Tesla Q4 2023 Earnings Call Transcript

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March 14, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Karat Packaging 4th Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Roger Pondell, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Carrot Packaging's 2023 Q4 and full year conference 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 Go. Before I turn the call over to Alan, I want to remind all of our listeners that today's call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

Such forward looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10 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. 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 the 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. With that, I will turn the call over to CEO, Allen Yu.

Speaker 1

Allen?

Speaker 2

Thank you, Roger. Good afternoon, everyone. Sales volume for our 2023 Q4 grew 7% over the prior year period. Although revenue was again impacted by unfavorable year over year pricing comparison and by startup delays from several new national and regional chain accounts, we estimated approximately $2,000,000 to $3,000,000 in revenue from new accounts was pushed into 2024. We are starting to work on orders from these new accounts now.

Speaker 2

As part of our strategic initiatives, we continue to scale back U. S. Manufacturing during the Q4, which further enhanced gross margin to a near record height of 35.7%. Sales from manufactured product in the 4th quarter were 16% of total net sales compared with approximately 27% last year. We expect our gross margin to remain at a higher levels because of our initiatives and the continued strong U.

Speaker 2

S. Dollar. Sales of our eco friendly product grew 11% in the 4th quarter over the prior year period. This category represented approximately 33% of total sales, which exceeded our expectation versus 31% last year. We are continuing to develop new and innovative eco friendly products to meet increasing customer demand and expand our customer base.

Speaker 2

In 2023, we opened new distribution center in Chicago and Houston and doubled the size of our Washington State distribution center with the move into a new 100,000 square feet facilities. These new distribution centers are fully operational and contributing nicely to geographic and market penetration. As part of our growth plans for 2024, we recently signed a new lease for a distribution center in Arizona. We're taking possession of the warehouse now and are expecting it to be fully operational early in the Q2. We are planning on opening another distribution center in the Southeast region this year.

Speaker 2

Together with a sales force expansion, we are further penetrating key U. S. Markets in the South, Midwest and Pacific Northwest region and expect the growth in these market to more than offset the decline in the California market with weaker conditions in the restaurant sector throughout the states. Our operating leverage in Q4 2023 was impacted by a write off vendor prepayment of $1,100,000 to purchase certain PPE product in 2020 during a period of extreme inventory supply shortage caused by the pandemic. We are focusing on implementing automation and AI technology at all of our facility in 2024 to further enhance efficiencies and productivities.

Speaker 2

Additionally, we are actively evaluating strategic acquisition opportunities this year as market valuation are showing signs of reality and normalization. With Caret's strong operating cash flow as well as the company's liquidity, strong balance sheet and positive long term outlook, our Board of Directors in February again authorized an increase in the quarterly cash dividend payment to $0.30 per share from $0.20 per share last quarter and from $0.10 per share since the regular quarterly dividend policies was initiated in August 2023. I will now turn the call over to Jan Guo, our Chief Financial Officer, to discuss the company financial results in greater detail. Jan?

Speaker 3

Thank you, Alan, and good afternoon, everyone. As Alan mentioned, we delivered another quarter of significant margin expansion and business performance. As I go through the key financial metrics here, I will be talking about certain misclassification adjustments made in the Q4 of 2023 for the full year amount within the income statement with no impact on net income. The prior year amounts were not adjusted due to the immaterial impact on the overall financial statements. Net sales for the 2023 Q4 were $95,600,000 including an adjustment of $6,500,000 of online sales platform fees for the full year, which resulted in an increase to both net sales and selling expenses.

Speaker 3

Net sales were $92,700,000 in the prior year quarter. Sales volume increased 7.3% over the prior year quarter, which was offset by unfavorable year over year price comparisons as we have passed on savings from ocean freight and raw material costs to customers, primarily in the last quarter of twenty twenty two and first half of twenty twenty three. By channel, compared with a year ago, sales to distributors, our largest channel, was lower by 6.0% for the 2023 Q4. Sales to national and regional chains decreased 3.6%. Sales to the retail channel decreased 5.2% and our online channel sales were up by 68.2%, including the impact of 60.7% from the adjustment of online sales and phone fees discussed earlier.

Speaker 3

We are encouraged by the volume growth in our business as well as the growth of our Eagle Friendly products, online channel and the increased geographic penetration in the East Coast, Northeast and Midwest. Cost of goods sold for the 2023 Q4 was $61,500,000 which included an additional import duty reserve of $2,300,000 and an adjustment of $3,900,000 of certain production expenses from general and administrative expenses compared with $63,000,000 in the prior year quarter, which included an out of period inventory write off of $1,700,000 Gross profit for the 2023 4th quarter was $34,100,000 which included the additional duty reserve and the impact from the adjustment discussed earlier versus $29,700,000 in the prior year quarter. Gross margin expanded 370 basis points to 35.7 percent in the 2023 Q4 from 32.0% for the prior year quarter. Gross margin in the 2023 Q4 included a negative impact totaling 240 basis points from the additional duty reserve and the impact from the adjustment discussed earlier. Despite the unfavorable year over year price comparison, gross margin benefited from our efforts to scale back manufacturing in the U.

Speaker 3

S. In favor of imports, which carry higher margin and improved operating efficiencies. Operating expenses in the 2023 Q4 were $29,500,000 or 30.8 percent of net sales compared with $24,900,000 or 26.8 percent of net sales in the prior year quarter. Operating expenses in the 2023 Q4 included the negative impact of a vendor prepayment write off and the adjustments discussed earlier totaling $3,600,000 The increase was primarily driven by higher labor costs, increased rent from additional leased warehouses and workforce expansion. Such increases were partially offset by lower shipping and transportation costs, stock based compensation and bad debt expense.

Speaker 3

Net income for the 2023 4th quarter was $4,200,000 compared with $4,500,000 in the prior year quarter. Net income for the 2023 4th quarter included the negative impact from the additional duty reserve, vendor prepayment write off and a tax adjustment of $300,000 totaling $2,900,000 Net income margin was 4.4% in the 2023 4th quarter compared with 4.9% in the prior year quarter. Net income margin in the 2023 4th quarter included a negative impact from the duty reserve, vendor prepayment write off, tax adjustment and the adjustments discussed earlier totaling 3 50 basis points. Net income attributable to carat for the 2023 Q4 was $3,900,000 or $0.19 per diluted share compared with $4,500,000 or $0.23 per diluted share last year. Adjusted EBITDA, a non GAAP measure in the 2023 Q4 was $8,600,000 versus $9,900,000 in the prior year quarter.

Speaker 3

Adjusted EBITDA in the 2023 Q4 included a negative impact of $2,300,000 from the additional duty reserve as discussed earlier. Adjusted EBITDA margin was 9.0 percent in the 2023 4th quarter versus 10.7% in the prior year quarter. Adjusted EBITDA margin in the 2023 Q4 included a negative impact from the additional duty reserve and the adjustments totaling 3 30 basis points. Adjusted diluted earnings per common share was $0.24 per share in the 2023 Q4 compared with $0.30 per share in the prior year quarter. We believe Carrot is well positioned to execute on its future growth strategy.

Speaker 3

We finished 2023 with $110,300,000 in working capital compared with $84,500,000 at the end of 2022. As of December 31, 2023, we have financial liquidity of $59,300,000 with another 20 $6,300,000 in short term investments. I will now close with our 2024 outlook. Net sales for the 2024 Q1 are expected to increase close to mid single digit from the prior year quarter based on the current competitive environment and the new business outlook. Our gross margin goal for the 20241st quarter is approximately 37% to 39%.

Speaker 3

For full year 2024, we expect net sales to grow 8% to 15% and gross margin to be in the range of 35 percent to 38%, assuming no significant increases in ocean freight rates. Alan and I will now be happy to answer your questions. And I'll turn the call back to the operator.

Operator

We will now begin the question and answer The first question is from Jake Bartlett with Truist Securities. Please go ahead.

Speaker 4

Great. Thank you so much for taking the question. My first is on the sales in the Q4 and backing out or backing out the online sales adjustment, there was a it was lower than guidance. Even I think if you add the $2,000,000 to $3,000,000 that kind of moved forward into the Q1 of 'fourteen, it was below guidance. So the question is what is driving that?

Speaker 4

What versus expectations, what really drove the lower than expected results in the Q4 per sales?

Speaker 2

Let me answer that question. Well, first of all, we did see a slowdown in the customers purchasing product for inventory back in December. Especially in the month of December, we saw a significant slowdown in all of our distributors taking orders on that part. And one of our reasons is that our main chain account are saying that they were overstock and the business was not as good as last year. So that was one of the main reasons that we had a really slow in December.

Speaker 4

Okay. And I remember the stocking or maybe destocking for distributors is an issue or just a dynamic in the Q4 that maybe had gone away. Is this maybe a return to normal kind of behavior from the distributors? Or was this are we still in kind of abnormal territory with how they're behaving right now?

Speaker 2

We understand that during every year, especially at the end of the year in December, our customer goes on vacations and they try to destock whatever and return inventory that are excessive. That's kind of a normal seasonality things. One way to avert that will be adding additional new accounts, new businesses to offset that, especially this year now that it's different than last actually the last quarter was different than prior year. In the prior year period, people are concerned that there might be a shortage. So they tend to stock up during the holiday.

Speaker 2

But last quarter, especially in December, people understand that there's abundant inventory out in the market. So they won't be too concerned about bringing too much inventory into their warehouse. And I believe that most companies are or most of our customer distributors are over stocking in the inventory, in the warehouse. They're struggling with the warehouse basis. In the past year, when they're short of spaces, they actually lease additional spaces, but now the warehouse space have become so expensive, people are trying to reduce their warehouse storage space to reduce their cost of operation.

Speaker 4

Okay. And then last question on sales. Alan, if you could just describe the pricing environment, it feels like part of why the sales were kind of expectations and guidance was marched down in 2023 was because of just pricing and your desire to pass along price plus on lower costs through price. Have we stabilized there? Do you think that you feel more confident that pricing is not going to continue to come down in 2024 that maybe is kind of bottoming and will grow from here?

Speaker 2

Well, yes, in 2023, I would say that in most industries, especially packaging industries, we're seeing everyone has seen prices coming down due to overstocking, due to the lower cost of ocean freight, due to lower cost of the raw material. And we're seeing basically not only bottom, we're seeing a kind of a rebound a little bit in terms of pricing in some categories like the glove, like certain category that are in shortage that are from overseas. So that's what we're seeing right now. We're seeing I would say that pretty much we came to the bottom in the Q4 and it started a little rebound in Q1 of 2024.

Speaker 4

Okay. I'll pass it on and jump back in the queue. Thank you so much.

Operator

Thank you, Jake. The next question is from Michael Hoffman with Stifel. Please go ahead.

Speaker 5

Hi, Alan, Jen. Can I ask some modeling questions about 2024, so we just get all the details? So could you give us a little of your thoughts about where SG and A lands, interest expense, taxes and then lastly free cash flow and sort of either a dollar amount or a cash conversion ratio of your EBITDA just so we can complete the model.

Speaker 3

So Michael, let me take that question.

Speaker 4

Yes.

Speaker 3

Yes. So let me take that question. So we can provide some high level estimate. Obviously, we provide revenue and gross margin, don't necessarily go down into all the details. But we can definitely share some of our thoughts here.

Speaker 3

And again, as we mentioned in the guidance, the full year the thoughts on the full year performance, a lot of that, especially for the second half, this is just a caveat, the second half of twenty twenty four is going to be assuming we don't have significant changes in the ocean freight rate. But high level, when we're thinking about, I think, Michael, you're asking operating expense and interest expense and cash flow, right? So operating expense, I would say, high level, this is an area of focus for the management team right now and our goal is to continue to improve the leverage there. I want to say 2024 high level operating expense on a full year basis is probably going to be fairly consistent or a little bit better than 2023 when you take out some of the discrete items that we incurred in 2023, I think overall operating leverage is going to improve a little bit. We do expect to see some improvement, especially related to labor cost, partially offset by increase in rent expense, some of the fixed expenses as we continue to expand our warehouse space.

Speaker 3

So high level, that's the operating expense operating leverage. Interest expense year over year, I don't see significant changes the term loans. And again, these are the term loans that we have on Global Wealth, which is a consolidated variable interest entity. These are the term loans on Global Wealth books so not our operating entity. But again, the both term loans are fixed interest rate.

Speaker 3

We don't expect significant changes year over year in interest expense. Free cash flow, we do believe our free cash flow is going to be is going to continue to be really, really strong in 2024. We talked previously about the pivot into a more asset light model focusing on the import as opposed to making heavy CapEx investments here domestically. So we do expect to continue with that model into 2024 and continue to expect strong free cash flow in 2024.

Speaker 5

So when you could just give us a sense of cash conversion of your EBITDA. I mean, you had just to put it in perspective, I mean, you're in the 70s percent of your EBITDA converted into cash. Should we assume that that carries into 2024 as well? That'd be cash flow from ops less all capital spending is Understood.

Speaker 3

I would think it will be in that range. It will be within a range.

Speaker 5

Okay. And then, Alan and Jen, can you help us a little bit about thank you for the details on the sales year over year change in the segments. When you look at the ones that were negative, what's the balance between price and volume? Like is there positive volume but really negative price and so the whole thing is negative? That's what I'm trying to get at is that there was a decent underlying volume number, but I'm overshadowed by the resetting of price for raw materials, lower freight, all that stuff.

Speaker 5

How do I think about that across those segments?

Speaker 2

Yes. In the Q4 of 2023, the volume did increase. I believe Jan, what is the percentage of volume increase overall versus the

Speaker 5

And how was that distributed across the 4 segments, the operating lines, when you think about that directionally, positivenegative distributors, national retail versus online?

Speaker 2

I would say that the mainly online sales volume was more positive. And into the I would say the retail segment was positive. In the distribution segment, I would say it kind of evened out a little bit. But mainly our growth in the volume is more on the online as well as the national chain account.

Speaker 5

Okay. And then, you alluded to this a little bit, Jen, about cadence, but can we talk because you're going to start the year at a much stronger gross margin and finish the year lighter to get to the average of the guidance. Talk to us a little bit about how to think about that cadence. Is there anything lumpy about it? Or do I just sort of gradually bring it down all year long to work out to get to the midpoint of the range?

Speaker 2

Well, here's the thing. I think if you're referring to 2023, if we 2024 or 2023?

Speaker 5

Yes, 4. With the guidance, you start the year at 37% to percent or 39% gross margin in the Q1, but the full year is below that. So is it a gradual decline every quarter? Or is there how do I think I'm just trying to our modeling, thinking about the cadence. Very steady decline each quarter, so I get to a blended average for the full year outlook.

Speaker 2

Well, this is how Jim mentioned earlier that there's a very big uncertainty of contract renewal for the ocean freight in May of 2024. So we kind of know exactly what's going to what might occur in the Q1 and Q2. But the big uncertainty is what is the U. S. Dollar?

Speaker 2

Is it going to be weakened or maintained as strong as we are today? And as well as ocean freight, is it going to maintain the current level? What's going to increase? If it increase, how much it increases? So kind of put a cushion in terms of the last two quarters of the end of the year.

Speaker 2

But we know that our volume is going to be strong. Our expected volume this year, we're hoping we're looking for a goal of 15% growth margin, not growth margin, 15% growth in volume wise. That is our goal that we're looking to shoot for. And in terms of, of course, the gross margin, we're also adding in that there's some change in terms of calculation, calcification. We used to have the CapEx at the operating level.

Speaker 2

But now starting 2023 or 2024, we'll bring the CapEx into the on the top of the levels. So basically that will affect the gross margin also. That will be one of the big aspects that will affect the margin.

Speaker 5

Okay. So just so I think I understand you, you were being conservative about the direction of ocean freight in your guidance, but it's a point of opportunity if in fact the ocean freight proves to be consistent at current levels? Is that what I'm here did I hear that correctly? I may be misunderstanding what you're trying to tell me.

Speaker 2

Yes, that is correct. If the ocean freight maintains stable, then basically I would say that this is definitely beneficial for our 3rd Q4. Got it. Okay. That's what I thought you meant.

Speaker 2

All right. Thanks. Thank you, Michael.

Operator

The next question is from Ryan Myers with Lake Street Capital Markets. Please go ahead.

Speaker 6

Hey guys, thanks for taking my questions. First one for me, so if we think about the revenue guidance range, the 8% to 15% growth, what would you need to see to come in at the high end of that range? Is that more of a stabilization in pricing or even a little bit of improvement in pricing. Just want to get a good understanding of how we potentially could see that 15% top line growth for 2024?

Speaker 2

Sure. Well, Ryan, in the past year, prior to pandemic, our company has been growing double digit every year, year over year. And last year was a much different environment because in 2022, there was a major spike in ocean freight and that we have to add the price of cost of goods sold and the reselling prices based on that. And there was a deflationary factor during the last year 2023. But in 2024, as everything stabilized, our selling volume is going to increase with adding new sales rep that's going out has been going out there in the street, selling to more new chain accounts.

Speaker 2

And we're already seeing that we're adding several dozens of new accounts in the past few months basically. So we're adding about 20, 30, 40 accounts, I would say 40 accounts every quarters, distribution and chain accounts. And with that said, that's going to add a lot to our top line as well as our existing customers. We're adding additional new items such as napkins and other new category that we're selling in that we're looking to bring in this year, additional 300 to 400 SKU that will also add to our top line. On top of that, we're looking at acquisition this year.

Speaker 2

As we mentioned, during our IPO, one of the things that for our growth strategy is started looking at acquisition target. And in the past years, we've been looking at it, but the price was not that reasonable. And we're seeing that people that are looking to sell their business that we're potentially we can acquire are becoming more realistic numbers that we can see that we can look into now. So if we were to hit the 15% range, I would say that would have a small acquisition. I'm not going to we're not going to talk about large acquisition, but we're looking at the small side acquisition.

Speaker 6

Got it. That makes sense. And then if we think about the softness that you commented on in the distributor and national channels in the Q4, just want to get a good understanding of how much of that was driven by just the California market versus how much of it was the overall system as a whole?

Speaker 2

California market in the Q4, we saw a decline of almost like a double digit decline in terms of California year over year. The restaurant environment in California, it's really bad in this industry and also as well as competitiveness. There's a lot more importers in California. Restaurants are not doing well, especially the mom and pop that are serviced by distributors. The chain account, however, is doing much better than the distributor, the mom and pop shops, which we're seeing a lot of restaurant closing and going out of bankruptcy.

Speaker 2

That's we're seeing in 4th quarters in California.

Speaker 6

Got it. Thank you for taking my questions.

Operator

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

Speaker 4

Hey, thanks for the follow ups here. My first was just on that discussion on guidance, Alan. And you had mentioned volume expectations of 15%, but the guidance is 8% to 15%. So is that just a follow on of the lower pricing that we had by the end of the year? Just helping us understand the dynamics.

Speaker 4

I know there's mix that goes on as well and it impacts sales growth. So maybe just help us mesh the 15% volume growth in the 8% to 15% revenue guidance?

Speaker 2

Yes. We're volume wise is per case count. The case counts could be something that's worth $3 $4 a bottle or something that is $80 a case. So that's where we're seeing the volume growth is. We're calculating by the numbers of bottles and number of cases that we're selling, the year over year comparison.

Speaker 2

And we're already seeing we're seeing the growth starting in Q4, especially the November December of last year. And we're seeing already seeing some strong growth this year already in the 1st 2 months with 1st 3 months of this 2024 already. And with the new customer that were just acquired recently and also the potential customer that are in our pipeline, we're seeing this number to continue to grow. So 15% is I would say that it's more of a conservative number that we're going to I'm going to say in terms of volume growth based on the number of customers that we have in pipeline, but this can be average because of course, we're looking at the Q2 and Q3 is always our stronger quarter versus our Q1 and Q4 in terms of volume growth wise. So we're going to be looking at 50% is our target in terms of apps growth quarterly wise.

Speaker 2

And in terms of revenue, revenue, we have a kind of a strong base already in the 2023. And we're seeing that with these volume growth and new account added and that's where we see the revenue growth at 8% to 15%. Of course, that is a revenue guidance that we want to be conservative because in 2023, we have a very we kind of have a decline in our revenue growth from 2023 compared to 2022. So we're trying to catch back in terms of 2024 to grow beyond the revenue we had in 2022.

Speaker 4

But just so I understand, the offset to volume growth is negative mix or negative price or else revenue would be higher than volume, I would assume. So why is revenue growth slower than volume growth?

Speaker 2

The pricing, you're right. We are having to compete with our other vendors for pricing. So we're doing both competing with other vendors as well as selling more higher price volume in online.

Speaker 4

Okay. And then Jen, the question on operating expense or G and A growth, I just want to make sure your comment, you said it was you want to improve versus 23%. That's on a percentage of sales basis. You don't expect the absolute G and A or operating expenses to be lower year over year. So I just want to make sure that that's the right message.

Speaker 3

That's correct, Jay. It's the leverage, the percentage.

Speaker 4

Percentage of sales, okay. And then just on the adjustments for the online sales platform fees kind of moving from, I guess, going into selling increasing selling expenses and retail sales, also the production expenses moving out of G and A to cost of goods. How should we think of that just from modeling? You're not telling us how much they were per quarter in 2023, but should we just divide those adjustments by 4 and assume that that's the right kind of impact on a quarterly basis as we look to model 2024 and beyond?

Speaker 3

That should be pretty close with the only caveat. Well, I guess a couple of covers there is the online platform fee with a significant growth of our overall online sales, I would expect that amount to increase in 2024 compared to 2023. On the production expense, I would expect 'twenty four amount to be slightly below the 'twenty three amount because of the continued scale back of the overall domestic production activities here.

Speaker 4

Okay. And then lastly, on the import duty reserve, is it the same kind of way to think about it there that it maybe should have been higher earlier, it was taken all at once here? Or is that not how that works? So just how would it how would by taking this reserve now, how would it impact the next 3 quarter COGS? Would it be higher because you would have if that was a reserve was if you reserve more appropriately on an ongoing basis, you'd have higher cost of goods sold.

Speaker 4

Is that how we should think about it?

Speaker 3

Can I just make sure I'm understanding your question correctly, Jake? You're talking about the reserve for the duty, import duty?

Speaker 6

Yes.

Speaker 3

Okay. So this reserve, we actually don't expect a significant change in 2024 currently based on the best information that we currently have. The reason why we had an increase in the reserve in this charge, which you're right, it impacted Q4 cost of goods sold. The reason why we had an impact was there was a change of estimate. It was a contingency it was a large contingency.

Speaker 3

We previously reserved took a charge reserved our based on our best estimate at that point in time, back in the Q2 of 2023, we had an investigation going on. So we took a reserve back in Q2 2020 Q2 2023. Fast forward to Q4 2023, we had some updates in estimate updates in events and circumstances that helped us better estimate this reserve, this loss contingency. That's the reason why we recorded an adjustment to this charge. We as of right now, based on the information and assistance provided from the council, we do not expect significant changes in 2024.

Speaker 3

That being said, as we think about this reserve amount as of twelvethirty onetwenty twenty three, this is based on the best estimate that we currently have. There might be future options that we would look into, But as of right now, we don't expect significant changes in 2024 related to this charge.

Speaker 2

Jake, let me add to what Jen just mentioned. This reserve is a special duty reserve. It's based on an item that we had imported from overseas. And this basically everything all the investigation has confirmed finalized. So in 2024 and onward, this we won't have to deal with this any type of importing issue on this particular product.

Speaker 2

But for the amount that we reserve, are we going to see a cash payout anytime soon? No. It might be a couple of years down the road since we are going to appeal and this is this $2,300,000 or $3,500,000 is the highest reserve we're putting and then we're very likely this reserve would change to a different amount, which is we're looking at a lower amount, the amount, dollar amount that would change. But this is the most we will see in terms of the duty that we're liable for basically.

Speaker 4

Great. That makes sense. I appreciate it.

Operator

Thank you. The next question is a follow-up from Michael Hoffman with Stifel. Please go ahead.

Speaker 5

Thanks. The M and A, just to be clear, given the quality of the cash flow, I presume you would be able to fund the small M and A that you're thinking about all from sources that you generate. So it's self funded?

Speaker 2

Correct. Unless yes, I mean we're basically we have over $100,000,000 like Jen mentioned in our report, over $110,000,000 in cash flows in terms that we can utilize, which we're not going to utilize all of it. But for sure, that's something that we have we can do self funded.

Speaker 5

Okay. The big statement being is that there's nothing on the rate of it you're going to drive the leverage up. This can be self funded off of cash and the leverage stays relatively stable.

Speaker 2

Yes, yes. We can also we are going to generate even more cash this year.

Speaker 5

Right. That's what I was trying to get at. Okay. Thanks.

Operator

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

Speaker 2

Thank you everyone for joining our 2023 Q4 earnings call. And I would like to say thank you all and have a nice day. Thank you very much. Bye bye.

Operator

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

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