Karat Packaging Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Karat Packaging, Inc. 1st Quarter 2023 Earnings Conference Call. Today, all participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded.

Operator

I would now like to turn the conference over to Roger Pondell, Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome Karat Packaging's 2023 First Quarter Earnings Call. I'm Roger Pondell with Pondell Wilkinson, Karat Packaging's Investor It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Allen Yu And as Chief Financial Officer, Jan Guo. Before I turn the call over to Alan, I want to remind all listeners Today's call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recently Form 10 ks 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.

Speaker 1

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, Allen Yu.

Speaker 1

Allen?

Speaker 2

Thank you, Roger. Good afternoon, everyone. Our first quarter performance reflect a strong 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.

Speaker 2

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 Q4 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 twenty twenty three 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 Due to supply shortages, we continue to execute our asset light business plan and are now scaling back manufacturing production in California.

Speaker 2

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 1st quarter over the prior year quarter. And demand remains strong. Our 2023 growth goals for the eco friendly product is to be around 35% of total sales. Due to the 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 proportion of the joint venture bagasse factory To Kure Global Group, we are expecting the transaction to close within 3 month period or soon thereafter.

Speaker 2

With the selling price equal to our initial investment of about $6,000,000 plus 5 percent 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 Q1 and continue to project positive cash flow throughout 2023, which is allowing Cary to generate excess capital and seek new opportunity.

Speaker 2

Accordingly, as announced on Tuesday, our Board of Directors 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?

Speaker 3

Thank you, Alan. Despite a challenging year over year comparison, Q1 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 Q1, as anticipated, decreased 9.1% to $95,800,000 from $105,400,000 a year ago. This was slightly better than our original expectation. Last year's Q1 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.

Speaker 3

By channel, sales to distributors, Our largest channel was lower by 7.6% for the 2023 Q1. 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 Q1. We continue to further strengthen our leadership position as Carrot is experiencing strong growth from these products based in part on our enlarged sourcing network an expansion of our product offering as well as the evolving regulatory landscape.

Speaker 3

Eco friendly products represented 33% of total in the 2023 Q1 compared with 25% a year ago. Gross profit increased 11.2 percent to $38,100,000 for the 2023 Q1 from $34,300,000 last year. We achieved record gross margin of 39.8% In the Q1, an improvement of 7.30 basis points over the prior year quarter. Gross margin expansion benefited by a significant decrease in ocean freight costs, which amounted to 5.9% of net sales in the 2023 Q1 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.

Speaker 3

Operating expenses in the 2023 Q1 were $25,400,000 or 26.5 percent of net sales compared with $24,800,000 or 23.5 percent of net sales in the prior year quarter. The increase was primarily due to workforce expansion and increase in rental expense from The 2 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 Q1 increased 15.6% to $9,200,000 from $7,900,000 for the same quarter last year. Net income margin was 9.6% in the 2023 Q1 compared with 7.5% a year ago.

Speaker 3

Net income attributable to carat for the 2023 Q1 was $9,000,000 or $0.45 per diluted share compared with $6,700,000 or $0.34 per diluted share in the prior year quarter. Adjusted EBITDA, a non GAAP measure, was $15,300,000 for the 20 20 3 Q1 compared with $13,000,000 in the prior year quarter. Consolidated adjusted EBITDA margin expanded to 15.9 percent of net sales compared with 12.3% for the 2022 Q1. Adjusted diluted earnings per common share rose to $0.46 per share from $0.36 per share a year ago. Carrot's consistent solid growth has built a strong financial and liquidity position for the company.

Speaker 3

The company is well positioned to execute on its future growth strategies. We finished the quarter with $97,400,000 in working capital compared with $84,500,000 at the end of 2022 and have financial liquidity of $62,100,000 with another $10,000,000 in short term investment. Moving further into 2023, we are forecasting revenue for the 2nd 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.

Speaker 3

Accordingly, we are currently expecting to record an impairment charge in the range of $2,700,000 to $3,500,000 in the Q2 of 2023, including approximately $1,500,000 to $2,000,000 write off of inventory with the remaining write off in operating expenses. We expect the benefit from this shift of strategy to more than offset to the impairment charge. At the gross margin level, we believe the gross margin for the Q1 It was exceptionally high and is not indicative of future quarters. We are reaffirming our 2023 Full year margin goal to be in the range of 32% to 33% even with the expected impairment charge in the 2nd 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. Alan and I We'll now be happy to answer your questions.

Speaker 3

And I'll turn the call back to the operator.

Operator

We will now begin the question and answer session. Today's first question comes from Jake Bartlett with Truist Securities. Please proceed. Great.

Speaker 4

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 what Roughly $2,000,000 in expenses and will those expenses or will that write off inventory write off Get backed out of adjusted EBITDA. I'm just trying to make sure what's going to be kind of flowing through to your adjusted EBITDA?

Speaker 2

That is also included.

Speaker 4

Okay.

Speaker 2

Chase? Yes. Yes. It has been included. Yes.

Speaker 4

Okay. So but as you report your adjusted EBITDA, will you you won't back out those kind of impairments?

Speaker 2

Jan, can you answer that question? Yes. I can answer the question that our gross margin, it's basically 32% to 33 Well, higher, it's included in the adjusted the impairment. But the other question, I would think that Jen could be better answer that question.

Speaker 3

Yes. Hi, Jake. This is Jen. Thank you for the question. Yes.

Speaker 3

So we obviously will be working With our auditors on the 2nd quarter adjusted EBITDA presentation, but we are thinking this is a nonrecurring charge related to the scaling back of our production in California. So we'll consider They add back to adjusted EBITDA as well as adjusted EPS for the write off in the second quarter.

Speaker 4

Okay. Okay. So adjusted gross margin a little bit higher than I think maybe prior guidance implied is my read on that. And just to that point, it was such a strong gross margin expansion in the Q1. It seems like you could have no gross margin expansion year over year for The year and be within that range.

Speaker 4

I mean, I guess help us understand, you're still going to be benefiting from lower freight Price, 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

Speaker 2

We do see gross margin improvement and, but our goal is, As we mentioned in the earning announcement that in the 3rd Q4, we want to go out aggressively. So we want to balance we will be able to balancing out, with the higher margin and lower margin chain account that we can able to increase the volume and the revenues With some of the chain account 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 base initially. But now that we're able to set up new additional warehouse base and making space in the existing warehouse, what we're doing right now is We're racking up all the existing warehouses or move into a larger warehouse and at the same time adding additional spaces. With that, when it's done, basically, we can go out.

Speaker 2

1st of all, we can increase our inventory levels, so we can increase affiliate. At the same time, we can go out and go after the new accounts with a lower margin. We're just being a little bit somewhat conservative Stating 32, 33 at this point.

Speaker 4

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. 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 you're kind of even as pricing Remains aggressive as you mentioned.

Speaker 2

Well, we're 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 lines, more of an elegant expensive line of bagasse and eco friendly paper product thus coming in, in the Q3. 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.

Speaker 2

It's the takeout box containers and even paper lids and also the custom bagasse plate And Custom Bagassi 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 to 45 days, more company are coming to us. They're saying that they're being forced to by the cities to move faster in terms of moving into Eco Friendly products. So when we set our right now our annual goal to be 35% of our revenue coming from the Eagle Ford new product, I would think that would be conservative number with the amount of additional product we're going to bring in Higher margin versus the traditional product that we sold, the portion cup, the plastic cup, all the plastic items They're basically factuated 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.

Speaker 2

Okay.

Speaker 4

And then sorry, last question is on the

Speaker 3

Hey, Jake, can I maybe just to chime in real quick, I think you were wondering how Confident we feel about the sales trend pickup, 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. 1, We already signed some new warehouses. We are getting ready to move in towards around the Some of the warehouses in the Q2 or towards the end of Q2, so we know that's coming along and we're also adding to Alan's point bracket spaces in some of the existing warehouses.

Speaker 3

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 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 Q3. So we do have some great visibility into what our volume is and that gives a lot of comfort A lot of confidence, right, in our overall sales guidance.

Speaker 4

Got it. And then lastly, kind of pulling out of the bagasse joint, the JV in Taiwan or selling it, Does that I mean, how much does that hurt your ability to 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 plans? How do you kind of think about the exit of that JV?

Speaker 2

Yes. We went into the joint venture last year when people couldn't travel, I couldn't travel overseas. And this year, I went 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 Factory in bagasse product in U. S.

Speaker 2

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, we I was not aware of so many Bagassi plant that are out there in Asia and also that are coming around in Asia with more product, better product and better pricing and newer equipments. And when I was able to do so and find out that originally when we want to join debenture with overseas partners is that We didn't know that there was abundant of these supplies out there in the market. 2nd, we didn't know We know that this BUKAZA product is going to be a highly demanded product in the U. S.

Speaker 2

And we know that we want to also be one of the one manufacturer to start production in the U. S, But we didn't know how challenging it was to start a manufacturing bagasse plant in U. S, which most of these larger manufacturer, our competitors Are looking to shut down this year. And one thing I heard that is the reason for them to shut down, they're porting 1,000,000 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, with, of course, there was regulatory issues that they couldn't the factory couldn't get permit.

Speaker 2

And that's one thing that decided 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, with 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 costs, higher premium product from different vendors. And that's what 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 Bragas domestically.

Speaker 2

That's how widespread the Asian countries are going after in terms of Eco Friendly Product Reducing Plastic versus U. S.

Speaker 4

Great. Thank you so much. I appreciate it.

Speaker 2

Thank you, Jake.

Operator

The next question comes from Ryan Myers with Lake Street Capital Markets. Please proceed.

Speaker 5

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 of your competitors? Yes. Got it.

Speaker 5

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?

Speaker 2

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 rep, people are looking for new jobs and we're actually picking up people in the similar And also one thing is that the key difference between us and our competitor is that we have everything where We have different way of selling product 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 certain product and the product might be store and manufacturing different facility they can consolidate versus the facility 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.

Speaker 2

But for us, basically, our sales can go anywhere. They're very flexible. We've given 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 take about a couple of months for the sales start to bring revenue in, new sales reps.

Speaker 5

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 FY 2023 and then you'll look to evaluate more warehouse space in 2024. How should we think about that for the rest of the year?

Speaker 2

Our lease is up in Seattle end of August. We've already negotiating with the different facility to double our spacing in Seattle Northwest area. We're also looking to add different territorial throughout the U. S. Because our goal is to increase our online visibility, to service different type of customers.

Speaker 2

And also we're looking to go into the B2C Commerce, party supplies. Now that basically, we're able to sell to consumer 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 Q1 of this year, the past 3 months, we actually enlarged our online team members more than doubled. And we're looking to double in terms of additional adding additional staff to help us grow that business segment.

Speaker 5

Got it. Thank you. Thanks for taking my questions.

Speaker 2

Thank you, Jay. Right.

Operator

Our next question comes from Ryan Hoffman with Stifel. Please proceed.

Speaker 6

I'm not sure who Ryan Hoffman is, but this is Michael Hoffman. How are you? Hey, Michael. I Don't even have a Ryan in the family, so whatever. I hope you have a good day.

Speaker 6

Can we get into a little bit about cadence? Jen, what's the ocean freight was 14.4 a year ago, 5.9 this year. How do I think about that trend Q3 and 4Q, what am I comparing against?

Speaker 3

Yes. Hi, Ryan. Thank you for the question. It's Michael. It's

Speaker 2

Sorry, I

Speaker 3

don't know why I have now I have Ryan stuck in my head. Sorry.

Speaker 6

It's Michael Hoffman. Don't call me late for dinner.

Speaker 3

Sorry, yes. So you're absolutely right. So for the rest of the year, we actually I 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.

Speaker 6

Okay. And I'm comparing 2Q through 4Q, it was averaging what?

Speaker 3

I would say, averaging maybe roughly 5%, give or take.

Speaker 6

From last year? So this is against last year, I meant. You were 14.4 last year in the 1Q. What's the trend? Oh.

Speaker 6

I wasn't saying that very clearly. It's the Ryan thing got me all confused.

Speaker 3

So it's going to come down. When you're doing the year over year comparison, you'll see a significant job. Last Q2, Q222, we were at 18% of sales. So 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 quarter sorry, for the rest of the year, right, Q2, Q3, Q4, we think that this percentage is going to be pretty stable.

Speaker 3

It's probably going to be very close to the 5% 4.4% to 6% in that range for the rest of the year.

Speaker 6

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%, if I take the midpoint at 32.5% and then do an average of what the remainder of the year would look by, that's like 30%. And yet, it's a really steep savings in freight, which helped drive the 39.8%. So Help me get comfortable.

Speaker 6

How much cushion have we built in here? We're trying to build cushion. Yes.

Speaker 2

I mean, me and Jen, we'll try 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 downs 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 that we're competitive in market in the 3rd Q4. That's all.

Speaker 3

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 Q2, 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 that we also previously discussed starting primarily from the Q3 going into the Q4 as we have the infrastructure in phase, 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 full year guidance of 32% to 33%.

Speaker 2

Okay. And I want to ask something, Michael, just FYI, like for starting April Actually May 1, we've reduced our highest moving item portion cut of plastic by 10%. And June and we just announced that we're looking to do another announcement in different categories in June 1, 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 the price should be coming down. And We are actually we have been doing so ever since last September, but not like one time decrease We've been doing it every monthly.

Speaker 2

So, we have done at least 4 price reduction already since last September.

Speaker 6

Okay. So just to understand how the market environment may play out, if you have this current Business climate that you lived in, in 1Q, 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 in 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.

Speaker 6

Just want to understand if Business environments like it is right now, probably have upside to the margin.

Speaker 2

Actually, I feel the business environment for my company is great. We're going out there. We're winning every bid that we go after. And NRI is actually this month, and we're expecting to increase additional 100 new chain account business We've been waiting to go out. We've asked our sales rep 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.

Speaker 2

So we do see Overall market environment is not good, but for our company, it's good.

Speaker 3

And Michael, I will say your statement is fair.

Speaker 6

Okay. All right. So I get we're being conservative, but if we could There's more room for upside than there is downside.

Speaker 2

There is a lot of room, I can say. Yes. Okay. There's a lot of room. Yes, a lot.

Speaker 6

So back in, I think I can't remember that it was the Q3 or Q4, but we reintroduced the idea of maybe starting to do some M and A again. And you thought about that as something that might Trickle into the second half, where is your head around M and A versus organic, and adding like you're adding Warehouse through the organic method instead of buying things, where are you on that?

Speaker 2

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 all the equipments domestically. A lot of these manufactured domestically, I've seen that they will have a challenging year in terms of competing overseas vendors Also maintaining these older equipments. We will see opportunity here. So far, I've been we've been approached by different companies, Capital Investment Group, Looking to represent certain company that they're looking to sell the company. Maybe 2 years ago, they wouldn't look into sale, 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.

Speaker 2

But we believe that right now it's not the time yet. Of course, as I mentioned that one of the key driver 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 also, 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 EBITDA.

Speaker 2

Sure. Yes, they're still looking at 10 times multiple, which is not realistic.

Speaker 6

Yes. Yes. Okay. That's fair enough. Thank you very much for taking the questions.

Speaker 2

Thank you, Michael.

Operator

The next question comes from Ryan Merkel with William Blair. Please proceed.

Speaker 7

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 2nd quarter revenue guidance. It's 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?

Speaker 7

Or is there So maybe some underlying demand weakness from your customers. Just want to be clear on that.

Speaker 2

I wouldn't there is no underlying demand in lower demand from our 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, I just mentioned that we do want to be a little bit conservative in terms of the revenue guidance and profit margin guidance Now day 4. We do feel that there is a lot of room to grow And both in revenue and gross margin, but we do we just want to be a little bit comfortable in terms of conservative.

Speaker 7

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 accounts because you have inventory now.

Speaker 7

Are you saying that you're going to cut prices below market to take market share? Or is it more of a mix impact that impacts the gross margins in the second half?

Speaker 2

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 different type of product.

Speaker 2

A lot of the customer that we're approaching Our people are switching it 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.

Speaker 2

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 chain, mid sized 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, I don't believe there is a paper lid in the market of your soda cup or paper lid for your food containers.

Speaker 2

That's something we just create we've Just started to bring in and they will be displayed at NRA show. A 100% compostable paper lid, not a plastic, not a bagasse, but a paper product.

Speaker 7

Got it. Thanks for the color.

Speaker 2

Thank you, Ryan.

Operator

At this time, we are showing no further questioners in the queue. And this does conclude our question and answer I would now like to turn the conference back over to Alan Yu for any closing remarks.

Speaker 2

Thank you, everyone, for joining the Earnings call is in Q and A session. And I look forward to all of you on the next earnings call. Thank you very much and have a wonderful day. Bye bye.

Operator

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

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Karat Packaging Q1 2023
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