Good day, and welcome to the Karat Packaging Inc. First Quarter 2023 Earnings Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question, you may press star then one on your telephone keypad. If you would like to withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to Roger Pondel, investor relations. Please go ahead, sir. Thank you, operator, and good afternoon, everyone. Welcome to Karat Packaging's 2023 First Quarter Earnings Call. I'm Roger Pondel with PondelWilkinson Inc., Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and his Chief Financial Officer, Jian Guo. Before I turn the call over to Alan, I want to remind all listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10-K as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements. Karat 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. With that, it is my pleasure to turn the call over to CEO, Alan Yu. Alan? Thank you, Roger. Good afternoon, everyone. Our first quarter performance reflect a strong execution of our 2023 business strategy. We were able to achieve a record gross margin of 39.8% and record adjusted EBITDA results since the company's IPO in 2021. Despite the industry-wide deflationary environment and multiple price reduction that we implemented, moving ahead with our growth strategy on improving inventory management and fill rate, we recently signed a lease for an 83,000 sq ft distribution center in Houston following the addition of a Chicago warehouse earlier this year. Our plans for geographic expansion on the East Coast and the Midwest region are progressing well. With the recent expansion of the sales team and additional marketing activity, together with the new contracts that were signed during the fourth quarter last year, we are expecting revenues to pick up again during the second half of this year. As a reminder, revenue for the first half of 2023 is expected to be lower than the same period last year when pricing for our inventory sold was at the peak level. Order volumes during that time period last year were unusually high due to supply shortages. We continue to execute our asset-light business plan and are now scaling back manufacturing production in California while increasing import items, focusing on higher margin product. During the past few months, we have significantly enlarged our sourcing network in Asia, giving us greater flexibility without additional overhead. To meet our growing demand for eco-friendly and compostable products, this category grew 17% in the first quarter over the prior year quarter and demand remains strong. Our 2023 growth goal for the eco-friendly product category is to be around 35% of total sales. Due to multiple construction and regulatory approval delays in Taiwan and our recent strategy to shift toward imports and diversifying eco-friendly product sourcing, we decided to sell our proportion of the joint venture bagasse factory to Kerry Global Group. We are expecting the transaction to close within three-month period or soon thereafter. With the selling price equal to our initial investment of about $6 million plus 5% interest. Lastly, we made a significant upgrade to our e-commerce platform and expanded our online support team. Sales to Canada and Hawaii are underway and proceeding well. We are now seeing some of the benefits of our online efforts with the business going in a positive direction. We again generated strong operating cash flow during the first quarter and continue to project positive cash flow throughout 2023, which is allowing Karat to generate excess capital and seek new opportunity. Accordingly, as announced on Tuesday, our board of directors declared another special dividend of $0.35 per common share. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company's financial results in greater detail. Jian? Thank you, Alan. Despite a challenging year-over-year comparison, first quarter 2023 results demonstrated our ability to adapt to the external business environment as we were able to significantly enhance margins and strengthen the company's liquidity position. Net sales for the 2023 first quarter, as anticipated, decreased 9.1% to $95.8 million from $105.4 million a year ago. This was slightly better than our original expectation. Last year's first quarter was a particularly strong revenue quarter, with inventory price increases at the peak due to extraordinarily higher ocean freight and other costs, and strong volume resulting from overall supply shortage in the industry. By channel, sales to distributors, our largest channel, was lower by 7.6% for the 2023 first quarter. Sales to national and regional chains decreased 14.2%. Sales to retail channel decreased 21.7%, and sales from the online channel increased almost 1%. As Alan mentioned earlier, our investment and marketing efforts to support our e-commerce platform have begun to bear fruit. Sales of our eco-friendly products increased 16.8% for the first quarter. We continue to further strengthen our leadership position as Karat is experiencing strong growth from these products, based in part on our enlarged sourcing network and expansion of our product offering, as well as the evolving regulatory landscape. Eco-friendly products represented 33% of total sales in the 2023 first quarter, compared with 25% a year ago. Gross profit increased 11.2% to $38.1 million for the 2023 first quarter from $34.3 million last year. We achieved record gross margin of 39.8% in the first quarter, an improvement of 730 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 first quarter, compared with 14.4% of net sales last year. Costs for certain raw materials were lower and operating efficiencies and productivity are continuing to improve. Operating expenses in the 2023 first quarter were $25.4 million or 26.5% of net sales, compared with $24.8 million or 23.5% of net sales in the prior year quarter. The increase was primarily due to workforce expansion, an increase in rental expense from the two additional warehouses added in May 2022, and higher marketing expense to support online sales growth. The increase in operating expenses was partially offset by decreases in shipping and transportation costs and bad debt expenses. Net income for the 2023 first quarter increased 15.6% to $9.2 million from $7.9 million for the same quarter last year. Net income margin was 9.6% in the 2023 first quarter, compared with 7.5% a year ago. Net income attributable to Karat for the 2023 first quarter was $9.0 million or $0.45 per diluted share, compared with $6.7 million or $0.34 per diluted share in the prior year quarter. Adjusted EBITDA in non-GAAP measure was $15.3 million for the 2023 first quarter, compared with $13.0 million in the prior year quarter. Consolidated adjusted EBITDA margin expanded to 15.9% of net sales, compared with 12.3% for the 2022 first quarter. Adjusted diluted earnings per common share rose to $0.46 per share from $0.36 per share a year ago. Karat's consistent solid growth has built a strong financial and liquidity position for the company. The company is well positioned to execute on its future growth strategies. We finished the quarter with $97.4 million in working capital, compared with $84.5 million at the end of 2022, and have financial liquidity of $62.1 million with another $10 million in short-term investment. Moving further into 2023, we are forecasting revenue for the second quarter to be down about 5% year-over-year. 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're 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. We're currently expecting to record an impairment charge in a range of $2.7 million-$3.5 million in the second quarter of 2023, including approximately $1.5 million-$2 million write-off of inventory with the remaining write-off in operating expenses. We expect the benefits from this shift of strategy to more than offset the impairment charge. At the gross margin level, we believe the gross margin for the first quarter was exceptionally high and is not indicative of future quarters. We are reaffirming our 2023 full year margin goal to be in a range of 32%-33%, even with the expected impairment charge in the second quarter, as we expect to continue to benefit from the stabilized ocean freight and our efforts to increase import, shift towards high margin items, and improve operating efficiencies. Alan and I will now be happy to answer your questions. I'll turn the call back to the operator. We will now begin the question and answer session. As a reminder, to ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Jake Bartlett with Truist Securities. Please proceed. Great. Thank you so much for taking the question. My first was on gross margin in the gross margin guide. I wanna make sure that I think from your last comment that the 32%-33% reiteration of the gross margin, that includes what, roughly $2 million in, you know, expenses. Will those expenses or will that write-off, inventory write-off get backed out of adjusted EBITDA? I'm just trying to make sure, you know, what's gonna be kind of flowing through to your adjusted EBITDA. That is also included. Okay. Jake? Yes. Also- Yes. It has been included. Yes. As you report your adjusted EBITDA, you won't back out those kind of impairments? Jian, can you answer that question? 'Cause, I can answer the question that our gross margin, it's, basically 32, 33 or higher, is included in the adjusted the impairment. The other question, I would think that Jian could be better answer that question. Hi, Jake. This is Jian. Thank you for the question. We are obviously will be working with our auditors on the second quarter adjusted EBITDA presentation, but we are thinking this is a non-recurring charge related to the scaling back of our production in California. We'll consider the add back to adjusted EBITDA as well as adjust the EPS for the write-off in the second quarter. Got it. Okay. Okay. Adjusted gross margin a little bit higher than I think maybe we your entire guidance implied is my read on that. Just, you know, just to that point, it was such a strong, you know, gross margin expansion in the first quarter. It seems like you could have no gross margin expansion year-over-year for the rest of the year and be within that range. I mean, I guess help us understand, you know, you're still gonna be benefiting from lower freight price, you know, freight costs? Is it just a matter of you're lowering prices that much that you wouldn't see a gross margin improvement year-over-year in the for the rest of the year? We do see gross margin improvement and, but our goal is, as we mentioned in the earnings announcement that in the third and fourth quarter, we wanna go out aggressively. We will be able to balancing out with the higher margin and lower margin chain account that we can being 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 space in the initially. Now that we're able to set up new additional warehouse space and making space in the existing warehouse, what we're doing right now is we're racking up all the existing warehouses or moving to a larger warehouse and at the same time adding additional spaces. With that, when it's done, basically we can go out. First of all, we can increase our inventory levels, so we can increase the fill rate. At the same time, we can go out and go out after the new accounts with a lower margin, which has been a little bit somewhat conservative, stating 32%, 33% at this point. Got it. Got it. Yeah, maybe just a little more detail on. You know, on the drivers to the back half of the year, you know, guidance obviously includes a very strong growth in the back half of the year. You know, maybe if you could describe, you know, how fill rates have improved, you know, maybe quantify where some of that new business, you know, how confident are you that that new business is coming online? Just give us some comfort that you're gonna be able to kind of, you know, hockey stick the growth trajectory here, you know, even as you're kind of, you know, even as pricing remains aggressive, as you mentioned. Well, one thing is our online business is definitely doing well, and we've realized that more and more people are looking for an eco-friendly product online. We're looking to add additional 200 to 300 SKU on the fine line, more of a elegant, expensive line of bagasse and eco-friendly paper product, coming in in the third quarter. At the same time, we're focusing more on the high margin items such as custom printing product. It's not just the custom printing cup anymore, it's the takeout box, containers, and even paper lids, and also the custom bagasse plate and custom bagasse hinge containers, as well as, we're looking to bring in pizza boxes, corrugated donut boxes. There are so many items that we're focusing just on the eco-friendly side, because we've seen recently, especially the past 30, 45 days, more company are coming to us. They're saying that they're being forced to, by the cities, to move faster in terms of moving to eco-friendly products. When we set our right now our annual goal to be 35% of our revenue coming from the eco-friendly product, I would think that would be conservative number with the amount of additional product we're gonna bring in at a higher margin versus the traditional product that we sold, the Portion Cup, the plastic cup. All the plastic items are... They're basically saturated the market. 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. Okay. sorry, last question is on. Hey, Jake. Yep. Sorry. Uh. Mm-hmm. Maybe just to chime in real quick. I think you were wondering how confident we feel about the sales trend pick up, right? In the second half of this year. I would say, I think Alan provided a lot of great color already. Maybe just to summarize, I think our level of confidence is pretty high, and that comes from primarily a couple of things. One, we already signed some new warehouses we are getting ready to move in towards around the some of the warehouses in the second quarter or towards the end of the second quarter. We know that's coming along, and we're also adding, to Alan's point, racking spaces in some of the existing warehouses. So that infrastructure is going to be ready pretty soon here. Just one other thing I will point out, I think we touched on this in some of the earlier discussions as well, is a big chunk of our business, we do have great visibility into what our volume is going to be from our pipeline, right? Some of the new contracts that we previously signed that were sitting in our pipeline, we know we're gonna start shipping around the end of the second quarter, starting also in the beginning of the third quarter. 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. Got it. Then lastly, you know, you know, 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, you know, going eco-friendly? I think that you had some excitement around that. You know, 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? Jake? Yes. We went into the joint venture last year when people couldn't travel. I couldn't travel overseas. This year, I went, I was able to go abroad overseas. Also, of course, with the joint venture, we were able to get some market intel that domestic manufacturer who has already started manufacturing bagasse product in U.S. are looking to shut down their production plant and going to source in OOC, because they came to our factory to source. During the time that we started the bagasse factory joint venture, I was not aware of so many bagasse plant that are out there in Asia and also that are coming up around in Asia with more product, better product and better pricing and newer equipments. When I was able to do so and find out that originally when we wanna join the venture with overseas partners, we didn't know that there was abundant of these supplies out there in the market. Second, we didn't know, we know that this bagasse product is gonna be a highly demanded product in U.S., and we know that we wanna also be one of the manufacturer to start production in U.S. We didn't know how challenging it was to start a manufacturing bagasse plant in U.S., which most of these larger manufacturer or competitors are looking to shut down this year. One thing I heard that is the reason for them to shut down, they pouring millions of dollars and they've lost money, and it's hard to maintain these equipment, finding the people domestically to produce these products with a higher quality. 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. That's one thing that decided made us decided to not only to back out, at the same time, we're scaling back manufacturing California because the cost of manufacturing California had risen year-over-year comparably. We heard that it's gonna go even higher with the electricity costs going up, with the labor costs 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. 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. 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 bagasse domestically. That's how widespread the Asian countries are going after in terms of eco-friendly product, reducing plastic versus U.S.. Great. Thank you so much. I appreciate it. Thank you, Jake. The next question comes from Ryan Meyers with Lake Street Capital Markets. Please proceed. Hey, guys. Thanks for taking my questions. First one for me, as you've taken price down pretty aggressively, do you feel like you've been able to gain market share versus some of your competitors? Yes. Got it. That's straightforward, and that's easy enough. As we you know, as we think about the sales team, and the ramp here in the second half, you know, how long typically does it take a new sales rep to, you know, get up to speed, add new customers? How should we think about, you know, the investments you guys are making in sales right now and kind of your level of confidence, how new salespeople online can help accelerate growth in the second half? 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. Basically we're able to pick up new sales rep. People are looking for new jobs, we're actually picking up people in the similar industry. 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. 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 only limited certain product. The product might be stored and manufactured in different facility they can consolidate versus the flexibility that we offer in our company that enables the sales rep to sell quickly, faster. Most of these companies, they have their structure in terms of regional, a city, a small territory. For us, basically our sales can go anywhere. They're very flexible. We're giving a lot of authority to our sales rep to go out and flexibility in terms of selling the product, the customers, and also pricing. With that said, we see that it only take about a couple of months for the sales starter to bring revenue in, new sales reps. Okay. That's helpful. 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? Our lease is up in Seattle, end of August. We've already negotiating with the different facility to double our space in Seattle northwest area. We're also looking to add different territorial throughout the U.S. because our goal is to increase our online visibilities to service different type of customers. Also we're looking to go into the B2C commerce, party supplies. Now that basically, we're being able to sell to consumers directly. Lately, we all heard that Party City went bankrupt, and there is a high demand of birthday plates, cups, and napkins and different type of anniversary type of consumer goods. That's something we're looking to get into as we grow our online team. Which, in just in the first quarter of this year, the past three months, we actually enlarge our online team members more than double. We're looking to double in terms of additionals, adding additional staff to help us grow that business segment. Got it. Thank you. Thanks for taking my questions. Thank you, Jake. Bye. Our next question comes from Ryan Hoffman with Stifel. Please proceed. I'm not sure who Ryan Hoffman is. This is Michael Hoffman. It's Michael. How are you? Hey, Michael. Don't even have a Ryan in the family, so whatever. I hope you're having a good day. Can we get into a little bit about cadence? Jian, what's the ocean freight was $14.4 a year ago, $5.9 this year. How do I think about that trend two, three, and 4 Q? What am I comparing against? Yeah. Hi, Ryan. Thank you for the question. Oh, Ryan? It's Michael. It's Michael. It's Michael. It is actually Michael. I'm not sure why they got me. Sorry. I don't know why I have... Now I have Ryan stuck in my head. Sorry. That's okay. It's Michael Hoffman. Yeah. You can't call me late for dinner. Sorry. Yeah. You're absolutely right. For the rest of the year, we actually, think ocean freight as a percentage of sales is actually going to be pretty stable. It might come down even a little bit from, first quarter, we were at 5.9. I think it's probably going to be in the 4%-6% range for the rest of the year. Okay. I'm comparing 2Q through 4Q. It was averaging what? I would say averaging maybe roughly 5%, give or take. From last year. This is against last year, I meant. You were $14.4 last year in the 1Q. What's the trend? Oh. I'm wasn't saying that very clearly. It's the Ryan thing got me all confused. It's going to come down. When you're doing the year-over-year comparison, you'll see a significant drop. On last Q2 2022, we were at 18% of sales. And then that came down to about 15% in Q3 and almost 10% in Q4. What I'm saying is for the rest of the quarter. Sorry, for the rest of the year, right, Q2, Q3, Q4, we think that this percentage is going to be pretty stable. It's probably going to be very close to the 5%, you know, 4-6% in that range for the rest of the year. Okay. That leads you then to an interesting, I get being conservative, but it seems like it's really conservative if you stay with 32%-33%. How do I think about what's creating margin, I mean, effectively sequential margin compression to stay inside 32%-33%? 'Cause at 39.8%, if I take the midpoint at 32.5% and, you know, and then do an average of what the remainder of the year would look like, that's like 30%. Yet it's a really steep savings in freight, which helped drive the 39.8%. Help me get comfortable. How much cushion have we built in here? We try to build cushion. Yes. I mean, me and Jian Guo, we don't know how the market condition is because we've seen the market in the overall market general, it's with the increase in interest rate and restaurants shutting down and more import product coming through the U.S. I don't know how competitive it's. We don't know how competitive down the road it's gonna be. We just want to build some cushions, maybe a lot of cushions, so that we're competitive in the market in the third and fourth quarter, that's all. 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. In the second quarter, we were also talking about we were expecting currently some write-off of inventory related to our scaling back of the production in California, right? That's part of the overall picture when we think about the second quarter margin. We also previously discussed starting primarily from the third quarter, going into the fourth quarter, as we have the infrastructure in place, the warehouse, you know, sales team, new sales members coming on board and we start to really focus on pushing the volume. We do expect to see the margin to come down as we might take additional price, you know, price reductions to gain additional market share. All of those are being considered in providing the full year guidance of 32%-33%. Okay. I wanna ask something, Michael. Just, FYI, like, for starting April, actually May first, we've reduced our highest moving item, Portion Cup plastic, by 10%. June, we just announced that we're looking to do another announcement. It's different categories in June first, also high moving volume categories. We know that and 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 done doing so ever since last September, but not like, you know, one time, in, a decrease. We've been doing it every monthly. We have done at least four price reduction already since last September. Okay. Just to understand how the market environment may play out. If you have this current business climate that you lived in in 1 Q, What I'm hearing is by all logic, you're gonna end up at better than 32%-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%-33% range, gain share, grow the business 5%-8%, gain share, stay at 32%-33%. If I have stable business environment, I'm probably gonna be better. Is that a reasonable conclusion? I'm not trying to push your numbers out. Just wanna understand if the business environment's like it is right now, I'll probably have upside to the margin. Actually, I feel the business environment for our company is, it's great. We're going out there, we're winning every bid that we go after. NRA is next actually this month, and we're expecting to increase additional 100 new chain account business coming aboard. We've been waiting to go out. We've asked our sales rep to hold back, not to go out and go quote because we have limited space, and now we're asking our sales that we're ready to go. We do see overall market environment is not good, but for our company it's good. So that- Michael, I would say your statement is fair. Okay. All right. I get we're being conservative, but there's more room for upside than there is downside. There is a lot room, I can say. Yeah. Okay. There's a lot room. Yes, a lot. Back in, I think I can't remember whether it was the third quarter or the fourth quarter, we reintroduced the idea of maybe starting to do some M&A again. You thought about that as something that might trickle into the second half. Where's your head around M&A versus organic, and adding like you're adding warehouse through the organic method instead of buying things. Where are you on that? Right now, at this point, after visiting the overseas manufacturing plant, comparing to domestic manufacturing, I do not think it is worth it to merge with a company that has old equipments domestically. A lot of these manufacturers domestically, I've seen that they will have a challenging year in terms of competing overseas vendors as manufacturer. At the same time, the most challenging will be hiring the technician to maintain the equipment and also maintaining these older equipments. We will see opportunity. So far, we've been approached by different company capital investment group, looking to represent certain company that they're looking to sell the company. Maybe two years ago, they wouldn't like looking to sell, but now they're looking to sell manufacturers or some competitors and even some distributors that they weren't looking to sell last year, but this year they're open, they're open-minded now. We believe that right now is 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. Also of course, given all of our P/E ratio, EBITDA multiples are low, we don't see companies out there looking to sell at low EBITDA margin. EBITDA. Sure. Yeah. They're still looking at 10x multiple, which is not realistic. Yeah. Yeah. Yep. Okay. That's fair enough. Thank you very much for taking the questions. Thank you, Michael. The next question comes from Ryan Merkel with William Blair. Please proceed. Hey, everyone. I haven't heard my name used that many times. Hello, Ryan. -in a conference call in quite a while. I like it. My first question is on second 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? Is there also maybe some underlying demand weakness from your customers? Just wanna be clear on that. I wouldn't. There is no underlying demand in lower demand from our customers. We're seeing that because we lowered our prices by like 10%-20%. We're seeing that possibly that the volume will go up very likely, but the revenue may come down. Of course, at the same time, as mentioned, that we do wanna be a little bit conservative in terms of the revenue guidance and profit margin guidance nowadays for. We do feel that there is a lot room to grow and both in revenue and gross margin. We just wanna be a little bit comfortable in terms of conservative. Understood. Makes sense. Okay. I wanted to follow up on gross margin. Alan, I think you said you wanna be aggressive with the national accounts 'cause you have inventory now. Are you saying that you're gonna 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? No, I wouldn't say that we're gonna cut prices. We just wanna be fair in the 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. At the same time, we're offering a different type of product. A lot of the customer that we're approaching are people that are switching it from styrofoam into paper or plastic, as well as switching from paper or plastic into compostable product. That's something that we're able to go after these customers, creating new ideas, brainstorming with them, new packaging. One of the thing that our competitor has been doing, selling more is styrofoam, and that is they're hitting basically, a wall on that part. There is really no room to grow in the styrofoam business. With that, all of a sudden, we see a demand driven toward the eco-friendly side of the business. Traditionally, most of the company out there are buying, just bringing in the traditional product. There are a lot of new smaller chain, mid-size chains, they're looking for a higher end compostable product. That's something we're looking to go into more. Even though we're gonna continue to bring in the traditional product, we're also looking to bring in the higher end, different, unique type of compostable product, such as out in the market, I don't believe there is a paper lid in the market of your soda cup or a paper lid for your food containers. That's something we've just started to bring in. Then we'll display this at NRA show. 100% compostable paper lid, not a plastic, not a bagasse, but a paper product. Got it. Thanks for the color. Thank you, Ryan. At this time, we are showing no further questioners in the queue. This does conclude our question-and-answer session. I would now like to turn the conference back over to Alan Yu for any closing remarks. Thank you everyone for joining me the earnings call Q&A session. I look forward to all of you on the next earnings call. Thank you very much. Have a wonderful day. Bye-bye. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.