Karat Packaging Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Thank you for standing by. My name is Cass, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carrot Packaging Incorporated First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Roger Pundell of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Carrot Packaging's 2024 First Quarter Conference Call. I'm Roger Pondell with Pondell Wilkinson, Carrot Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce you to the company's Chief Executive Officer, Allen Yu and his Chief Financial Officer, Jan Go. Before I turn the call over to Alan, I want to remind everyone 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 Carrot'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. Accurate 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.

Speaker 1

And with that, it is my pleasure to turn the call over to CEO, Allen Yu. Allen?

Speaker 2

Thank you, Roger. Good afternoon, everyone. Sales volume for our 2024 Q1 grew 3.5% over the prior year period. Net sales were about the same as last year, but included certain items that impacted year over year comparability, which Jan will discuss later in this call. We are encouraged by our Q1 performance as the growth initiatives that we implemented last year are starting to bear fruit.

Speaker 2

Our new business pipelines continue to grow and our product offering continue to expand. We are adding new customers and gaining wallet share with existing accounts. Sales for manufactured product in the Q1 were 12.4 percent of total net sales compared with approximately 3% last year. In keeping with our asset light strategy in the U. S.

Speaker 2

And emphasis on imported items, Sales of our eco friendly product rose 6% in the Q1 over the prior year quarter. This category represented approximately 34.5% of total sales versus 32.6% last year. Eco friendly products remained priority for Carrot as we continue to develop new and innovative products and build up inventory to meet growing demand from customers. We also achieved a near record high gross margin of 39.3% during the Q1 With better visibility into ocean freight rate and new contract rates locked in through April 2025, combined with the continued strength of our U. S.

Speaker 2

Dollar, we expect our gross margin to remain at a higher level. Our operating income in Q1 2024 was impacted by a non cash impairment of $2,000,000 of the right of use asset for our City of Industry lease in California. With the shift to optimizing our new Arizona warehouse base and away from California, our future rent expense will be reduced. Our newly established distribution center in Arizona is now fully operational, which will provide meaningful efficiency for Carrot in the Southwest region. We are continuing to look for other distribution center in the Southeast region this year to further penetrate and grow key U.

Speaker 2

S. Markets. Additionally, we are exploring strategic acquisition opportunities to further penetrate the marketplace. We carry strong operating cash flow as well as the company's liquidity, solid balance sheet and positive long term outlook, our Board of Directors again authorized an increase in the quarterly cash dividend payment to $0.35 per share on May 7 from $0.30 per share in the preceding quarter. Our regular quarterly dividend policy began in August of last year with an initial payment of $0.10 per share.

Speaker 2

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. Net sales for the 2024 Q1 were $95,600,000 compared with $95,800,000 for the same quarter last year. Sales volume increased 3.5% over the prior year quarter. As Alan mentioned earlier, net sales year over year comparison is impacted by both items. Our Q1 2024 net sales were understated by $700,000 related to products shipped and recognized as revenue in 2023 and not delivered until 2024.

Speaker 3

The related impact on cost of goods sold and gross margin was $400,000 and $300,000 respectively for Q1 2024. In the prior year period, we had assessed the impact of the lag between shipping and delivery to the previously issued quarterly and annual financial statements and concluded it was immaterial. The impact will not be recurring in future quarters. The amount of the revenue deferred for products shipped in March 2024, but not delivered until April 2024 was $1,900,000 Additionally, net sales for the 2024 Q1 included $2,200,000 of online sales platform fee. By channel, compared with a year ago, sales to distributors, our largest channel, was lower by 3.3% for the 2024 Q1.

Speaker 3

Sales to national and regional chains were up slightly. Online channel sales were up by 9.0%, which benefited from the inclusion of online platform fees of $2,200,000 as discussed earlier. And sales to the retail channel increased 5.0%. The distributor channel remains challenging and the overall pricing environment is still very competitive. However, we are seeing encouraging growth momentum in the other channels, primarily driven by our continued geographic penetration in the East Coast, Northeast and Midwest region and growth in our eco friendly products.

Speaker 3

Cost of goods sold for the 2024 Q1 was $58,000,000 compared with $57,700,000 in the prior year quarter. The increase was primarily due to higher freight and container rates earlier in the year and increased import volume and the inclusion of certain production costs in cost of goods sold, partially offset by lower product costs for certain raw materials and finished goods, as well as favorable foreign currency exchange rate. Gross profit for the 2024 Q1 was $37,600,000 versus $38,100,000 in the prior year quarter. Gross margin was 39.3% in the 2024 Q1 compared with 39.8% for the prior year quarter. Operating expenses in the 2024 Q1 were $29,500,000 or 30.9 percent of net sales compared with $25,400,000 or 26.5 percent of net sales in the prior year quarter.

Speaker 3

Operating expenses in the current quarter included a non cash impairment of $2,000,000 of the operating right of use asset for the City of Industry lease that Alan mentioned earlier as we entered into an agreement to sublease this warehouse in California. The increase was also driven by the inclusion of online sales platform fees, higher rent from additional leased warehouses and higher labor costs due to workforce expansion. Such increases in operating expenses were partially offset by a decrease in shipping and transportation costs and the inclusion of certain production costs in cost of goods sold. Net income for the 2024 Q1 was $6,500,000 compared with $9,200,000 in the prior year quarter. Net income margin was 6.8% in the 2024 Q1 compared with 9.6% in the prior year quarter.

Speaker 3

Net income attributable to carat for the 2024 Q1 was $6,200,000 or $0.31 per diluted share, compared with $9,000,000 or $0.45 per diluted share last year. Adjusted EBITDA, a non GAAP measure in the 2024 Q1 was $13,500,000 versus $15,300,000 in the prior year quarter. Adjusted EBITDA margin was 14.2% in the 2024 Q1 versus 15.9% in the prior year quarter. Adjusted diluted earnings per common share was $0.40 per share in the 2024 Q1 compared with $0.46 per share a year ago. The first quarter ended with $112,300,000 in working capital compared with $110,500,000 at the end of 2023.

Speaker 3

As of March 31, 2024, we had financial liquidity of $49,300,000 with another $33,500,000 in short term investments. During the Q1, we made significant investment to stock up our inventory ahead of our summer peak season. With a positive outlook for new business, we expect net sales for the 2024 Q2 to increase by mid single digit over the prior year quarter. Our gross margin goal for the 2020 4 Q2 is approximately 38% to 40%. For the full 2024 year, we expect net sales to grow 8% to 15% and gross margin to be in the range of 37% to 40%.

Speaker 3

Alan and I will now be happy to answer your questions. And I'll turn the call back to the operator.

Operator

Thank you. We will now begin the question and answer And your first question comes from the line of Michael Hoffman with Stifel. Your line is open.

Speaker 4

Hi, Alan, Jen, thank you for taking the question. Sorry about my voice. I'm not sure where it's disappeared to. Can you bridge for us maybe by the line items, whether it's national distribution on-site or online, I mean, or retail versus your own plan. So if I think about the guide you gave us, we were going to land somewhere around $100,000,000 round numbers.

Speaker 4

We're about 4.5 short. Of those 4 buckets, where's the shortage? And what gives you confidence in this next 90 day view in light of that where it fell short?

Speaker 2

Michael, let me get just understand the question. Are you referring to $4,000,000 short for the Q1 or are you referring to Q1?

Speaker 4

Yes. You gave us a forward view of up mid single digits, which if we did the math, it was land you at about $100,000,000 right? And you did $95,500,000 I'm rounding. So we're $4,500,000 short. And if I think of the 4 segments, where does that shortfall come relative to your own plan and what gives you comfort in the next forward plan that we've got a better handle on that?

Speaker 2

Sure. Well, I believe Jen mentioned earlier in the call that there was some change in accounting practice recognition revenue recognition. We actually had to deduct $2,000,000 and normally in the past 12, 15 years, 20 years, we have been recognizing revenues as we ship the product. But our auditor has decided that we need to adapt a new method of recognizing revenues that we need to account for when the customers, even if we ship at the last date of every month, they need to understand how long does it take for them to receive the product. And they're asking us to recognize revenue upon the day they receive it.

Speaker 2

So we had to reduce $2,000,000 from our the current quarter, over $2,000,000 basically. And that's something that we have never done so in the past 24 years of our accounting history. So this is the Q1 they want us to start moving forward to change this practice. That's over $2,000,000 that we couldn't count for in recognition. The other $2,000,000 we were actually me and Jan, we were actually looking to guide in terms of $90,000,000 approximately $98,000,000 versus $100,000,000 I believe that we actually would have met the lower end of our projection in terms of the Q1 if we had we were able to account for the $2,000,000 that we had to change in revenue recognition practice.

Speaker 4

Sounds like you ought to get another auditor. How are you supposed to track when a delivery arrives unless you're controlling the last mile? That seems like an unreasonable reach.

Speaker 2

Jen is the one that dealt with the auditor. Maybe Jen, you could perhaps kind of explain to because I was we were fighting for that. We thought that was really hard to understand to account for because it's taking a lot of our time to just trying to find the bill of landing and when the customer receive it, we have to track down all the tracking using some of our delivery are delivered by 3rd party and UPS. So we have to set up a program just to accommodate this new request on that part.

Speaker 3

Hi, Michael. This is Jen. Let me chime in on this one. So I think you make a fair point about tracking. It is a challenge and we are reviewing our internal process to make sure that we have reliable accurate data to be able to account for the to account for revenue appropriately.

Speaker 3

I will say, as I mentioned in my prepared remarks, that historically, this is something that we've been tracking internally for a fairly long time. As Alan mentioned, It's the same accounting practice since 15, 20 years ago. We have evaluated, as I mentioned earlier, previously, kind of the lag between shipping and delivery and concluded and our auditors concurred in the past that the impact was immaterial. Basically, the lag was immaterial even though we don't necessarily track every single shipment, know exactly when it's delivered to the customer, we have a pretty good idea and we have a sort of the estimate method to help us get to a pretty close number. So that said, fast forward to March 2024, I will just add a little color here is in Q1, we are seeing increased activities, the pickup in activities towards the end of the quarter.

Speaker 3

And that's also one of the reasons why if you look at the last few days in the quarter, the activity that we saw, the amount of the shipment that went out actually increased quite a bit compared to what we typically see towards quarter end. As I mentioned earlier, the amount of the revenue that we deferred from March to April is $1,900,000 So basically roughly the $2,000,000 that Alan was talking about earlier. Compared to typically on the quarterly basis we see towards the quarter end, that number is roughly 700,000, 800,000. So there's a little bit of increased activity in the shipments that in the products that we shipped but have not yet delivered to the customer. So that also accounted for a little bit of a year over year comparison.

Speaker 3

I just wanted to point out part of the reason why you are seeing the $1,900,000 Adam talked about this, sort of the $2,000,000 is also the increased activity, the increased momentum that we've seen towards the quarter end.

Speaker 4

Okay. So I just want to tease out a couple of things on this. Did you if you did you look at March of 'twenty 3 and do the same treatment of the counted sales as you shipped it, now you had to count it as on the delivery and sort of adjust that number and then the reality of the like to like is you hit your low to mid single digit growth rate and because you reset the prior number to look the same way?

Speaker 2

No. Actually, Michael, like I said, this is the first time.

Speaker 4

Yes, I get that. I was just wondering if you did the work and put the prior year on the like basis. What I'm trying to get to and I'm not doing a very good job of it is, I think I'm hearing you said almost 4% volume growth. So I'm going, okay, underlying structural demand is good. Maybe I'm still re pricing some inventory from the above average inflation in the inventory.

Speaker 4

But volume is good, so SKUs are good. I got this oddball accounting thing, you still think you ought to fire your auditor. And if I had I like the light comparison, you really did land somewhere between low to mid growth. And so none of us should freak out, the market shouldn't freak out, stock should be fine tomorrow, blah, blah, blah. There was a question in there somewhere, but I'm not sure what it was.

Speaker 4

But can you guess where I'm going?

Speaker 2

Yes. Again, like I said, I basically, this is it is what it is. I mean

Speaker 4

I get that. But underlying business, if all this noise aside, underlying business demand is good.

Speaker 2

It is very good. I wouldn't say the underlying business, I personally I think this is the best quarter since for 12 months basically for Q4 because we've seen volume decline, pricing decline for the past 3 quarters and this is the Q1 we're seeing a solid year over year growth in volume, in revenue, also in revenue if we were to use the old accounting method. Revenue was higher, the volume was higher and the pipeline that we have is stronger than ever. So I would say that this is the best quarter in a year.

Speaker 4

Okay. That's who knows what the market does tomorrow because it hates misses. But I think the big message here is you've got a good underlying fundamental business model still chugging along. You've made business decisions to assure the growth rate by moving the distribution centers and we've got this oddball accounting issue. Have we repriced all the inventory for the above average pricing?

Speaker 4

Is that out? We're not looking at re pricing issues anymore at this point?

Speaker 2

Yes. Well, actually we're looking we're not looking at any repricing issue. And also one of the major the question mark that we mentioned that last quarter was the ocean freight. We were not sure uncertain how the ocean freight is going to play out, but it actually it will actually play out pretty well that ocean freight did not increase significantly for the next year contract. So that's why we're more confident in terms of raising our full year gross margin guidance.

Speaker 2

Originally, I believe with 35 percent to 38% or 35% to 37%. Now we're upping to 37% to 40% because we feel confident that we signed now that we have signed the contract with Ocean Freight, which was the wild card. And that's why we feel very strong that we're going to see a very strong year with the support ocean freight as well as strong dollar.

Speaker 4

Okay. I'll leave it at that. Thank you very much.

Speaker 2

Thank you, Michael.

Operator

Your next question comes from the line of Ryan Myers with Lake Street Capital Markets. Your line is open.

Speaker 5

Hey guys, thank you for taking my questions. Just kind of as a follow-up to the last question, I just want to make sure I understand it clearly. So it sounds like you priced through the sorry, you went to the lower price inventory this quarter. So pricing shouldn't be a headwind for the remainder of the year?

Speaker 2

That is correct.

Speaker 5

Okay, got it. That's helpful. And then if we think about the eco friendly business, it came in at 6% growth for the quarter. I know that business has kind of been treading in the double digit growth rate there. Is there anything to call out about what you guys saw in the quarter for Eco Friendly or is that just kind of related to the pricing as well?

Speaker 2

Well, we did see a demand picking up Eco Friendly product. We saw more and more city actually enforcing compostable product And they're making even stricter, like the State of Washington is imposing that, to be able to not confuse a consumer. They starting July, they want every compostable plastic items to have some type of green item on it or like the lids, so that they can see it. Specifically, it's different than the regular PET non compostable lids. And we're seeing that there's new laws on the paper bag, shopping bag, that basically that U.

Speaker 2

S. Commerce is increasing tariffs on all the imports from overseas, which definitely will raise the price for U. S. Domestic user, starting, I would say, as early as August or September. Once everyone deplete their inventory, the price can go up as much as 30%, 40% on the paper shopping bag.

Speaker 2

So there's these new laws in different states and cities is actually creating a higher demand in terms of compostable product. And we're seeing more people moving away from just regular plastic into compostable, regular Styrofoam into plastic and also other items. So I would say that those manufacturer that continue to sell styrofoam, it's really seeing a really a drop in volume wise.

Speaker 5

Okay, got it. That makes sense. And then if we think about the 8% to 15% top line guidance for the year, just kind of want to get a good understanding of what needs to happen or what needs to come into the model for you guys to hit the higher end of that range?

Speaker 2

Well, if we would just do organic growth, we're looking at the 8% range. The reason we're saying that because last year, our 3rd Q4, we were not as strong as we had we didn't have as much pipeline that we have today. And all the pipeline that we have is currently with the national chain account with supermarket. Those are actually turning into revenues and we're seeing them in the 3rd and 4th quarters. That will help us to the 8% 10% gross margin.

Speaker 2

And also we are aggressively actually in conversation with several different companies potentials that to partner or acquisition that we're hopeful that by the end of this year or Q3, we should be able to have some results in terms of what acquisition or what partnership that we may have by Q3 of this year. And that will help us to the double digit mark by the end of this year, as I mentioned earlier this quarter.

Speaker 5

Okay, got it. Okay, sure. That's helpful. Thank you for taking my questions.

Operator

And your next question comes from the line of Ryan Merkel with William Blair. Your line is open.

Speaker 6

Hey, guys. This is Mike Francis on for Ryan. Thanks for taking my questions. And first, a little follow-up on the last question regarding the M and A. Was that 18% or 8% to 15% at the end of 4Q that you gave, was that also inclusive of the M and A?

Speaker 2

If we do not include any M and A, that will be the range of 8% to 10%. If we include the M and A, that will be in the range of 10% to 15%, yes.

Speaker 6

Okay, perfect. Thank you. And then next for me, you talked about the distribution area being a little weaker.

Speaker 4

Can you give a

Speaker 6

little more color around that? Is it just sort of market softness or is there anything I'm happy to explain to the players there?

Speaker 2

Well, we have been seeing California West Coast market dropping. The overall environment in California, especially for the mom and pop smaller restaurant chains, they were seeing decline in sales. Not only that, we're seeing closures. One of my favorite restaurant that I've been going the past 25 years, they announced shutting down April 30. And we're seeing more and more restaurants shutting down in California because of increase in minimum wage and it's hard to find laborers in California, especially hard to find people that want to work in the kitchen.

Speaker 2

We're still seeing that we see a little bit it's better now that the drop was only single digit versus double digit in the past quarters for California. So that's where we're seeing a softness. And also we're seeing this is across the board from all of our competitors and distribution that they're saying the same thing as well. But we're seeing a strong growth in online as well as potentially a stronger growth for the national chain account. That's where and also in Midwest and East Coast, that's where we're focusing on that part for that.

Speaker 4

Okay. And

Speaker 6

last one from me. You raised the dividend again. Is there any sort of target capital allocation we should think about longer term, maybe like a percent of operating cash flow or anything like that?

Speaker 2

Currently, we're sitting on some cash that we actually put on deposit for income we actually generated income. And of course, we're increasing our dividend because we our cash flow continue to increase because our operation is pretty strong and we're not we don't have any debt on that. And that's why we're looking at merchant acquisition. If we were to successfully complete 2 acquisitions by the end of this year, that should deplete our cash, pretty much take some of our cash. I wouldn't say deplete our all of our cash because we're still generating more cash every quarter.

Speaker 2

I would say that we're still in a healthy cash position on that part. We are looking at acquisition target definitely not to exceed what we have on hand cash on hand.

Speaker 6

Okay. I hope you can find a new replacement restaurant, it's too bad. And I'll pass it on.

Speaker 2

All right. Thank you, Ryan.

Operator

That concludes our Q and A session. I will now turn the conference back over to Allen Yu for closing remarks.

Speaker 2

Thank you everyone for joining us Q1 2024 2024 Earnings Conference Call. And I want to again say thank you very much and we'll talk to you next time. Bye bye.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Karat Packaging Q1 2024
00:00 / 00:00