Karat Packaging Inc. Q3 FY2021 Earnings Call

Good afternoon, and welcome to the Karat Packaging Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Roger Pondel, with PondelWilkinson Investor Relations for Karat Packaging. Please go ahead.

Thank you, Andrea, and good afternoon, everyone. Welcome to Karat Packaging’s 2021 third 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 its interim Chief Financial Officer, Peter Lee. Before I turn the call over to Alan, I need to remind everyone today that our 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 IPO registration statement and in its most recent Form 10-Q as filed with the Securities and Exchange Commission, copies of which are available on the SEC’s website at www.sec.gov, along with other Company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements and Karat Packaging undertakes no obligation to update any forward-looking statements, except as required by law. Please also note that during this call, management will be discussing adjusted EBITDA and adjusted EBITDA margin, which are non-GAAP financial measures, as defined by SEC Regulation G. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in today’s press release, which is now posted on the Company’s website. And with that, it’s my pleasure to turn the call over to CEO, Alan Yu. Alan?

Thank you, Roger. Good afternoon, everyone. We’re pleased to be here with all of you today. Our business continued to grow at a robust pace. Earlier today, we reported solid third quarter net sales growth that reflects exceptionally strong demand for our products and continued expansion in our customer base. Market trends remain favorable, particularly for the environmentally friendly products and solutions that Karat Packaging provides. For the third quarter, net sales were in line with the guidance range that we increased just last month, growing at a pace of 35% year-over-year. Sales in our distributors, online, and national channel were particularly strong, excluding the personal protective equipment products that we sold in the third quarter last year during the height of the COVID-19 pandemic. Our rate of comparative sales growth for the third quarter was 43%. Online sales rose 64% year-over-year in the third quarter as we continue to ship our sales mix toward these high-margin channels. Sales through national and distributor channels also increased at a double-digit pace. Our sales were somewhat constrained by inventory shortages, resulting from tight labor conditions and port delays in the third quarter. We are managing the labor environment through increased recruiting efforts, the use of temporary labor, targeted overtime, and shifted distributions to other facilities in our supply chain. Gross margin in the fiscal 2021 third quarter declined year-over-year, primarily due to the increase in freight costs, which every company is experiencing. Ocean freight rates again rose in the third quarter relative to last year, although they have begun to ease and stabilize recently. Despite the sequential improvements, we expect these rates to remain at the current highest level compared to last year. In addition, gross margin was affected by increased landed costs, which include freight, duty, and custom brokerage fees of approximately $1.8 million versus a benefit in the same quarter last year and in the preceding 2021 second quarter. These increased fees were capitalized into inventory in the prior quarter, resulting in higher inventory costs in the third quarter. Subsequently, the Company saw its higher cost inventory resulting from increased landed costs capitalized from the second quarter, which negatively affected gross margins. Landed costs vary from month to month, especially due to the extreme cost fluctuation of ocean freight this year. We will likely see a benefit for the fourth quarter based on the current inventory being sold that carries the lower landed costs. To respond to the current inflationary price pressures and product shortages and to protect our margins, we instituted multiple price increases in September and again in November, without any pushback. As a result, we expect our gross margins to improve sequentially in the fourth quarter. Our positive balance business momentum continues into the fourth quarter with the secular tailwind we’ve seen this year in consumer spending for services and the adoption of environmentally friendly products helping to drive demand and support for our business. As a result, we’re currently targeting net sales to be in the range of $93 million to $96 million in the 2021 fourth quarter, up about 34% at the midpoint of the range compared with the same period last year. This sequential decline is consistent with normal seasonality. We expect our sales results for the full 2021 year to be in the range of $366 million to $369 million. Growth in high-margin online sales and actions we’ve taken to pass on higher freight costs also give us confidence in our ability to improve our gross margin in the fourth quarter. We want to leave adequate time for questions, so I’ll stop here and turn the call over to Peter to discuss our third quarter results in detail. Peter?

Thank you, Alan. Our 2021 third quarter results, despite strong top-line growth, gross margin declined and expenses increased, primarily due to higher freight, shipping, and labor costs. Net sales increased 35% over the prior year to $103 million in the 2021 third quarter. During the height of the pandemic last year, we shifted quickly to import PPE products to meet a critical need. Sales of these products in last year’s third quarter totaled $5 million. Since we updated in the second quarter of last year, PPE sales have expected to decline and represented less than 1% of total sales in this year’s third quarter. Excluding PPE products, sales for the 2021 third quarter rose 43% year-over-year. Sales to distributors, our largest channel, grew 44%, and sales from national chains expanded 24%, primarily due to more business with existing customers. Online sales rose 64% for the quarter, reflecting strong demand and our continued investment in this critical channel. Sales to the retail channel fell 14% from a year ago, with some sales shifted from retail to the online channel. We also increased minimum shipping requirements to better manage our tight labor conditions, which shifted a portion of our sales mix from retail to distributors, enabling us to better utilize staffing and resources. For reference, the tables in our earnings release issued earlier this afternoon break out sales of our traditional products excluding PPE by channel. Gross profit increased 29% to $30 million for the 2021 third quarter, primarily due to the strong sales growth for the quarter, partially offset by a decline in gross margin. Our gross margin was 29% for the 2021 third quarter, a decline of 120 basis points compared to 30.2% for the same period last year. The gross margin decline primarily reflects higher freight costs, which have begun to ease and stabilize in the fourth quarter, even as we continue to take actions to pass through our higher costs through a series of price increases. Although our gross margin was slightly lower sequentially for the third quarter, we expect to see improvements in the fourth quarter and likely to see additional benefits from the freight and duty capitalization, as Alan mentioned earlier. Operating expenses for the third quarter increased 53% year-over-year to $24 million, principally reflecting higher shipping costs, payroll expenses associated with workforce expansion, increases in facility and transportation costs, higher professional fees, and stock-based compensation of $0.8 million. Operating income declined 24% to $5 million for the 2021 third quarter. Operating margin was 5.2% compared with 9.2% for the same period last year. This is primarily due to pressure from higher freight and shipping costs. The provision for income tax expense was $1 million for the 2021 third quarter, slightly lower than our provision for the same period last year. Our effective tax rate was 24% for both periods, and we continue to expect our effective tax rate for 2021 to be in the mid-20% range. Net income amounted to $4.1 million in the 2021 third quarter compared with $4.6 million for the same period last year. Net income attributable to Karat Packaging was $3.8 million, or $0.19 per diluted share for the 2021 third quarter compared to $4.1 million or $0.26 per diluted share last year. Adjusted EBITDA on a consolidated basis was $8.2 million for the 2021 third quarter compared with $9.1 million a year ago. Consolidated adjusted EBITDA margin was 8% in the third quarter compared with 11.9% for the same period last year. Adjusted EBITDA attributable to Karat Packaging was $7.3 million for the 2021 third quarter. Net cash used in operating activities was $3.6 million for the 2021 third quarter, compared with net cash provided by operating activities of $3.6 million for the same period last year. The decline was primarily due to changes in working capital, particularly a decrease in accounts receivable and our line of credit balance. I will now turn the call back to Alan for closing remarks. Then, we’ll be happy to answer any questions you may have. Alan?

Thank you, Peter. Our business continues to thrive as we capture positive secular trends in the food service industry. As a nimble supplier of a wide range of products, Karat Packaging is able to respond more quickly to market conditions and competition, which we believe gives us a tremendous advantage. Our 2021 third quarter delivered solid growth in sales as we proactively worked through our cost pressures. We’re pleased that demand continues to be strong, which we believe will contribute to another solid sales performance in the fourth quarter. With that, I’ll turn the call over to the operator. Operator, for Q&A?

We will now begin the question-and-answer session. And our first question comes from Jake Bartlett of Truist. Please go ahead.

Thank you for your question. Alan, my initial inquiry is about supply constraints and how they affect our ability to serve customers. It seems that demand currently exceeds what we can supply. I have two questions regarding this. First, does this situation reduce seasonality? Typically, demand decreases in the fourth quarter, but it appears that demand is higher than our supply right now. If our supply capacity remains unchanged and demand is elevated in the third quarter, shouldn't this mitigate the seasonal impact in the fourth quarter?

Jake, that is correct. I mentioned that we won't see significant seasonality in the fourth quarter. Historically, our sales tend to decline during this time, starting in October through December. This drop occurs mainly because many distributors cease purchasing products towards the end of December, as they look to manage their inventory for tax purposes. By the last week of the year, it's challenging to find distributor buyers since most are on vacation, except for the national chain accounts that have already stocked up. In previous years, this has led to notable changes in seasonality. However, this year, we're facing a supply shortage and are struggling to meet demand. Every case we offload from the container is sold the next day; every product we produce at our facilities is immediately purchased. We've even had to ship products from Hawaii to Chino despite high shipping costs, and they’re gone as soon as they arrive in California. Demand in the market is currently very high, and every manufacturer is facing similar challenges. Across the U.S., you'll hear people mentioning shortages of lids, straws, or cups, often resorting to using plain clear cups instead of branded ones. I noticed this even on a plane where traditional local cups were substituted for clear cups. The demand in the market is very strong right now, has remained strong through the third quarter, and appears to have intensified.

Got it. That’s helpful. Alan, as you think forward to 2022, it sounds like demand should remain strong. But how comfortable are you that supply is going to improve so that your sales can grow with that demand, or do you think that really sales growth is just going to be constrained just because of all the challenges that you just mentioned?

We have been informed by raw material manufacturers that the supply will be even tighter in 2022, especially with paper products. As more cities and states require companies to adopt ESG practices, the only options for compliance are bagasse, multi-fiber products, or paper. There has already been an allocation on paper raw material, and we’ve been told that it will be even worse in 2022, along with the compostable raw materials. In 2020, there was more supply during the COVID period, but it's tightening up now. Demand has remained strong, and even extending to 2024, the PLA resin has been largely pre-purchased already.

Got it. So, you see the implication is that you would expect the supply constraints to limit the sales growth for you in 2022?

We are increasing our orders for products from overseas and bringing in more inventory to boost our sales revenue due to rising customer demand. We have identified additional vendors in various countries to help us protect our revenues for the year 2022.

And then just the last question on gross margins for the fourth quarter specifically and then going forward. But can you quantify the impact of the $1.8 million gain that you had in the third quarter and you expected that to reverse in the fourth? Can you help us by quantifying what that portion could be? And then, separately, as you think about gross margins, if we were to assume that freight costs stay where they are now in the fourth quarter and into '22. And then you think about the pricing that you just took, what would gross margins look like in that scenario? So, given your pricing and then assuming that freight costs stay where they are.

Well, here’s the thing. Our gross margin is 29%. That’s part of the reason; the main reason is that we had a pretty good capitalization, that $1.8 million, that we booked in the third quarter. During the second quarter, we had actually had a freight duty capitalization gain of more than $1.8 million, which is actually north of $1.8 million. So, we enjoyed the benefit of the freight and duty capitalization when we imported more products at higher ocean freight rates in the second quarter. In the third quarter, when we reduced our inventories and lowered our freight costs from the second quarters, we booked negatively on the $1.8 million. For the fourth quarter, we are already seeing that we will see that $1.8 million negatively affecting our gross margin. We also expect a potentially increased freight and duty capitalization in the fourth quarter. Of how much, I wouldn’t say, but we are expecting a gain in the freight and duty capitalization in the fourth quarter. But for sure, it’s not going to be a negative $1.8 million like in the second quarters. With that said, it definitely will be north of 29.5%, just like we did in the third quarter at 29.7%. The favorable gain that will be booked in the fourth quarter, and the increase that we had on September 15, which had a very significant increase on that date. Some of the customers requested an extra week to take effect of pricing because they had purchase orders in. Those increases are reflected in this third quarter. The increase on November 1 across almost all the hotter items we’re selling, including the cups, is going to help us pretty nicely on the fourth quarter gross margin. With the reduction in freight duty costs and an improvement in sales, we do see a very healthy fourth quarter. That’s potentially helping us to reach our goal of 31%; I mean, that’s the goal we set at the beginning of the year. So basically, we’re hoping to see that goal basically.

Great. Thank you very much. I appreciate it.

The next question comes from Ryan Merkel of William Blair. Please go ahead.

So first off, Alan, I just wanted to get your view high-level, what are you hearing from restaurant customers? How are traffic levels? And then, are you still seeing the delivery and takeout at a very high rate?

Yes. I am noticing that the demand for our 9x9 takeout food containers from restaurant chain customers is increasing. Some of our national accounts report seeing a 30% to 40% rise in takeout during the holiday season. One large chain we work with, which previously only partnered with DoorDash, is now also utilizing Uber Eats and other platforms. Most of these chains are experiencing their peak month during the holiday season. Additionally, we've recently onboarded several new chain customers. The restaurant industry remains strong, particularly in takeout, mainly because they are short-staffed in dining areas. This situation makes it more cost-effective for them to focus on takeout since they lack personnel for indoor dining.

And then, second question, you’ve had a lot of price increases this year. Can you just give us a sense of where’s year-over-year price inflation right now? And I got to think there’s a lot of carryover next year, if you could just help us with maybe a range on what that might be?

Yes. We instituted at least four price increases this year. And most of them have been in the past six months. The primary reason is inflation really shot up; labor costs skyrocketed. It’s really tough to get people and retain employees nowadays. Not to mention, ocean freight, and domestic logistic freight costs have also nearly doubled in the past 12 months versus last year. Are we seeing any price stability? No, we have not seen price stability. Primarily, there is a major factor that we’re waiting to see how that’s going to play into our costs, for every importer in the U.S. We’ve been notified by all of our shipping carriers that starting November 15th, the Port of Los Angeles will be penalizing shippers if there’s a container that’s not pulled out of the shipyard. But the problem is, the shippers are telling the importers they will pass on these penalties. And of course, the importer will pass on these penalties to the consumers. In the past, we were told that right now it’s not that importers don’t want to get these containers out of the port; it’s the port issue. The port doesn’t have enough employees to get these containers onto the chassis to get to the truck. I mean, there’s truckers that want to take these containers out, so there is no shortage of truckers. The only reason that there’s a shortage of truckers is that it’s taking three times as long to get a container out of the port, due to a shortage of labor in the port. Ultimately, we’re just waiting if this penalty is really going to go through. Because if it does, we’re going to see even larger inflation, because all these penalties will be passed on to the consumer immediately.

Yes, definitely an interesting situation with the penalties there. Okay, thanks. I’ll pass it on.

And our next question will come from Michael Hoffman of Stifel. Please go ahead.

Hey Alan, Peter. Thank you. Alan, you began this year, going public with a guide that was 9 to 11 EBITDA margins. Based on how you’re framing the fourth quarter, how do we stand there? I’m assuming we’re at the low end, but are we going to still be inside 9 to 11?

We are still projecting 9 to 11 EBITDA margin. As we mentioned, for the fourth quarter, we do see a strong margin due to the favorable aspects we’re going to see. We already took a hit after we subtracted in the third quarter the freight and duty mobilization. We’re going to see a favorable freight and duty capitalization, plus the price increases and improving sales. That 9 to 11 is still our target for year-end.

Okay. And you’re expecting both margin and dollars of EBITDA to be better sequentially?

Yes.

And just to be clear for everybody, so your freight duty was high in 2Q, got buried in your inventory, hurt your sales in 3Q. You’ve worked all of that inventory out, so it’s all gone, or most of it’s gone, or how much of it’s gone?

Our inventory level is at the lowest I’ve seen this year, currently.

So, that $1.8 million that was built into inventory that put pressure on the gross margin in 3Q is now out. So, unless there’s incremental freight duty cost over and above what you were thinking, doing the same thing on short-term inventory turns, I’m going to be okay, we’re going to be okay?

Yes.

Alan, if I may. Our inventory turn is a little bit above 60 days. Following that guideline, to answer your questions, yes, it would have all turned. But, there are different degrees turns for different SKUs. But on average, yes, it would have turned. And then, your assumption would be correct, and that the sales in the fourth quarter would have a lower cost inventory.

You have talked numerous times about moving more and more supply out of China into other vendors. And you were being aggressive about doing that, given some of the rolling blackouts going on in China. What progress did you make on that? Can you share that with us?

Sure. I would say that we’re currently increasing the amount of product coming from China to Taiwan. I previously mentioned that we added several new vendors, most of whom are in Taiwan, for cups and lids, with some coming from Vietnam. Our aim is to shift away from China due to its uncertain political stability, especially with the rise in COVID cases. Many provinces are imposing citywide shutdowns, leading to restrictions on interstate and intercity travel. Restaurants are struggling, primarily operating through takeout, and many are closing due to COVID. We are worried that if this situation continues, especially with the recent spike in cases, it could worsen during the winter, resulting in more shutdowns in industrial areas. Even though most of the capacity we work with has returned to 80%, we are uncertain about future shutdowns, which poses a risk we want to avoid. Therefore, we are directing more product to Taiwan and Vietnam.

Okay, if I remember correctly, you were about 20% out of China, so are we below 20% now?

I don’t have that number, but I can give you that after we look into the numbers to see how much we are actually importing from China versus other countries or how much we reduced.

Okay. That would be helpful. And then, you’ve been giving us all on to the year, the percent of total revenues that were eco-friendly, and the trends have been very favorable. What was it in the third quarter?

Peter, do you have the number? I think I saw the number was 18%, for eco-friendly products.

Yes. Sorry, I was on mute. It’s $18.7 million, which takes about 18.2% of the total revenue.

Okay. So, I believe I am recalling this correctly, and it sounds sequentially accurate on a percentage basis. Is that right?

0.2%, yes. So Q2 was $17 million, 18% of total revenue, increased to 18.7.

So, it’s better in terms of total dollars but slightly lower in percentage. It seems to be leveling off a bit. Is that primarily due to supply issues, meaning you could have sold more if you had access to it?

It is indeed largely a supply issue. We are currently increasing our inventory of compostable products. Right now, we are stocking up at our facilities in Hawaii and Chino, as we know that starting January 1st, there will be new requirements. We are already preparing our national chain accounts with their compostable lids, clear cups, and takeout containers. This change will require every restaurant and national chain in Hawaii to start using compostable takeout products. Therefore, we expect to begin shipping those out in mid-December in Hawaii.

Okay. If I remember correctly, there’s a new content rule being introduced in California. How is that affecting the overall model at this point, and could this disruption be seen as a positive change? How is it impacting the model?

I’m sorry. What was it that you mentioned that was a new something coming?

California has a new rule regarding recycled content in food packaging set to take effect in 2022. I'm curious about how this is affecting your customers' buying behavior and your ability to satisfy demand given the changes associated with this rule.

I am not sure which recycling content you’re referring to. I know that California is asking people not to serve straws or utensils in public but to provide them upon request behind the bar and in restaurants. I believe that some cities are increasing pressure on restaurant operators to use compostable products instead of paper and plastic. They are tightening the rules and adding more products to the existing list. This will push restaurants to find more sources for compostable products. Recently, we introduced more compostable product lines to serve additional customers.

Got it. I have two more questions. What is the status of adding manufacturing capacity in California or Texas? Also, I would like to revisit the freight volumes from November 15th.

When we observed that freight and ocean freight costs were rising, along with an increase in demand for cups and compostable straws, we decided to invest a portion of our revenue in new equipment, approximately $5 million. We've already placed orders for several paper machines, plastic machines, more straw machines, and takeout container machines. Additionally, we're planning to order some automated robotic packaging machines, which will start arriving in December, continuing into January and February, and throughout the rest of next year. Our goal is to increase our capacity by about 20% to 30%. The main challenge we face right now is training our staff. While acquiring the equipment and getting it delivered is manageable, the toughest part is ensuring that we have staff adequately trained. To address this, we've adjusted our policy to allow for part-time hires, providing more flexibility in scheduling for new employees so they can work part-time based on their availability. We recognize that during the holiday season, many employees may be unavailable due to illness or vacation, which could disrupt our services. Therefore, we're increasing our hiring of part-time seasonal workers and seasonal drivers. Importantly, we will also start operating on Saturdays, adding an extra production day each week. Our production runs 24/7, and we’re expanding our warehouse operations from five days to six to keep up with orders and ensure timely shipping, beginning around the third week of November.

Okay. And then, on this November 15th fine that’s coming from the ports. Have you looked back at 3Q and said if that fine existed during the quarter, what that would have been as an incremental cost?

I would estimate a minimum of $0.5 million a month.

Okay. And are you hearing of other distributors and vendors and companies talking about any kind of legal action against the ports, because this feels like a gouging issue, when you think about it? Certainly, I can’t understand how adding a compounding $100 where the second day it’s $200, the three day it’s $300, the fourth day it’s $400 is going to influence moving containers faster, if they’re the bottlenecks. So, what’s the legal sort of ramifications that all of the people like you are sitting here on the gate, waiting to get their containers out and the port’s the bottleneck?

I feel that we are a small importer compared to Target, Walmart, or Costco. If we face a cost of $0.5 million a month, these larger companies will be facing millions. Ultimately, they will pass those costs onto consumers. I’m just observing to see how this unfolds. As mentioned, the Port of Los Angeles is already profiting significantly; they are paying union workers substantial amounts to deal with the current issues, like calling in sick. This situation won't improve the movement of containers since they need more workers. President Biden mentioned a request for them to operate 24/7, but they lack the workforce to support that. This is problematic. Fining shippers and, in turn, consumers won't resolve the issue. We have already experienced the highest inflation recently, and once these fines take effect, inflation will likely rise even more. Eventually, there may be a situation where containers are abandoned. If my shipping cost is $16,000 per container and I face an additional $10,000 fine, I, as the importer, would simply abandon it because it's not worth it. This will lead to further bottlenecks since the port will have nowhere to store these abandoned containers.

Yes. That’s what I’ve been hearing from other distributors. All right, Alan, good luck. Interesting environment.

It’s challenging. It has never been like this before.

The next question is a follow-up from Jake Bartlett of Truist. Please go ahead.

Thank you for your follow-up. I have a couple of quick questions for Alan regarding the comment about being able to achieve at least the low end of the 9% to 11% EBITDA margins. I want to confirm that this refers to the ex-Global Wells EBITDA. If we assume that you’re at 31% gross margins based on the revenue guidance, it seems that some other costs would need to decrease to reach the 9% for the year. This includes shipping costs, and even if those costs decrease and maintain a consistent percentage of sales, it may be difficult to achieve that margin. Additionally, I am curious about the recurring G&A or operating costs, which have been rising significantly each quarter. Is there any indication that these costs might decrease, or was there anything unusual in the third or second quarter that may improve this situation in the fourth quarter?

Jake, you are right. We are noticing a decrease in shipping costs and labor costs. One significant challenge we faced in the second quarter was the typical labor shortages, which led us to hire third-party services at a higher cost than usual. We also relied on temp agencies, incurring additional expenses for staffing. As a result, we made an effort to hire more direct employees. Additionally, in the second quarter, we had to spend nearly 70% more to ship products from California to Texas because the influx of products overwhelmed our California warehouse. We needed to invest more in transferring goods to other warehouse locations, but we managed to reduce these costs towards the end of the third quarter and into the fourth quarter. Therefore, we anticipate a decrease in domestic shipping costs, labor costs, and significant freight expenses as we shift to using more of our contracted ocean freight rates instead of the more expensive brokerage rates we had to pay in the second and third quarters.

Got it. That’s really helpful. I have another question about sales. National sales revenue is up solidly year-over-year, but it didn’t accelerate much from the second quarter to the third. Meanwhile, distributor sales and other channels have accelerated more significantly. What is happening with national sales? Is there a reason why sales in that area are being constrained in this environment? Perhaps they are less inclined to seek new customers, or maybe it’s more challenging for you to acquire incremental customers. Why isn’t that channel growing faster in the current environment?

We have a lot of increases from new national chain accounts. We told them we don’t have enough capacity. So, we’re asking them to give us more time to get ready to service them. One other national chain that’s well-known in Texas, we told them that we can start maybe December, once we stock up more in our inventory. We need to service the existing national chain accounts first before we can take on new ones. On the distribution side, basically, we’re selling whatever we have in our inventory. There is no commitment to really have to fulfill their order 100%. Because there is a shortage in the entire market, we’re getting distributor buying from everywhere, anywhere they can find product to serve their retail customers. But for national chain accounts, we can’t just take on our national chain account, knowing that we’re going to be out of products.

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

Thank you, operator. And thanks to everyone who joined us today. We appreciate your support and interest in our company. You have our commitment to working hard and working smart to achieve our collective goals of enhancing shareholder value. We look forward to speaking with you again soon. Goodbye.

The conference has now concluded. Thank you for attending today’s presentation. And you may now disconnect.