the overall picture when we think about the second quarter margin. And then we also previously discussed starting primarily from the third quarter going into the fourth quarter as we have the infrastructure in place, the warehouse, sales team, new sales members coming on board, and we start to really focus on pushing the volume we do expect to see the margin to come down as we might take additional price reductions to gain additional market share. So all of those are being considered in providing the four-year guidance of 32% to 33%.
spk02: And I want to ask something, Michael. Just FYI, for starting April, actually May 1st, we've reduced our highest moving item, portion cut, plastic cut, by 10%. And we just announced that we're looking to do another announcement in different categories on June 1st, also high moving volume categories. So we are looking to, we know that, we understand that our customers are looking for savings, and they see that price should be coming down, and we are actually, we have been doing so ever since last September, but not like, you know,
spk09: one time a decrease where we've been doing it every monthly so we have done at least four price reduction already since last September okay so just to understand how the the market environment may play out if you have this current business climate that you lived in in one queue What I'm hearing is by all logic, you're going to end up at better than 32% to 33% margin. If the business climate deteriorates, which is what you've built in as the super conservatism and the numbers, you can stay in the 32% to 33% range, gain share, grow the business 5% to 8%, gain share, stay at 32% to 33%. But if I have stable business environment, I'm probably going to be better. Is that a reasonable conclusion? I'm not trying to push your numbers out. I just want to understand if the business environment is like it is right now, I'll probably have upside to the margin.
spk02: Actually, I feel the business environment for our company is great. We're going out there. We're winning every bid that we go after. And NRA is actually this month, and we're expecting to increase additional 100 new chain account business coming aboard. We've been waiting to go out. We've asked ourselves to hold back, not to go out, and go, quote, because we have limited space. And now we're asking ourselves that we're ready to go. So we do see overall market environments are not good, but for our company, it's good.
spk19: And, Michael, I would say your statement is fair.
spk09: Okay. All right. So I get we're being conservative, but there's more room for upside than there is downside.
spk02: There is a lot of room, I can say. There's a lot of room, yes, a lot.
spk09: Back in, I think, I can't remember if it was the third quarter or the fourth quarter, but we reintroduced the idea of maybe starting to do some M&A again, and you thought about that as something that might trickle into the second half. Where's your head around M&A versus organic, like you're adding warehouse through the organic method instead of buying things? Where are you on that?
spk02: Right now, at this point, after visiting the overseas manufacturing plant, comparing to domestic manufacturing, I do not think it is worth it to buy, to merge with a company that has old equipment domestically. A lot of these manufacturers domestically, I've seen that they will have a challenging year in terms of competing overseas vendors as manufacturers also at the same time The most challenging will be hiring the technician to maintain the equipment and also maintaining these older equipments. We will see opportunity. So far, we've been approached by different companies, capital investment groups, looking to represent certain companies that they're looking to sell the company. Maybe two years ago, they weren't looking to sell, but now they're looking to sell. Manufacturers, some competitors, and even some distributors that they weren't looking to sell last year, but this year they're open-minded now. But we believe that right now it's not the time yet. Of course, as I mentioned, one of the key drivers that will enable us to look into a certain company is, will that give us strategic access to a particular location and clientele? That is something we're looking at. And of course, given all of our P-E ratio, EBITDA multiples, are low, we don't see companies out there looking to sell at the current rate of low EBITDA margin. They're still looking at 10 times multiple, which is not realistic.
spk08: Okay, that's fair enough. Thank you very much for taking the questions. Thank you, Michael.
spk14: The next question comes from Ryan Merkel with William Blair. Please proceed.
spk16: Hey, everyone. I haven't heard my name used that many times in a conference call in quite a while, but I like it. My first question is on second quarter revenue guidance coming in a little bit below the street. Are you saying that the reason that it's coming in a little bit light is because you're having to cut price more? or is there also maybe some underlying demand weakness from your customers? Just want to be clear on that.
spk02: There is no underlying demand, lower demand from our customers. We're seeing that because we lowered our prices by 10% to 20%, and we're seeing that possibly that the volume will go up very likely, but the revenue might come down. But, of course, at the same time, as I mentioned, that we do want to be a little bit conservative in terms of revenue guidance and profit margin guidance nowadays. We do feel that there is a lot of room to grow, both in revenue and gross margin, but we just want to be a little bit comfortable in terms of conservative.
spk16: Understood. Makes sense. Okay. And then I wanted to follow up on gross margin. Alan, I think you said you want to be aggressive with the national accounts because you have inventory now. Are you saying that you're going to cut prices below market to take market share, or is it more of a mixed impact that impacts the gross margins in the second half?
spk02: No, I wouldn't say that we're going to cut prices. We just want to be fair in prices because everyone knows that the raw material has come down. And it's not fair for the customers to not receive any benefit at all. That's something we believe that at least they should be receiving the market pricing information, market intel on that part. And also at the same time, we're offering a different type of product. A lot of the customers that we're approaching are people that are switching from styrofoam into paper or plastic, as well as switching from paper or plastic into compostable product. And that's something that we're able to go after these customers, creating new ideas, brainstorming with them, new packaging. One of the things that our competitor has been doing, selling more, is Styrofoam. And that is, they're hitting a, basically, they're hitting a wall on that part. There is really no room to grow in the Styrofoam business. And with that, all of a sudden we see a demand driven toward the eco-friendly side of the business. And traditionally, most of the company out there are buying, just bringing in the traditional product. But there are a lot of new, smaller chains, mid-size chains, they're looking for a higher-end composable product. That's something we're looking to go into more. Even though we're going to continue to bring in the traditional product, we're also looking to bring the higher-end, different, unique type of composable product, such as Out in the market, I don't believe there is a paper lid in the market for your soda cup or a paper lid for your food containers. That's something we just started to bring in, and it will display to that NRA show. A 100% compostable paper lid, not a plastic, not a bagasse, but a paper product.
spk04: Got it. Thanks for the caller.
spk03: Thank you, Ryan.
spk14: At this time, we are showing no further questioners in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Alan Yu for any closing remarks.
spk02: Thank you, everyone, for joining me in the earnings call and tweeting session, and I look forward to all of you on the next earnings call.
spk03: Thank you very much, and have a wonderful day. Bye-bye.
spk14: The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.
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