Good day. Welcome to the Karat Packaging Inc fourth quarter and full year 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Roger Pondel, Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, everyone, welcome to Karat Packaging's 2022 fourth quarter earnings call. I'm Roger Pondel with PondelWilkinson, 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 our 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 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'll turn the call over to CEO, Alan Yu. Alan?
Thank you, Roger. Hello, everyone. We were able to grow our top line during the fourth quarter of 2022 against a very strong prior year quarter, despite an overall challenging deflationary environment in our industry and multiple price reductions that we've implemented. Additionally, thanks to our continued margin improvement efforts, we achieved record full-year gross margin of 31.2%, despite a negative out of period inventory write-off of approximately $900,000 and generated a record full-year operating cash flow of $29.5 million. With the stabilization of ocean freight costs and the supply chain issues caused by the pandemic now essentially behind us, we are focusing on operating costs, containment, and eliminating inventory redundancies built during the supply chain disruption period.
During the fourth quarter, we added a number of contracts with new national and regional chain accounts, and we expanded product offering to existing customers. We are expecting these new agreements to materialize and add to our top line starting mid-2023, and we are continuing the strong momentum in building our pipelines. In the near term, revenue for the 2023 first quarter will likely to be down about 10% compared with our prior year period. We are anticipating revenue to pick up again toward the end of second quarter. For the full 2023, we are expecting revenue growth to be at the high single-digit year-over-year. As a reminder, year-over-year comparisons were impacted by pricing for inventory sold during most of the first half of 2022, which was near peak level.
Order volumes during that time period last year were unusually high due to supply shortages. We continue to see solid growth in our eco-friendly products. This category grew 24% in the fourth quarter over the prior year quarters, and demand remains strong into 2023. Our joint venture in Taiwan, building a state-of-the-art bagasse factory for manufacturing 100% compostable food service products, is progressing well. We are continuing to receive orders and many inquiries that could fill capacity quite quickly, which would be a good problem to have. Construction of the plant is behind schedule because of power supply issue, which now has been resolved. We currently expect initial shipment to begin in the second quarter. We are implementing a number of growth strategies in 2023 that we are confident will provide solid long-term returns.
Among them, we are improving our fill rate and inventory management and modifying our model to be more asset light by scaling back manufacturing production in California while expanding import products which carry higher margins. To accommodate future growth, we are working on increasing our distribution space. In February, we signed a new lease for the approximately 52,000 sq ft distribution facility in Chicago and expect to move in by end of April. We are also getting close to signing a lease for another distribution facility similar in size in Houston. Additionally, we are working on expanding our existing warehouses by adding approximately 50% of the new rack space. As part of this initiative, we are targeting geographical expansion in the East Coast and Midwest regions. To do so, we are increasing the size of our sales team by approximately 35%.
Lastly, we are in the process of upgrading our e-commerce platform and expanding online support team. We are excited to begin offering online sales in Canada and Hawaii. We expect to again generate strong operating cash flow and continue to scale back our CapEx this year, which will give the company flexibility to consider returning excess capital to our shareholders as we continue to look for strategic growth opportunities. I will now turn the call over to Jian Guo , our Chief Financial Officer, to discuss our financial results in greater detail. Jian?
Thank you, Alan. Our 2022 fourth quarter results reflect continued top line growth despite a challenging year-over-year comparison, improved margin, and continued strengthening of our liquidity position. Let me provide more color on our operating results, starting with revenue. Net sales for the 2022 fourth quarter increased 1.5% to $92.7 million from $91.3 million a year ago. The 2021 fourth quarter was a particularly strong revenue quarter, with COVID reopenings and price increases implemented due to extraordinarily higher ocean freight and other costs. By channel, sales to distributors, our largest channel, grew 3.1% for the 2022 fourth quarter. Sales to the retail channel increased 4.6%. Sales from the online channel increased 1%, sales to national and regional chains decreased 3% for the quarter.
The decrease in the chain accounts was due to certain operational issues, which have been essentially resolved. Sales of our eco-friendly products increased 24% for the fourth quarter. During the fourth quarter, we completed a project to reevaluate and classify our inventory to be more aligned with the variety of product categories offered to customers. As a result, some of the product category data, including eco-friendly products in the prior periods, was recast to allow for a more meaningful comparison. We continue to see accelerated growth from these products as we strengthen our market leadership position and expand our product offering in this category to meet the needs of our customers and the evolving regulatory landscape. Eco-friendly products represented 27% of our total sales in 2022, compared with 21% in 2021.
Gross profit increased 4.8% to $29.7 million for the 2022 fourth quarter from $28.3 million last year. Gross margin expanded 100 basis points to 32.0% from 31.0% in the prior year quarter. Gross margin was favorably impacted by lower and stabilized ocean freight costs for the 2022 fourth quarter and 9.8% of net sales, compared with 12.3% of net sales in the 2021 fourth quarter. The growth margin was negatively impacted by a $1.7 million inventory write-off, which represented an out of period adjustment for certain inventory items in the previously issued quarterly and annual financial statements, as well as an impact of $2.4 million from freight and duty capitalization.
Based on current cost factors, we are expanding our 2023 full year margin goals to be in a range of 32%-33%. Operating expenses in the 2022 fourth quarter were $24.9 million or 26.8% of net sales, compared with $21.2 million or 23.2% of net sales in the prior year quarter. The increase primarily reflected higher labor costs of $1.5 million due to workforce expansion, higher production costs of $1 million due to unexpected machinery repair, and about $600,000 due to an increase in rental expense from the two additional warehouses added in May 2022. Operating expenses in the 2022 fourth quarter also included a CapEx deposit write-off of approximately $500,000 related to pre-pandemic capital investment project.
Net income for the 2022 fourth quarter decreased to $4.5 million from $6.0 million for the same quarter last year. Net income margin was 4.9% for the 2022 fourth quarter versus 6.5% in the prior year quarter. Net income attributable to Karat for the 2022 fourth quarter was $4.5 million or $0.23 per diluted share, compared with $5.6 million or $0.28 per diluted share in the prior year quarter. Adjusted EBITDA, a non-GAAP measure, was $9.9 million for the fourth quarter versus $10.9 million in the prior year quarter. Consolidated adjusted EBITDA margin was 10.7% of net sales versus 11.9% in the prior year quarter.
Adjusted diluted earnings per common share was $0.30 per share for the 2022 fourth quarter versus $0.32 per share in the prior year quarter. During the 2022 fourth quarter, we generated operating cash flow of $17 million and continue to expect strong cash flow in 2023. We believe Karat is well positioned to execute on its future growth strategies. We finished 2022 with $84.5 million in working capital compared with $72.1 million at the end of 2021. We have financial liquidity of $63.0 million as of December 31st, 2022, and declared and paid a special cash dividend of $0.35 per share on our common stock. Lastly, we just completed the extension of our $40 million credit line, extending the maturity to March 2025.
We expect to continue to further strengthen our financial and liquidity position in 2023. Alan and I will now be happy to answer your questions. I'll turn the call back to the operator.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up a handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jake Bartlett with Truist Securities. Please go ahead.
Great. Thanks for taking the question. you know, my first one is on the, on the 2023 sales growth. And Alan or Jian, can you talk about what the drivers are? You know, high single digits, does that include, you know, negative impact from pricing? Pricing would be a headwind. Just if you could give us the components of that high single digits growth, that'd be helpful.
Sure, Jake. Well, first of all, we believe that right now we're seeing that price contraction due to deflationary, especially from ocean freight, pricing coming down to back to pre-pandemic. We have been adjusting our prices ever since September of last year, 2020, and then October, November, December, even January. We do see that pricing to be a little bit basically stabilized as well as ocean freight has been stabilized. Our growth are part of seeing several factors. One, our online sales. We're seeing strong online sales. Also, we added, we're looking to start in Canada for online sales in Canada. We never really tried to approach in the past years. This is because we actually modify our platforms and increase our warehouse spaces.
Of course, second is national chain account and regional chain account. As mentioned in the previous discussion that we actually sign in several over a dozen different regional and national chain account that is expected to start shipping, starting April, May, June, July of this year. They will add to our existing volume. Right now, the obstacle headwind to service these national chain accounts that we just added is warehouse spaces. We have been short of warehouse spaces ever since end of last year. We added some spaces that was not, still not adequate. That's why we are continuing to seek for new spaces. That's this is an area that we're looking to really expect that speeding up the process of getting additional warehouse spaces in different areas.
Even in California, we are actually looking for additional spaces in California. New Jersey, South Carolina, we just expanded additional 50,000 sq ft in South Carolina, and we're racking up the entire warehouse in New Jersey. We're moving some of the equipment out of California and reusing that space to a racking space for product that were coming in to service each account that we signed up. As also another factors that will actually growth will be the eco-friendly products. We're seeing more and more states, cities are banning Styrofoam, the plastic and the straws. We're bringing more, higher margin, higher, revenue-wise product from overseas to sell to our customers and because of the need on that part.
Great. You know, just kinda really narrowing back in on the pricing side, because that seems to be, you know, obviously it was a headwind in the fourth quarter here. I think you mentioned it, Alan, that you thought that the pricing level, the absolute level of pricing has stabilized. I just wanna, you know, get your confidence on that we're not gonna just see continuing, you know, decrease in pricing, which is gonna kind of squeeze margins, but also, you know, limit the sales growth.
You know, in the 10-K, you know, as you disclose kind of the drivers to the change in revenue, I think the implication here, if I did the math right, is that pricing was a - 4% drag in the fourth quarter. The question is, if you kept prices where they are now, you know, how much of a drag would that be for 2023 as a whole? Should we assume that pricing is gonna be a negative impact on growth for 2023 as a whole?
Well, earlier, Jake, we mentioned in our earlier in the conference call that the 2022 first quarter was the biggest, the highest, ever in history of ocean freight. That's what we're seeing and also as well as supply chain disruptions, was all in the first quarter, mainly in the first quarter of last year. That everyone was rushing to buy whatever they can and stocking up everything and then at the higher price. Even ourself, we did that too. This year, we're seeing that first quarter, we're seeing everything's coming down, all the prices coming down, ocean freights coming down. Right now, it's ocean freight stabilized. It has been continue to come down since July of last year till even till the end of the last year.
In January, the ocean freight started to stabilize. I do see that there's not much of a price difference anymore in the future for 2023, unless we have sufficient spaces that we're going after even more accounts that we're looking to sacrifice our margin and prices to obtain new accounts, which we already have enough pipelines and also agreements that basically it's gonna fill our capacity in terms of warehouse space. Again, we do have capacity in bringing more additional product and manufacturing capacity, but we're lacking in warehouse spaces. That is the key components. We can grow as long as we add more warehouses at a not increasing too much facility costs.
Okay, great. you know, I just wanted. Sorry, Jian. Thanks.
Hi, Jake. This is Jian. If I can just add on to Alan's comments real quick. I think Alan provided a lot of great color on pricing, so hopefully that answers your questions about pricing just as far as what the trend is going to be for 2023. I also just wanted to add that we do expect to continue to be able to expand our gross margin even when pricing start to stabilize, right? As Alan mentioned, pricing as of last year, if you're looking at earlier part of 2022, it was at peak level. A lot of that was because of the significantly higher ocean freight costs.
Now, even as we start to take actions to be proactive to pass on savings to our customers because of the significant drop in ocean freight and because of a lot of the other margin improvement sort of initiatives that we are implementing, we're actually guiding higher gross margin on a full year basis for 2023, and we're very confident that we can continue to expand our gross margin even with this price action that we're talking about.
Great. My other question.
Yeah, Jake, let me add some.
Sure. Yeah, go for it.
Let me ask you, let me add one more thing to, price margin-wise.
Mm-hmm.
Jian mentioned that we are able to keep or actually increase our gross margin even with the price decrease. That is correct because we're actually looking to have a full year guidance of 32%-33% gross margin. If you look at, if we take a look at back in fourth quarter, we actually took almost over around $2.4 million freight and duty capitalization. Same thing with the third quarter. It was, like, more at about, around the same area, freight and duty capitalization. Starting the first quarter of 2023, I don't believe we'll see any more of the freight and duty capitalization that would take down on our margin-wise, gross margin-wise and then revenue-wise. We're seeing that it's gonna be a favorable thing, which ocean freight stabilize for this year.
Great. My other question was just on manufacturing and the decision to, I guess, take away the manufacturing in the Chino facility. You know, one question is, are you keeping the manufacturing in Texas facility? You know, what is it just maybe a little more detail on the decision to make that change. There were some reasons why you did. You had manufacturing capabilities before. I'm wondering kind of what changed to kind of drive that decision.
Yes. We're actually, have started increasing our equipment and moving some of the equipment from California into Texas. We're increasing our Texas manufacturing capability because it has more space and also the warehouse spaces, it's cost less. The manufacturing cost is much lesser in Texas versus California. Finding skilled mechanic, laborers, it's much easier in Texas versus California. California, the warehouse facility cost has gone up triples since 2 years ago. In terms of as well as labor costs has gone up a lot tremendously. We're seeing that, and that is, has been one of our key headwinds in the third and fourth quarter of last year as labor continued to go up, different laws changes in California.
We see California as more as a hub that can facilitate product manufacture overseas into California. For us to manufacture more in Texas is more favorable for us because it's more in the inland area. Also most of our new accounts, new customers are actually out of the Midwest and Texas, Midwest and East Coast now. We're seeing most of our growth in the Midwest and East Coast versus a decline in the West Coast area market.
Great. Thank you so much. I appreciate it.
The next question comes from Ryan Meyers with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my question. First one for me, it sounded like revenue in national and regional chain accounts was negatively impacted by some operational issues that you said have since been resolved. Just wondering if we can get some more detail on that and what went on there.
Well, Brian, in the fourth quarter, we had actually some issues with our equipment. You know, they were shutting down, they were broken. We had a kind of a delay in production output. We then actually just had to turn over to our overseas partners to have them start producing for us. Basically, it was a bit of a delay because we have to ship them overseas into California versus it was made in California. The delay these products have come in, and we see that this is actually pretty good in terms of it would cost us less to bring the product from overseas versus us continue to maintain the CapEx expenditures to fix these equipments, to maintain these equipment, to continue to purchase these equipment.
That's one of the decision that we made in January that we want to reduce manufacturing California because we're losing mechanics, skilled mechanics in California. It's challenging to find new ones to replace them. We might as well just start to move our equipment into Texas and also for the West Coast rely on our overseas partners.
Got it. That's helpful. Just kind of switching gears. When we think about the eco-friendly products, you said it was 27% of the mix here in 2022. How would you expect that business to grow? What, you know, percentage of mix would you expect that to represent in 2023?
Jian, do you have the numbers, the actual numbers on that part? I can explain. What I'll do is I'll explain the part that the growth part. The growth aspect is that we see that 2023, more and more city and states are going to push, force the law into effect, especially like in California, we're banning the Styrofoam completely in California in some of the cities. We're adding the, like in May, there's no more Styrofoam in the city of Los Angeles County, so everyone have to go into paper, something more eco-friendly. More and more cities are actually after.
Now that the COVID pandemic is behind us, they're going back and start looking at eco-friendly packagings, and that's where we see the growth is, as well as our online channels. We're seeing the more sales in the eco-friendly aspect of the product through our online channels. With the new sales that we're moving into Canada has completely gone into eco-friendly, and that's where we see the major huge market in terms of eco-friendly product in the northern state of Canada.
Got it. Last question.
Hey, Ryan.
Oh, go ahead, Jian.
Yeah. If I can also add on just from the numbers perspective. I think as you pointed out over the on average for the entire full year of 2022, eco-friendly products represented about 27% of total sales. This is based on the updated product category that we talked about in our prepared remarks. Just to give you an idea about the sort of the trajectory here. When we look at Q1 2022, that percentage was 25. Q4 2022, that percentage was 31. You can clearly obviously see the momentum in the growth of our eco-friendly products.
As Alan mentioned, with all the strong demand, the regulatory, the change in the regulatory environment and our continued expansion of the products that we are offering in this category, we do see that this momentum is gonna continue into 2023.
Got it. That's super helpful. Last question for me. Appreciate the commentary on building out the sales force there. Obviously you're targeting some new geographies, but I'm curious, are you guys targeting any industries outside of foodservice?
I'm sorry, what was it? The food service area, because I, w e are targeting, with the additional sales force, we're targeting geographic location as well as we're adding new food product. Yes, new beverage items, bubble tea, boba product supplies. We do see that the demand for boba supply has come back up this year. That's a area that we're targeting. Mainly geographic area in the Midwest and the East Coast and Southeast, that's where we see the biggest driver of our growth in 2023.
Got it. Thanks for taking my questions.
The next question comes from Michael Hoffman with Stifel. Please go ahead.
Hi. Thank you very much for.
Alan, Jian, I wanna get to the sales growth thing a little. Can you walk us through what we should assume for cadence 1Q, 2Q, 3Q, 4 Q to get to 7% - 9%, so midpoint 8%, that's high single-digit sales growth for the year. What's the cadence look like over the four quarters?
Jian, do you have like a breakdown, the forecast on that numbers? I can go over the process and the strategy, but the actual numbers, I think you have the projected numbers. Michael, let me go over the strategy in that part. The first quarter of 2023 versus 2022, we see a decline because the first quarter, we that was when the market was short of everything, so everyone's trying to grab a whole container. They were stocking up. They were worried about everything. I think we were selling out everything that we had on the floor.
We started to really increase our inventory, and which all came in in the second quarter of 2022, which really actually decreased our operationals because we couldn't move anything in our warehouses. Then we immediately added new warehouse facilities in California. That helped a lot for our third and fourth quarters. It eliminated the warehouse space issues. That's why we see a decline, year-over-year decline, because we actually normalized this year. Well, with the price coming down. We see that this is a continued issue for 2023. That's why we started to look for additional spaces early in the last year. In January, we finalized Chicago, and we're looking to finalize Houston.
We wanted to make sure we have been operational by May of this year, because we see a bulk of our new accounts that are coming aboard, they need the product. We need to stock for them by April or May of this year. That's where we really see the increasing need of South Carolina space to increase. New Jersey warehouse need to increase the space. Texas need to increase the space. Seattle. Every one of our facility need to increase our existing space by racking up the entire warehouse, adding additional 15%-25% additional spaces, plus the two additional warehouses. That will help us for facilitating the growth of the new account that we're signing up, which we already signed up. It's just that the product will be started coming in from overseas and also domestic.
We have to increase the stockpile, 30 - 60 days inventory on the floor for them to start to take on the product. That's where we see the number is.
Okay.
Michael, maybe just to.
Go ahead. Sorry.
Hi, this is Jian.
Hi, Jian.
No, you're fine. Just maybe to provide a little more color from the numbers perspective to answer your question on a breakdown by quarters in 2023. This is what we have in mind. For Q1 2023, we already discussed in the previous prepared remarks that we are currently expecting the revenue to be down about 10%. I think Alan provided a lot of great color on operationally what's driving that. From overall the trend perspective, I think that's going to, we talked about that trend is going to revert, we're gonna see that revenue growth is going to accelerate towards the end of the year.
We do currently expect continued momentum in our revenue growth, primarily in the second half of 2023, probably around 20% or above in the fourth quarter. Over, when we're looking at the full year, 2023, that's how we come up with high single digit year-over-year growth.
If I'm playing this out, - 10% in the first, low to mid-single digits in 2Q, you know, teens in 3Q, over 20% in 4Q, and that's how you get a blend to about 8%.
That's just the overall trend, is we're gonna.
Yeah.
Start a little, it's gonna continue to accelerate throughout the year. Yes.
Right. Right. The way I sort of characterize it, 1 Q - 10%, 2 Q sort of up 5%-10%, 3 Q up 10%-15%, 4 Q up 20%-25%. That blends you into, you know, call it an 8% number. That's a high single digit. Would you discourage us from thinking about it that way?
I wouldn't. I think the overall trend makes sense. Obviously, part of it depends on the timing of the shipment, especially as we think about quarter end, I think overall, the trend is makes sense.
Okay. Then, I mean, you know, your margin, you know, your margin outlook, 32%-33%, straddles the 32.2% for the year. It's a, you know, a slight down 2 basis points and up 80 basis points, and you're dealing with a negative in the first quarter. The nature of this question is are we looking for increased number of SKUs and better quality of what's being sold is what helps overcome a headwind in margins in 1Q and then an improving trend to get you to call it the midpoint 32.5%, which would be, you know, up modestly year-over-year on a full year basis at the midpoint? Is that the right assumptions about how that's happening?
Michael, let me answer that question. We're gonna see a more of a higher margin in the first quarter and second quarter, and then we're gonna see a lesser margin in the second half of 2023. That's one of the strategies that we're seeing is because we are going to go full ahead in terms of competing the market in starting the second quarter or second half of the year as we have more capacity in terms of facility space. Yes, and earlier Jian mentioned that in the fourth quarter, we're gonna see.
Actually, starting third quarter, fourth quarters, we're gonna see a more of an increase because historically, our increase year-over-year has been around 15%-22% year-over-year growth. That's where we're gonna see the momentum on that part, mainly because of our additional sales rep that we've hired as well as the additional warehouse space that we have to service the new geographic area customers. We mentioned that in the past years, our goal is to continue to grow into the area that we have not touched, that is the Southeast, Midwest, and the East Coast. Finally, we are adding, with the additional space that we added, we'll be able to accommodate the growth in that area.
Okay. Just so I make sure I've heard this correctly, if I'm looking at the margin trend, you're higher in the first half than you are in the second half, which means you have a sequential improvement from the year end, 4.2%, into the first half in order to land at a midpoint of 32.5% for the full year, which is the your guide's 32%-33%. Is that correct?
Correct. Correct.
Okay. Okay. I don't, I don't wanna belabor the fourth quarter much. you know, I get some of the dynamics that are happening that were out of your control between down equipment and getting product from overseas. I haven't had a chance to do this 'cause I'm on the road, so I confess I should have done it myself, but I haven't, so I'm asking you. Let me ask it a different way. You, you gave guidance that would've landed us at about 33.2% for the margin for the quarter, and we came in at 32%. What accounts for that 120 basis points?
I'm assuming some of it's the write-offs, and some of it's the timing of product that got disrupted because of the equipment failures. I would like to hear sort of what made up some of that 120 basis points?
I, to me, my understanding is the write-off, but Jian can go into detail on that part.
I can take that question. The biggest impact in terms of the margin in the fourth quarter, you're right, it is the write-off. The out of period, which we talked about in the prepared remark, the impact is $1.7 million for Q4 2022.
Okay. All right. I can do the math on that. What's really important is if you would've hit your margin target, even if the sales were down because of the pricing give backs related to freight, that's the real important message is margins are on track ex the write-off.
Yes. Margin is actually on track to grow.
Specifically in the fourth quarter, margins were okay ex the write-off. You know, I get the dollar amount's lower because of starting on a smaller sales base 'cause you had to give price back. The margin went actually was. You know, margin trend ex your write-off for the fourth quarter was on budget or better.
Michael, I can take that question. It actually is going to be better. Without the impact of the $1.7 million out of period adjustment, our fourth quarter margin would have been 33.8%. It would have been better. In Q1, we are seeing that operationally that some of the actions that we are taking to improve the margin is actually, we're starting to see some of those translating into numbers. We do expect margin to continue to expand from that number into Q1 2023.
I wanted to make sure we had that clarity 'cause I think that's important for everybody to understand. You had a good margin quarter. You had to give back some price, you had a good margin quarter. Okay. That's. Last question for me, capital spending, you said it was gonna be down, what's the dollar amount you're budgeting?
Jian, can you take that question for the capital spending? I know my understanding that it will be much lower than the previous years. I believe the 2022 and 2021, we spent over $50 million in capital expenditures. In 2023, I think we're looking to spend under $4 million for capital expenditures as we decrease manufacturing in California. We will reduce the CapEx expenditure for the maintenance expenses. In terms of.
Yes.
Yeah.
Yes, that's absolutely right. I would say our run rate CapEx is going to be significantly lower, as Alan talked about. That number is excluding, for example, the continued investment that we are making into the joint venture or if we were to expand to continue to invest into the joint venture. That's absolutely right. The run rate CapEx is at a much lower level.
Okay. About $4 million is what I'm hearing.
That is correct.
Correct.
Okay. All right. Great. Thank you for taking the questions.
Thank you, Michael.
The next question comes from Paul Dircks with William Blair. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. first one for me is, forgive me if this was covered earlier, but on the destocking behavior, you know, obviously, I think the thinking was that it would end here in the fourth quarter. It's obviously continuing into 2023. Can you help us parse out if there are certain customer segments, certain product categories or any other certain, you know, labeling of what actually is being destocked? How much confidence do you have that it will wane, over the next quarter or two?
I believe that this stocking part for most of our clients that we service has ended in the end of last year. We continue to emphasize to our customers, do not overstock. We will bring product in. There's no shortages. There's no supply chain issue in most cases. Ocean freight are better than last year in terms of the arrival time. They're more clear. They're easier to get a container out of the port. It's less congested. The domestic local carriers are actually faster than before. There's less of an issue of supply chain disruption. Only in certain cases that some of the containers might get delayed, but in most cases, it's not gonna be delayed.
Also as well as, the price, we actually kind of alerted our most of our customers that price has started to come down since last August, September, Octobers, and they continue to come down, and we will continue to let them know what is the market price on that part. Our client has been educated, advised on that part. I don't see any more of destocking. That's where I say mentioned earlier that everything should be normalized in 2023.
Okay, just to be clear, no more destocking here in the first quarter?
Correct.
Okay, got it. Next question for me. In 2022, price was up about 12% for the company. Can you let us know what was price up for the Karat Earth products? Or maybe if you have it in this way, how much the Karat Earth products contribute to your overall price increase?
Jian, do you have the numbers?
Karat Earth in itself, in terms of the percentage of the overall price increase is actually not a super significant percent. It should be, it should be below 10%.
Okay. You know, maybe into 2023, are we seeing any price deflation on Karat Earth products, or are those somewhat saved given the fact that there's so much of a push globally into eco-friendly products?
Yes, Paul. I am seeing some deflationary pricing on the including the Karat Earth. They're brought in from overseas. When they, when the price increase in the ocean freight, it was also added to the Karat Earth. Basically all category lines were added on the ocean freight ones. We also have announced a price decrease on the Karat Earth product in the fourth quarter and also January of this year as well.
Got it. That's helpful. Last one for me. You know, into 2023, what are your expectations for being able to leverage your SG&A? Do you expect that you'll be able to do that for the full year, or is this something that we should think about only when revenue's growing in the back half of the year?
I do believe, I'm sure if Jian can elaborate more, but my understanding that our SG&A is coming down. In second part of last year, SG&A went up sharply, facility costs, labor costs and also production manufacturing expenses. SG&A should be starting to come down in terms of 2023 as we reduce manufacturing in California. Mainly the SG&A increase was due to manufacturing California, trying to repair the equipment, and also the hiring the people or skilled labor to maintain these equipment. That was one of the biggest challenge for the past two quarters.
We do see that, moving to, the Texas, that will have give us more of a leverage in terms of balancing out and reducing the expenditure and SG&A in that part.
Okay, very well. Thank you for your help.
Thank you, Paul.
The next question is a follow-up from Jake Bartlett with Truist Securities. Please go ahead.
Great. Thanks for taking the question. I had just a couple follow-ups. One was on the CapEx and what you're talking about kind of for expectations for 2023. If I include, you know, just CapEx plus deposits, which I think it seems to be the best way to do it, but, you know, it was $14.7 million in 2022. What should that number be in 2023? You mentioned, you know, $4 million in CapEx, but that's not kind of the maybe the whole picture and especially with what you're, you know, investing into the JV. What should we is if we think about kind of free cash flow as, you know, a combination of the CapEx and deposits, what should that number be?
Well, Jake, for the, the year, for the year 2022 and 2023, the equipment that we orders in 2022, we pay most of the deposit, and we actually accounted for that as a CapEx expenditure already in 2022. They're coming in. Basically, there's not much coming in into 2023. Basically all we have to do is pay the remaining balance of those equipment that we paid for already in 2022. As far as JV, we actually paid a majority of it in 2022 already in terms of CapEx deposit on that part.
2023, as we mentioned that we wanna see first how the joint venture in terms of the sales growing and growth and everything, to see if we do increase the CapEx, the additional investment. Actually, we're looking to having additional party to join the joint ventures in terms of selling the shares and having more shareholders for the company. There's different area that we're actually looking to right now on that part. We don't see much of a increase in CapEx or deposit in 2023 for the joint venture, but for the, a s well as for the equipment-wise. That's why we're saying that we're pretty safe in terms of $4 million, in terms of maintenance.
Some of the capital expenditure we're actually looking to spend is on new trucks, new trailers, warehousing, rackings, and those are the things that we're spending in terms of the 2023, more on logistics side.
Okay. Now, in the Chicago or Illinois factory in Houston or warehouse, those wouldn't be big CapEx expenses. That's the $4 million includes those?
Yes. That would not be a big expenditure for CapEx.
Okay. My other question is about, you know, back to pricing and, you know, in my other coverage, covering restaurants, you know, their guidance for costs in 2023. All of them have, you know, packaging costs being up year-over-year, so they're not seeing this, at least telling us yet about deflation on that line. Is there any nuance that maybe the what restaurants order, you know, for to-go packaging, you know, is not gonna be deflationary, but other items are? Just maybe a little more detail because I'm seeing a little bit of a disconnect in terms of what the restaurants I cover are talking about and then your kind of commentary on pricing.
Maybe if you could just, m aybe it's a factor of what is coming down. I know in the past you talked about the plastics, you know, and plastic-based products are really what's driving the deflation on your pricing. Any more detail there would be helpful.
Sure. plastic actually dropped more than anything. Paper has not dropped at all. Paper costs in U.S. has been actually has gone up a lot in 2022, even toward the end of the year. I've even seen a price increase in January of 2023 on the paper side. But on the plastic side, it has dropped a lot, more than 40% in terms of resin costs. That's basically, it's known to everyone. One thing about the restaurant industry. Restaurant doesn't really. Even though they orders, they buys direct from manufacturer like us, they actually have to have a third-party logistics, such as a Sysco, SYGMA, or other national distribution company. They would do the markup.
In terms of what is their landed cost, the actual cost is determined not just by buying the product from us, but also from the logistics side of the business. In that part of the segment of business, I've seen that increase a lot in terms of facility and labor. That might be a indicate that the actual landed cost has gone up versus the product cost has come down.
Okay. Thanks a lot. I appreciate it.
Thank you, Jay.
This concludes our question and answer session. I would like to turn the conference back over to Alan Yu for any closing remarks.
Well, thank you for everyone for joining the conference call of Karat Packaging. I look forward to the future conference call. Again, thank you all, everyone. Goodbye.
The conference is now concluded. Thank you for attending today's presentation. You may all now disconnect.