Karat Packaging Inc. (KRT) Earnings Call Transcript & Summary

Good day, and welcome to the Karat Packaging, Inc. Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Roger Pondel, Investor Relations for Karat Packaging. Please go ahead.

Good afternoon, everyone, and welcome to Karat Packaging's 2022 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 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 Karat Packaging'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, and Karat Packaging undertakes no obligation to update any forward-looking statements, except as required by law. Please also note that during this 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. And with that, it is my pleasure to turn the call over to CEO, Alan Yu. Alan?

Thank you, Roger. Good afternoon, everyone. Our third quarter 2022 net sales increased 7% from the prior year period, which was a particularly strong quarter from post-COVID reopenings. Results for the most recent quarter were impacted by customers destocking of certain inventories. Due to supply chain recovery, nonetheless, we continue to see solid long-term demand, particularly for our environmentally friendly products, which grew 27% over the comparable prior year period. We also are continuing to gain wallet shares with our existing customers, and we recently closed numerous new deals with both new and existing chain and distributor customers. We are fully committed to growing our offering in eco-friendly disposable food service product as more cities and states in the United States and around the world are enacting regulations to ban Styrofoam and single-use plastics. Customer increase are increasing as is demand, and we remain optimistic about our leadership position, while we continue to invest in new and innovative composable products. Our joint venture of building a bagasse factory in Taiwan is progressing well. It is expected to begin manufacturing 100% compostable food service products in December, with first shipments to begin early in the new year. We already are receiving orders and increase that could fill capacities. Our initial investment of approximately $6.5 million in this project is on target to produce approximately 648 containers of products annually. And we are in discussion with our Taiwan partner to expand production line to double the manufacturing capacity by mid-2023. Gross margin for the third quarter expanded significantly despite selling through some inventory with higher freight and duty costs absorbed from the first and second quarter. We continue to see solid gross margin improvement into the fourth quarter from normalized ocean freight rates, continued shift to higher-margin products and foreign currency gains, which already allow us to implement some price reduction to proactively pass on savings to our customers. [indiscernible] record quarterly operating cash flow and ended the quarter with financial liquidity of $54.5 million. We are pleased to announce that our Board of Directors recently declared a special cash dividend of $0.35 per share on the company's common stock. Terex's consistent solid growth has built a strong financial and liquidity position for the company, giving us the flexibility to return excess capital to our shareholders. Proceeding into the fourth quarter and fiscal 2023, we have implemented a number of new initiatives to significantly grow online sales. We are expecting to continue growth from our ecofriendly product line, improvement in our fulfillment rate with the recent warehouse expansion and better operating efficiencies. We are currently targeting net sales for the 2022 fourth quarters to be in the range of $95 million to $98 million, up from $91.3 million for the 2021 fourth quarters. We are confident to achieve our full year average gross margin growth of 31% to 32%. I will now turn over the call to Jian Guo, our Chief Financial Officer, to discuss our financial results in greater detail. Jian?

Thank you, Alan. We achieved net sales of $110 million for the quarter, up 7% from $102.7 million in the same period last year. with the widely anticipated economic downturn, along with the supply chain recovery, net sales for the 2022 third quarter were impacted by customers' destocking of certain inventory. The increase from the strong prior year quarter due to COVID reopenings was principally driven by our ecofriendly products, including continued gains in wallet share with our customers. By channel, sales to distributors, our largest channel grew 11% for the 2022 third quarter. Sales to the retail channel increased 7%. Sales to national and regional chains increased 5% and sales from the online channel decreased 4% for the quarter. Gross profit increased 15% to $34.2 million for the 2022 third quarter from $29.8 million last year. Gross margin expanded 210 basis points to 31.1% from 29.0% in the same period last year. Gross margin benefited from higher margin eco-friendly products previously implemented price increases to offset inflation, favorable foreign currency exchange rates and improved operating efficiencies and leverage. Although ocean freight rates dropped significantly towards the end of the third quarter, Total freight and duty costs remained elevated at 14.8% of net sales during the third quarter of 2022 compared with 14.1% of net sales in the prior year quarter. The 2022 third quarter freight and duty costs included an impact of $5.9 million from freight and duty capitalization as we sold through some inventory with higher freight and duty costs absorbed from the first and second quarter. We expect total freight and duty costs to continue to decrease as a percentage of net sales in the 2022 fourth quarter and potentially into 2023. We continue to focus on optimizing our eco-friendly products and online sales and improving operating efficiencies to offset price reductions of certain products. As Alan has mentioned, we are confident to deliver on our gross margin goal for the full year. Operating expenses in the 2022 third quarter were $26.3 million or 24% of net sales compared with $24.4 million, also about 24% of net sales in the same period last year. The net increase in expenses was primarily due to higher labor costs and workforce expansion and an increase in rental expense from our expanded warehouse distribution network. Other income totaled $143,000 in the 2022 third quarter compared with other expense totaled $24,000 in the prior year quarter. Other income for the 2022 third quarter included a gain on foreign currency transactions of $369,000 compared with a foreign currency loss of $63,000 in the 2021 third quarter. Net income for the 2022 third quarter increased 51% to $6.2 million from $4.1 million for the same quarter last year. Net income margin was 5.6% for the 2022 third quarter compared with 4.0% a year ago. Net income attributable to Karat packaging for the 2022 third quarter was $6.1 million or $0.31 per diluted share compared with $3.8 million or $0.19 per diluted share a year ago. Adjusted EBITDA for the third quarter rose 30% to $11.7 million from $9.0 million a year ago. Consolidated adjusted EBITDA margin was 10.7% in the third quarter versus 8.8% for the same quarter last year. Adjusted diluted earnings per common share increased 50% to $0.33 from $0.22 in the prior year quarter. During the 2022 third quarter, we generated record quarterly operating cash flow of $20.2 million and paid off the entire $11.6 million balance of outstanding borrowings on our $40 million line of credit. We believe Karat is well positioned to execute on its future growth strategies. We finished the quarter with $90 million in working capital compared with $72.1 million at the end of 2021 and financial liquidity of $54.5 million. We continue to explore other options to expand liquidity in support of business growth and to further enhance long-term shareholder value. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

[Operator Instructions] Our first question comes from Jake Bartlett with Truist Securities.

Great. My first one, Alan, is so I wanted just to see what your confidence is that destocking is what's driving the lower sales. I think of destocking as being more impactful, I would think, to distributors than the change or something like online, but those channels also grew slower than the distributor channel. So the first question is really just what's your confidence level that something is temporary as destocking is what's driving the slower sales growth.

Well, first of all, you're right. The chains are not destocking, it's mainly the distributors. A lot of distributors are actually overstock. I can tell that by talking to a lot of these distributors, they were so afraid of the supply chain disruption and outages in the past month. All of them bought in truckloads and themselves as well as they were buying from us. Some people are buying 30 days, 45 days inventory. And all of a sudden, every one of the warehouse, including our warehouse was packed with product that was coming from overseas. We have to emergency leasing secondary warehouse in California just to store the product. And luckily, we were able to also destock some of our inventories, and that's why actually, our operations are back to normal or in the month of July and August, we were just trampling to find warehouse spaces to put the product in and it was actually hampering our operation. We had to spend extra money in terms of extra people to move product. Our efficiency was down, operational efficiency was down because the warehouse was packed with every product that's blocking every line in the warehouse. I think that's the same situation with our customers as well.

So Alan, so what is driving what do you think the biggest below your guidance, the miss on RS versus distributors wasn't by that much. So why do you think you saw so much slower growth at the change in online, I think, than you would have been expecting. Is it the pricing issue that's coming through or just I look at from our coverage and restaurants that off-premise demand has remained fairly robust. So what do you think is driving that slower-than-expected growth if it's not destocking at the chains in the online side of the business?

Yes. We have started price reduction. As you know that we had 7 increases last year and 2 increases this year, mainly due to the increase in ocean freight costs. As ocean price has dropped, we actually wanted to take the initiative to actually starting to lower the price for our customers so they can also benefit the lower costing and to offset some of the inflation in cost was incurred during the end of last year and earlier this year when Ocean freight was at $15,000 of containers. So that is also another issue of our it's not a slower sales, but I would say it's lower in the total overall revenue.

Okay. And just on to the pricing, you've obviously taken a lot of price over the last couple of years. Do you expect the pricing, your average prices to be down year-over-year in 2023 as you move forward? Is that a situation where as you taken through significant price the last couple of years that it will actually decrease, thank you.

I do see a certain category in plastics, price will be lower dropping but on the paper side, it has held very strong and also looking to increase in the paper side. The demand for paper has actually increased significantly, especially with a lot of in California and other states are not only banning Styrofoam some places are banning plastic overall. So the demand on paper is still on the rise and also which cost in the shortage of paper supplies. So I do see the plastic side prices coming down, but the paper side is going up. And that's where we see the growth is, the eco-friendly product line, the paper shopping bag versus the place, the paper food container or composable paper food container, paper soda cup or actually even higher costing composable paper soda cup versus the traditional plastic cup and Styrofoam cup. So that's where I see the separation of the difference in cost and prices. Pasta will come down, paper will go up, which kind of offset each other.

So on average, you don't think there's going to be a decrease, you think maybe prices will hold flat in 2023 versus '22 and I'm really just across your whole portfolio of products, should we expect flat pricing in '23 versus '22, is that the message?

No. Actually, I do see a plastic size, the cost of plastic product selling price it's going to come down slowly but on the paper side, it might go up. So that's where I see the offsetting, so the average even out.

The average will be flat, okay.

Our next question comes from Michael Hoffman with Stifel, please go ahead.

If we could talk a little bit about what's going on in 3Q and then sort of carry it into the remainder of this year and the next year. The year-over-year growth that happened, how much of that was in physical units or SKUs versus price?

I would think that Jian could answer that question in terms of the year-over-year growth number. Jian?

Yes. Michael, thank you for the question. Yes. So in terms of the quarterly year-over-year revenue growth actually, we are, what we are seeing is the vast majority of the growth actually was driven by pricing. We actually saw a little bit of a decline in terms of volume. So overall, as we talked about in our prepared remarks, our overall year-over-year growth, there's about a little over 7%. I will point out, as you probably recall, the year-over-year comp is actually very challenging for us this year because last year, if you recall, Q3 was a really strong quarter with really strong volume from post COVID reopening last year's year-over-year growth in the third quarter was over 30% so we do, as Alan pointed out, we do still feel really confident with the continued long-term momentum, long-term demand in our revenue growth.

And sort of just to aggregate your growth in your model. And you got a company about where the detractions occurring across the product lines that, where do you think you are in the sale of that. [indiscernible] customer base works through the changing demand side in the marketplace.

I'm sorry, would you mind repeating your question, Michael. I wasn't sure if I got your question clearly. I heard quite a bit of a noise.

Yes, sorry, I'm in the airport. So you alluded to destocking. When you analyze the types of SKUs that are the focus to that destocking would you say that there's still more to happen before we're done or it all happened in the third quarter?

Let me answer that question since I'm more familiar with the market. I believe that right now, to my knowledge, is from the customer side. They are some of the customers are still basically overstocked. The warehouse is still full but the retail sector, the retail customers are starting to reducing their inventory on their floor on the stores. They're starting to reordering, especially this month, particularly this month in November versus last couple of months ago. We're seeing that maybe this holiday season coming up and people are getting prepared for the holiday season. But I do see that most of the destockings have happened in the end of third quarter and also the beginning of fourth quarter.

[indiscernible] when you give us what you're projecting for fourth quarter revenue you factored in an incremental level of destocking as well as whatever the year-over-year price comp would be on the price increases you've done all through the past year. And are there specific SKUs or product categories that are seeing a greater push on the destocking [indiscernible] or is there no real pattern, it's just overall activity.

Yes, I do see that on the inventory side, particularly on the plastic side, customers are having destocking inventory on the plastic side because they see that the price is coming down. So nobody want to hold on to the inventory that is higher cost, higher value. So they know that they should be stocking too much on the plastic items. But on the paper side, I would think that no one, customers are not really stocking up because even though that unlike last year, people are afraid of [indiscernible] last year, I think even with the higher demand in paper, I think the inventory is just about correct. It hasn't been like last year, where there is a scarcity of the inventory on the paper side.

If we were to think about plastics as a percentage of your model, so say we kind of get a sense of what this pressure feels like.

I almost think the plastic, it's about 30% of our entire model.

And do you think you'll clear this plastics inventory correction by the end of the fourth quarter.

Yes, yes. I do believe that our inventory that we brought in the higher cost will be cleared out by the end of the fourth quarter.

Okay. And then sorry, I know I'm teasing it out piece by piece [indiscernible] cost down dramatically. How do I think about the sequential impact favorable impact of lower freight costs for you have we this sort of happened in the third quarter, there's a tail for it in the fourth quarter or is this going to carry into '23, given the sort of churn of your own inventory and how that [indiscernible].

As Jian mentioned earlier in the conference call, actually, we've seen most, I would say, 90% or 95% of the higher freight and duty costs were absorbed mainly in the third quarter. Second quarter, we absorbed some, but majority of like $5.6 million out of the $6.6 million were absorbed in the third quarter. So in the fourth quarter, we do not think there's much more of a capital actually freight and duty cost in terms of affecting our cost on the gross margin side that's why we're seeing that our fourth quarter gross margin will be significantly higher than our second and third quarters. So that we're comfortable that our entire annual gross margin goal of 31% to 32% will be achieved by the fourth quarter.

And correspondingly, the anniversarying of that would be it would carry into the first half of '23. So we've got that incremental gross margin level in the first half of '23, [indiscernible]. Right.

Yes, that is correct.

Okay. And then you alluded to a new business expansion of wallet. So when you think about, we get through the clearing of the destocking, which are having unit pressure, we would expect to be positive unit growth and then some level of normal pricing in '23?

Yes. We do expect a positive unit growth in the fourth quarter year-over-year comp and also going to the first quarter. As now I would think that everyone is back to normal. They're allowing a vendor like us to visit the customers. We're able to sit in front of the customers and explain to them and also letting them know what kind of composable product that we now have available, especially we know that in January 1st, both California and New York are banning PFAS, a chemical on the bagasse item and that is something that everyone is rushing into to get their hands on the PFAS-free bagasse product because that will be the law starting January 1st. So we are expecting a high we have been receiving abundant increase on these new composable product, and that's something that will be our focus for the 2023 years.

Our next question comes from Ryan Merkel with William Blair.

Hey, good afternoon everyone. My first question, Alan, could you just comment on the outlook for consumer spending on restaurants. As you think about budgeting for '23, are you thinking about slower demand for your customers or are you not seeing that yet?

Actually, I'm seeing a slower demand from the Mom and Pop retail stores, but I'm seeing a higher demand in the national restaurant chains. Talking to some of the restaurant chains, their volume they're growing more as more and more people are sending the money to the fast chains versus these restaurants, Mom and Pop restaurants. And that's where we see this shifting to that part.

And in prior downturn, what do your customers typically do? Do you see them looking to save costs? Do they come back to you for price concessions? Do they try to find lower-priced products? Just trying to think through some of the implications of a slower consumer economy next year.

This is how I see from talking to the customer perspective on the restaurant side. Right now, the main concern is not on the packaging cost, the main concern is on getting labor, getting people staffed to work in the restaurant that is the key. And the biggest growth in the expense is actually not on the packaging it's coming from the labor side, even as food cost have leveled basically. So the packaging, without stopping 5%, 10% to them, it's basically it's nothing comparable to what the labor cost increase has been in the past 2 or 3 months, especially in California.

Yes. Makes sense. Okay. Last one for me. Can you comment on how much revenue you expect from the Grain Earth technology joint venture in 23?

That we were expecting, I believe, in the past quarter, we mentioned that we're looking to ship around at maximum capacity, 648 containers a year in 2023. But in terms of overall revenue, I think it's about around $20 million. I think that was about approximately $20 million to $25 million of our revenue from that. And at the same time, we are actually in discussion with them to increase the capacity by mid-2023 because we're seeing more and more increase in demand in the bagasse product as California and New York banning Styrofoam and other states and cities are banning Styrofoam. So the demand for bagasse product is actually on the rise sharply, but the supply is actually limited because there aren't that many factory making the bagasse product in the world.

Our next question is a follow-up from Jake Bartlett with Truist Securities.

Great. Alan, my question is on the pricing and I think typically, you don't just lower prices because you want to pass along or for the goodness of your heart is because competition is offering lower prices, too. And so I'm wondering whether part of what's happening here is some of the gains you've made into accounts, the kind of incumbent who used to be supplying that can might be getting more aggressive trying to win the business back? I mean, is that what you're seeing? Are you seeing more competition as the supply chain eases in the maybe the other suppliers can now supply their customers like they had prior. Are they simply just trying to compete more to win back that business on price?

I think that I don't see our competitors are going really going after the price right now. I think it's more about the service issue. Most of our competitors, the bigger manufacturing and domestic ones they're actually going back to all the customers living to know that. They've overcome these supply issues. There is really not much of a supply chain disruption issues anymore. So, but they're not really low in the price as much, and that's one of the things. But on the distribution side, where they tend to buy from import overseas those are the ones that are really starting to come back and starting lowering the prices to the market. And for us, basically, we do want to maintain our market share in both the national chain account and distribution account. And also, of course, online, we're seeing what we're looking for a sharp growth online next year with a lot of implementation, how we start, move forward into different sorts of selling channels, including Amazon, Canada and Amazon, Mexico and Amazon, Hawaii that's where we see our growth is going to be. But in terms of price, I don't think our domestic competitor is really into the lowering the price in terms of getting the business back but rather than offering supplies, basically, make sure that there's no service disruption. I think that's a key part right now, people want they want stability.

Got it. So you don't think you're losing some of the share that you gained during the supply chain disruptions. Do you think that you're going to hold on to those into the business that you gained over the last couple of years?

Yes. And actually and also on top of that, we're actually, as we mentioned earlier, we're actually gaining some new accounts in the Midwest market and Southeast market region. That region that we haven't really been tapping into, now that we're able to start going out on sales car, people can fly to customers and start recent our product, we're seeing more and more new customers coming to our way. That basically that needed the product didn't really have an opportunity to go after or look for new vendors and suppliers. I think that's something that we're doing right now.

Great. And then last question, you know, we've been tracking freight costs from China, East Asia to the West Coast, and they're down about 85% currently and have been down year-over-year since early July. So I just want to understand how that flows through. I know this is a delay. I guess you have inventory now that has been shifted that lower price that's going to, we have visibility into higher margins, gross margins in the first half of the year. But maybe just help us understand how that looks for the impact on gross margins. It sounds like you're giving customers lowering prices, partly on passing along the savings from this lower freight. So what should we in broad strokes, what should we think about for gross margins in '23?

I believe the gross margin will be, we're looking at actually a 31% to 32% gross margin in 2023 or even higher because the product that we're now we're looking to bring in are more eco-friendly products, ESG items. And with that, it carries a higher margin. Why I say that carry higher margin, there is still limited capacity producing the right ESG product. The one that has certification, the one that is approved by the city with the lack of supply is, of course, the price goes up. And also, these are premium products such as bamboo straws, such as composable food containers, the bagasse product or PFAS-free typical. These are the items that basically have caries a higher cost. So to make up a gas product with PFAS-free chemicals, actually, that increased the cost in order to making sure that it can absorb waters or absorb Greece, not soaking through it. So I would think that there's going to be some kind of elevation in terms of price on these items that will offset the other products such as plastic cups, plastic portion cups in that part in that sense. So I do think that the gross margin we're looking good on that part, especially with the online sales is growing, we're seeing great potential in terms of online sales because we do see that customers are actually ordering more online looking for these eco-friendly products that they cannot find in the local distribution area.

Okay. And then just lastly on that, and sorry just to tack one more on. But we're looking at spot rates here as we understand as we get them but you also sometimes are paying contract. And so maybe just remind us when you've been paying contract. As we think about the year-over-year change in freight costs, I mean, for instance, in the second quarter of 2022, your freight costs were 18% of sales. If I look at that as being current prices being down 80% from when they were new, the prices at that time. It seems like there could be a major impact on gross margins, but again, you might have been not and I think you weren't paying the spot market you're paying a contract at that time. So just remind us when you were paying contract when you kind of switched to market just so we can understand and try to gauge how the freight costs might flow into gross margins?

Sure. Well, last year, most of us importers or the people passing importing products have had a contract rate of approximately $4,500 per container. But the problem is, even we had a contract rate of $4,500 per containers, the ocean freight shippers, they didn't give us any containers availabilities to use that contract rate. So we have to go out in the market to get spot rate at $10,000, $15,000, $20,000 per container. They may give us 20% of what we needed. So perhaps we were able to get 20% of the container that we need to add contract with $4,500. And the rest of the container, we have to go out and get spot rate paying $15,000 for containers. This year, on the different side is that most companies signed a contract of $10,000 for containers started in May but because it probably has been dropping down, most of the importer like us, we stopped using our contract. We went out in the market and got the spot rate of 7,000, 6,000, 5,000, 4,000, up to now it's like a little over $2,000 per container. So these ocean freightliner came back to every one of our importer and says, okay, we're going to change your contract that you signed in April at $10,000 we'll lower it to whatever is a spot market rate is so that's the difference between this year and last year.

[Operator Instructions] Our next question comes from [ Josh Axel ] with UBS.

I was wondering, first of all, if you can maybe discuss a little bit about your rationale, capital allocation regarding paying a special dividend versus buying back company stock or maybe other options that you have?

Got you. Well, the rationale behind versus buying back stock is that our float in the market is very limited. We don't have that much flow of shares in the marketplace. So our goal is actually, we do want and then that's where our stock price is discounted because we don't have enough float in the market. Okay. And we do have excess cash, what can we do with it? We're sitting on it and we're reducing our capital expenditure. We have in the beginning of last year when we first went public, we mentioned that our expected capital expenditure will be 5% of overall revenue. And this year, we're looking at 3%. And we're looking at next year, our capital expenditure is approximately less than 2%. And we're actually we're generating profit, where our ocean freights have dropped, our daily operation cash has increased. So actually, we're seeing we will be sitting on millions of dollars of cash on hand, and we do not want to waste our money to go out there, buy a company has over value. So what we did is we actually found that this new technology company partnered with in overseeing Taiwan that they can actually invest in the company with very little money that we can actually have the availability of what the market, not just U.S., what the world needs is composed of a product and that's where we're investing our money into it. Even with that investment and doubling that on that investment next year, we're still going to be sitting on a lot of cash. We have been asking advisers is a good repurchase shares, our advisers are telling us, it's not a good idea to repurchase shares because our flow it's already small out there in the market. Our goal is actually to we need to have more flow in the market, so that, which can attract more shareholders that is our rationale.

Great, thank you, I really appreciate it. That's very helpful. Can you, you gave a little bit of detail, but I was wondering if you could maybe expand a little more on your online strategy and your expectations for growth in the coming 2023 and beyond?

Sure. Currently, we're selling our product on Amazon, our own lawlecupstore.com. We just added recently walmart.com, ebay.com, and we're looking at other channels. On the Amazon.com, we've been selling products in the U.S. only. And we're seeing that starting January 1st, 2023 Canada is banning all plastic, and there's going to be a major need for a composable eco-friendly product, not only on the strong side, on the food container, on the cup side, on the container side. And that's where we see we'll be pushing through Amazon Canada, same be with Amazon, Mexico, also with Amazon Hawaii with that said, we need to add more warehouse space. We need to have more products in our least Coast warehouse. In the past, we've been struggling to get product into the East Coast, whereas only California have most of the product majority of our product and shipping from California into East Coast, that takes about 5 to 7 days. Customers who are our B2B customers that are in Connecticut, in Boston, in New York, they don't want to wait 5 to 7 days to get the product so we lose that business. And that's why our strategy is restock or actually stock up as much as we can in New York, South Carolina. Our South [indiscernible] distribution facility will be doubled by end of this month with the inspection on the virus inspection that we have increased our facilities in South Carolina, which we could service Southeast region. The focus of getting online sales up is how fast can you ship. Well, we can ship within 40 hours. How quickly can you get the product? Do you have multiple DCs that could shift the last mile to the customer faster, so they don't have to wait a week and by ordering like going out, driving half an hour or 30 minutes or an hour to find their local suppliers, they'd rather order online. So we're seeing more people sourcing for eco-friendly products online and that's where we see our growth is going to be eco-friendly ESG product online next year.

Thank you. And my last question, and I appreciate your time. You've been very clear today and over the last several quarters and years about the growth of eco-friendly products. Can you talk about, as you look forward well beyond next year over the next several years, what percentage of your revenue you see that being because it's, I guess, relatively small today.

Right now, I believe our eco-friendly product is approximately 20% of over revenue. Our new joint venture is actually selling 100% of eco-friendly proposal revenue with the additional expansion in 2023. That will be 100% ESG product and adding other ESG products, not only the bagasse product. In U.S., our core business, I do see in 2023, we should be at 35% to 40% our goal in terms of ESG product. As we move forward with our growth in revenue, I do see our sales on the paper shopping back, mainly on the bagasse now has PFAS-free chemical on it will be the top driver in the 2023 year.

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

Thank you, operator, and thanks all of you for joining us today. We appreciate your support and interest in our company, and I look forward to keeping you appraised of our progress and to speaking with you in the future again. Have a great Thanksgiving and holiday season ahead. Thank you very much. Bye-bye.

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