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Karat Packaging Inc. (KRT 2.23%)
Q1 2022 Earnings Call
May 12, 2022, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Karat Packaging Inc. first 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.

Please go ahead.

Roger Pondel -- Investor Relations

Good afternoon, everyone, and welcome to Karat Packaging's 2022 first-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 chief financial officer, Jian Guo. Before I turn the call over to Alan, I want to remind all listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recently 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 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.

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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?

Alan Yu -- Chief Executive Officer

Thank you, Roger. Good afternoon, everyone. We're pleased to be here with all of you today. Our first quarter 2022 result again demonstrated excellent operational execution, achieving record sales and strong margin expansion.

Our positive sales performance was broad-based across all categories, including national and regional chain accounts, distributors, online, and retail channels. Sales were boosted to some extent by Karat's Tea Zone branded products, particularly bubble tea supply and our newly expanded logistics services. We continue to gain wallet share with our existing customers, and we added many new customers through wholesale distribution and through e-commerce, direct-to-consumer channels. Our online presence continue to be an important initiative.

In addition to selling Karat products, we plan to expand the selling platform of our sites, enable other foodservice purveyor to showcase and sell their product and creating a convenient one-stop shopping option for our customers. The company achieved gross margin of 32.5% in the year 2022 first quarter, increasing 390 basis points over the same quarter last year. Despite continued supply chain challenges and higher freight costs, this penetrated our ability to improve operational efficiencies and cost leverage. Gross margin also benefited from freight and duty capitalization.

Demand for composable and biodegradable products is on the rise as more cities and states are beginning to enact regulations to ban single-use plastics and styrofoam products. Karat's long-standing commitment to providing environmentally friendly disposable products has empowered us to grow into a leader in the industry. As we continue to provide new and innovative offerings, just subsequent to the close of the quarter, we entered into a joint venture agreement to build a 180,000 square feet state-of-the-art automated factory in Taiwan to manufacture 100% composable foodservice products from bagasse, which is a derivative of sugarcane pulp. The new plant, which will feature state-of-the-art robotics is expected to produce approximately 7,600 tonnes or 650 containers of take-out boxes, plates, bowls, tableware and other bagasse products in the year 2023.

About half of the product produced at this plan will be earmarked for Karat's customers. This will further enhance Karat's vertical integration in its supply chain and minimize dependence on imported goods from China, which is where most bagasse products in the United States are currently imported from. Longer term, it is our objective to build a similar plant in the United States and become a dominant domestic manufacturer in the near future. And I'm also happy to mention that as of this month, we expanded our warehouse capacity, adding total of 90,000 square feet of new leased warehouse space in California and Hawaii.

We also expanded our South Carolina warehouse space by 50,000 square feet to be continuing increasing demand. This much need additional warehouse space will give us more growing room and allow us to further increase our fulfillment rates and support additional sales growth. As we proceed into 2022, we believe we will see continued business growth further accelerated by the expansion of our warehouse base and continued operating efficiencies. We are currently targeting net sales for the 2022 second quarter to be in the range of $116 million to $118 million, up about 24% at the midpoint of the range over the same period last year.

Accordingly, for the full 2022 year, we are increasing our guidance with net sales expected to be in the range of $445 million to $449 million versus $360 million in the year 2021 and up from last quarter's forecast, a full-year growth guidance of 17% to 19% or $426 million to $433 million. Our gross margin goal for the year 2022 full year remains 31% to 32% on average. The ocean freight costs are challenging to predict. We currently expect the freight rate to remain elevated for the remainder of 2022.

While some of our higher first-quarter ocean freight costs will be absorbed in the second and possibly the third quarter of 2022, we reiterate the full-year average gross margin goal of 31% to 32%. We currently expect some tailwind from foreign currency gains and continued operating efficiencies to offset most of our expected unfavorable impact on freight and duty capitalization in the second quarter. I want to leave adequate time for questions. So with that said, I will turn over the call to Jian Guo, our chief financial officer, to discuss our financial results in greater detail.

Jian?

Jian Guo -- Chief Financial Officer

Thank you, Alan. As Alan mentioned, we delivered another quarter of impressive sales growth and a significant increase in adjusted EBITDA. We reported record quarterly net sales in the 2022 first quarter, rising 39% to $105.4 million from $75.7 million in the same period last year, reflecting strong growth from existing and new customers. Our new product offerings, greater product penetration, and price increases implemented throughout the second half of 2021 and the first the months of 2022 all contributed to the strong sales growth.

By channel, sales to distributors, our largest channel grew 48% for the 2022 first quarter. Sales to national and regional chains advanced 36% and online sales increased 18%. Sales to the retail channel rose 32% for the quarter fueled by our bubble tea suppliers. Gross profit increased 59% to $34.3 million for the 2022 first quarter.

Gross margin for the 2022 first quarter rose to 32.5% from 28.6% for the same quarter last year. The margin expansion was primarily a result of the strong sales growth in our higher-margin products, improved operating efficiencies and fixed cost leverage, along with favorable foreign currency impact. Also benefiting gross margin was strong pricing to offset increased product, ocean freight, and labor costs. Although some of the higher first-quarter freight costs will not be absorbed in cost of goods sold until the second or possibly the third quarter of 2022, overall freight costs as a percentage of net sales increased from 8.6% in Q1 2021 to 14.4% in Q1 2022.

While we currently expect the ocean freight rates to remain elevated for the remainder of 2022, as Alan mentioned, we are confident that we will continue to effectively manage the freight costs and deliver on our gross margin goal for the full year. Operating expenses for the 2022 first quarter were $24.8 million or 24% of net sales, compared with $17.9 million, also 24% of net sales in the prior-year quarter. Our operating cost leverage remained consistent with the prior-year quarter as the operating efficiencies achieved were offset by higher shipping transportation and production costs and stock-based compensation. Heading into the second quarter of 2022, we are seeing some abatement in the shipping cost increases and expect stock-based compensation to be more comparable year over year.

Other income net was $1.1 million for the 2022 first quarter, compared with $465,000 in the prior-year quarter. We recognized an interest income of $1.3 million in both quarters from the change in the fair value of our interest rate. The interest expense on our line of credit and term loans decreased $572,000 year over year, primarily due to the decrease in our average debt outstanding from the first quarter of 2021 to the first quarter of 2022. Provision for income taxes was $2.7 million or 25% for the 2022 first quarter, compared with $1.2 million or 28% for the prior-year quarter.

The higher tax rate in the prior-year quarter was attributable in part to inclusion of certain nondeductible costs related to Karat's initial public offering, which was completed in April 2021. Net income more than doubled to $7.9 million for the 2022 first quarter from $3.1 million for the same quarter last year. Net income attributable to Karat Packaging Inc. was $6.7 million or $0.34 per diluted share for the 2022 first quarter, compared with $1.8 million or $0.12 per diluted share for the same quarter last year.

We delivered record first quarter consolidated adjusted EBITDA of $13.0 million, an increase of 90% from $6.8 million a year ago. Consolidated adjusted EBITDA margin improved 330 basis points to 12.3% in the first quarter from 9% for the same quarter last year. Adjusted diluted earnings per common share more than doubled to $0.36 from $0.15 in the prior-year quarter. Net cash used in operating activities was $11.4 million for the 2022 first quarter versus net cash provided by operating activity of $4.5 million for the same quarter last year.

The difference primarily reflected changes in working capital, including inventory buildup to accommodate higher demand in our peak season and an increase in accounts receivable from higher sales, partially offset by higher account payables and accrued expenses. We finished the quarter with $93.7 million in working capital compared with $72.1 million at the end of 2021. I -- we believe Karat is well-positioned to execute on its future growth strategies. As of March 31, 2022, the company had $10.2 million of borrowing outstanding under the line of credit and additional availability of $29.8 million under this line.

We invested $4.8 million in capex during the 2022 first quarter, principally for manufacturing automation. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

Questions & Answers:


Operator

Thank you. [Operator instructions] And the first question will be from Jake Bartlett from Truist Securities.

Jake Bartlett -- Truist Securities

Great. Thanks for taking my questions, and congrats on a great quarter. Good start to the year. My first question is on the increased guidance for sales in 2022.

If you could maybe just give us some detail as to what the main drivers of the increased guidance is. It seems like demand for a while now has been really kind of stronger than you can accommodate. So it feels like it's -- demand has already been strong. So I'm wondering, is it the increased capacity that you've added in the quarter? Is it just the increased staffing that you're seeing? And then also if you can touch on whether there's more pricing assumed in that guidance.

I think the pricing, at least what I had was about 5% to 7% was going to be running through in 2022. Maybe any update there?

Alan Yu -- Chief Executive Officer

Sure, Jake. Well, one thing that we've seen that the increase is coming from demand. For example, you heard that we are adding additional warehousing space, both in California and Hawaii. It's because we've seen the demand in Hawaii has actually explosively grew a lot than what we anticipated it was going to be.

There's more tourists going to Hawaii and basically everywhere, there's a demand for packaging. And same thing in California that we're shipping to Las Vegas in Arizona, there's really a strong demand increase on the packaging side for the state of Arizona and Las Vegas. More and more tourists are coming into Vegas and more and more tourists are in California. And another thing is our boba tea supply.

We have -- we are seeing a huge demand in the growth of boba tea supply, the first quarter already that we're entering into our peak season in the second quarter. And that has attributed to a large sum of growth in our overall revenue wise. Lastly, of course, more and more people looking to go into the eco-friendly lines. We're seeing a high demand in the bagasse products, in the composable utensils categories, and our full line is growing.

I would say it -- particularly, there's a few categories growing really strong, but other categories are growing as well. Another thing is our fill rates are going up. That automatically -- last quarter, I mentioned that our fill rate was only 60%, but we actually increased our fill rate to approximately 70% to 75% now and automatically increases the revenue. So I wouldn't attribute much of the increase in guidance toward the price increase on that part.

Jake Bartlett -- Truist Securities

Great. That's really helpful. And then on gross margins, if you could just -- if you could give us how much the first quarter was helped by the capitalization of freight and duty, that would be helpful. And you mentioned in the guidance in the press release that includes that moving piece.

Maybe just help us understand how that might flow through the rest of the year. It was a help in the first quarter. Does it hurt in subsequent quarters? Just help us understand how to model the quarterly progression there.

Alan Yu -- Chief Executive Officer

Jian, I'll let you answer that question for Jake.

Jian Guo -- Chief Financial Officer

Sure. Hi, Jake. Thank you so much for the question. So in terms of the impact from the capitalization for -- in Q1, the total dollar amount of the impact was about approximately $6 million.

As we mentioned in our remarks, even with the $6 million in benefit in our cost of goods sold in the first quarter, overall ocean freight cost remains as a percentage of sales much higher year over year. And last year, Q1, we were at 8.6% of sales versus Q1. This quarter, it was 14.4%. And a lot of that was primarily because we were really stocking up.

We brought a lot of the shipments from Asia to stock of inventory in anticipation of our peak season starting with the second quarter. So to answer the second part of your question in terms of expectation for the remaining quarters in 2022, so in Q2, we expect our -- absorb probably a good chunk of the benefit that we realized in Q1 in terms of the capitalized ocean freight costs. That said, I will highlight a few factors as we think about our gross margin for the second quarter as well as for the full year 2022 holistically, even with a little bit of a headwind, if you will, from the ocean freight capitalization in Q2, we are seeing some favorable impacts, and we do expect to be able to offset at least partially or mostly some of the negative impact from the ocean freight capitalization in Q2. Just to name a few.

So one, we are seeing a tanisignificant positive impact from foreign currency impact, just really strong USD against some of the currencies in Asia. And then we continue to see improvement in our product mix as we continue to shift into higher-margin products as well as continue to improve on some of our operating efficiency. So we are seeing quite a few positive factors that are trending toward basically offsetting the negative -- the expected negative impact in Q2, and that's the reason why we reiterated that for the full year 2022, we still expect to deliver on the gross margin goal of 31% to 32% on average.

Jake Bartlett -- Truist Securities

Great. Thank you. That's really helpful. And then my next question is on the JV that you're you're entering into in the facility.

You mentioned, Alan, some tons of packaging and some containers. Can you help us understand what that might mean for sales in 2023? And do you expect that facility to be open kind of early in the year and that this could be a benefit for the whole year? That's my next question I have one more quick follow-up.

Alan Yu -- Chief Executive Officer

Sure.W ell, as you said, we expect the 2023 be the year were actually the year that many state and city will be transforming from styrofoam or paper and plastic into 100% compostable packaging product. We've already received a new step, the county of Los Angeles starting May 1, it's going to ban all single single-use plastic such as styrofoam and plastic utensil, plastic straws and plastic takeout containers. Hawaii already did that last year and New Jersey is banning that to. And more and more states are going to be the same thing.

But as we all know, most of the bagasse products still coming out of China. And this is what we've been telling our investors and same as anyone that we're trying to move away from China into other parts of the world, Asia, or perhaps possibly with the JV that we started in Taiwan, our goal is to test out the automation of the robotic system. Can we bring it into Texas to manufacture domestically? And yes, our goal is basically see if we can produce these domestically, and that is our goal. And what kind of impact would it have on our revenue side? Definitely, it will have a favorable impact on our revenue side.

Now we can actually control the cost of our product that we produce versus -- basically in terms of share, we don't have to worry about ocean freight we have to worry about is the raw material, which domestically can be found and some of the raw material can be actually contributed too from our paper manufacturing into the production of the bagasse product. I would say that -- I mentioned we can produce 650 containers out of that first part of the joint ventures. We do have a second part of joint venture, which will also be able to produce another 650 containers out of the same location on that part. So what exactly the total revenue of 2023, that we're still figuring out right now.

Jake Bartlett -- Truist Securities

Got it. And then real quickly, is that more of a certainty of supply if costs move? Or is that more of a driver of sales you think with that JV?

Alan Yu -- Chief Executive Officer

I would say it's driving of sales and also the ability -- learning the ability to test out the new equipment see if they are suitable for domestic manufacturing in the U.S.

Jake Bartlett -- Truist Securities

Great. Thanks a lot. I'll pass it on.

Operator

[Operator instructions] The next question is from Brian Butler with Stifel. Please go ahead.

Brian Butler -- Stifel Financial Corp. -- Analyst

Hi. Thanks for taking my questions. Well, let's just start on the ECO and environmental products. Can you just update everyone kind of what percent of revenue that is now? And then kind of the expectation of what that percentage for 2022 guidance and where it could go once the new facility is kind of ramped up in '23?

Alan Yu -- Chief Executive Officer

Jian, can you actually give Brian the current numbers and also over with the future goals of the company on that part.

Jian Guo -- Chief Financial Officer

Yes, sure. I can take that question. Ryan, so in terms of eco-friendly products, overall, as a percentage of total sales it went up just a little bit from Q4 in remaining in the high teens. I think Q4, we said close to 20 high teens.

So it's still in that range, went up just a bit less than 1% in terms of -- and that is for, obviously, the current quarter. As we think about sort of the rest of 2022 and 2023, we think the percentage will continue to increase throughout 2022, especially as we are seeing some of the regulatory development in some of the regions, counties, cities, where there were some recent developments pushed toward the use of eco-friendly products and consume of the -- and definitely also the continued shift on the consumers' preference side toward the eco-friendly products as well. We do expect the trend to continue into 2023 to answer the second part of your question, it's especially with additional capacities on our end as the JV, the joint venture production starts in the second half of this year.

Alan Yu -- Chief Executive Officer

And, Brian, our goal for the 2023 is our goal is soon to be 30% of our overall revenue to the eco-friendly product line, ESG, the green product. That is our goal.

Brian Butler -- Stifel Financial Corp. -- Analyst

Can you remind me? Is the eco-friendly product materially higher in margins? Or is it pretty similar to your other products?

Alan Yu -- Chief Executive Officer

We do hear a higher margin than our traditional products.

Brian Butler -- Stifel Financial Corp. -- Analyst

It is higher margin. OK.

Alan Yu -- Chief Executive Officer

It is.

Brian Butler -- Stifel Financial Corp. -- Analyst

The next question was kind of on the overall growth. Can you break that down between kind of price and volume between the strong growth you saw? And then maybe are you getting price at a level that's offsetting the inflation in each business line?

Alan Yu -- Chief Executive Officer

Can you rephrase that question?

Brian Butler -- Stifel Financial Corp. -- Analyst

Well, I guess just at the very highest level, can you break down the organic growth between price and volume?

Alan Yu -- Chief Executive Officer

Jian, would that the assessment that you had in your hands?

Jian Guo -- Chief Financial Officer

Yes, I can take that question. So when you look at the overall revenue growth year over year, I would say, roughly -- approximately half of that came from pricing and then the remaining primarily out of volume and mix. So in terms of the pricing, the additional color I'll add here is, as you're aware, we implemented multiple price increases in the second half, primarily in the second half of 2021, also a little bit in the first quarter of this year. So that's really when we're looking at the year-over-year comparison that's giving us the benefit there.

Brian Butler -- Stifel Financial Corp. -- Analyst

So about -- so if I heard that correctly, about 50% of the growth was from the increased pricing that you had put in place.

Jian Guo -- Chief Financial Officer

Correct. A little over 50%.

Brian Butler -- Stifel Financial Corp. -- Analyst

A little over 50%. OK. And on the cash flow side, on the inventory build, how should we think about that inventory through the remainder of the year? Does that come back down and we end up with a working capital number that's either flat or slightly negative? Or is that going to remain at an elevated level for a while?

Alan Yu -- Chief Executive Officer

How do we think the inventory will remain elevated level for a while because to support our growth because we do expect our growth to continue to be strong. And in the last year, there was a lot of shortages in our product, and that's one of thing causing a fulfillment rate to be -- and we realize that we can't -- it takes us two months or three months to get a product from overseas to U.S., and we can have -- we can -- a customer wants the product, they want it now. So we have to have products in place sitting in the warehouse. And this is one of the reasons that we increased our warehousing space in California and Hawaii understanding that if we have the product in place, there's a demand for it, then they will definitely automatically increase our sales.

So we are actually looking for more warehousing space in Texas and in California to grow that. With that said, we'll be bringing more inventory in to support our growth.

Brian Butler -- Stifel Financial Corp. -- Analyst

OK. So with that kind of change in higher inventory to support the growth, I mean, is the expectation that free cash flow is going to be flat to negative this year?

Alan Yu -- Chief Executive Officer

I would say free cash flow will be positive this year with our -- with us generating more net profit from the operation.

Brian Butler -- Stifel Financial Corp. -- Analyst

OK. So even with the additional investment in the inventory, you expect free cash flow to remain -- will be positive for 2022. That's fair.

Alan Yu -- Chief Executive Officer

That is fair.

Brian Butler -- Stifel Financial Corp. -- Analyst

OK. And then last one for me. Any color on -- or update kind of on the M&A environment and outlook for 2022 and 2023?

Alan Yu -- Chief Executive Officer

Well, last year, it was challenging in terms of when the market was booming, everyone was doing well and the latest we've seen a lot of M&A activities in the market. I guess now with the market coming down, there's a seen less M&A activities in the recent months. And I would think that this will be a good opportunity for us to really look into who actually -- which -- what partnership or which company that will be suitable to further up with in terms of in the next six to nine months as economies shift downward in most cases. So I would say that there's -- for us, I think that there's more opportunity down the road than it was six months ago.

Brian Butler -- Stifel Financial Corp. -- Analyst

OK. Great. Thank you for taking the question.

Alan Yu -- Chief Executive Officer

Thank you, Brian.

Operator

And the next question will be from Paul Dircks from William Blair. Please go ahead.

Paul Dircks -- William Blair -- Analyst

Hi. Good afternoon, and thank you for taking my questions. So first one for me, I just wanted to ask, Alan, over the last 30 to 60 days, how is the tone of the conversations that you've had with national account customers changed as we've seen the rapid inflationary pressures across the economy take greater hold?

Alan Yu -- Chief Executive Officer

Well, the past 30 to 90 days, we've seen our -- most of our national account customers are still continuing -- are looking to work even closely with us, and they're seeing that there's still a concern that there's a supply chain disruption in the marketplace. -- primarily on the paper side. There is -- there's still -- I mean, the paper shortage is still ongoing, not necessarily on the plastic side, but on the paper side, there is a shortage of papers raw material. And it could be from a paper food container, a paper cup or a paper trade or something else.

But mostly on the paper side, there is a shortage in the domestic marketplace. So we talked to a lot of the national chain account. They do want to work with us even closer in terms of if we can be a secondary supplier to them just in case that the primary supplier will not be able to accommodate them, and which I think it's a good idea that doing the pandemic that it changed everyone's perception of having a single source of vendors versus not only a secondary but third backupsource in order to make sure that there's no supply chain disruption, which we are still seeing right now.

Paul Dircks -- William Blair -- Analyst

Got it. So maybe said differently, my -- I'm implying, I guess, your answer implied that we're not really seeing much of a change from a demand standpoint from those national account customers if for no other reason then they're looking to carry it as a solution for some of their own supply chain challenges. We're not really seeing an economic impact here as far as the demand goes and as it relates to you, that would be a fair statement?

Alan Yu -- Chief Executive Officer

Yes, I haven't heard much of the net increase on that part, yes.

Paul Dircks -- William Blair -- Analyst

OK. I appreciate that. Switching to the online channel. You mentioned during the prepared remarks that you guys were planning to open up the website to become more of a one-stop shop.

Can you maybe talk about, one, does this require a step-up in expenditure? And two, how would this change the growth potential and maybe even the margin profile of the online channel, which, as you know, is your highest-margin channel for your business?

Alan Yu -- Chief Executive Officer

Well, I don't see any change in margin in our online sales. One thing is we have been utilizing Amazon to sell our products. We're not utilizing our [Inaudible] store, our own website to sell directly to the end user. At the same time, we feel that our -- we need to expand our product offering, not just what we have carry ourselves.

But in terms of -- it could be a sauce, it could be a draw shack, player sauce. It could be a chili sauce it could be other items that is basically needed by our customers. So what we're looking at is partnering with different vendors that they can use us as a platform, use our clientele at their base and to sell the product. And that's where we can earn commission or affiliate commission on that part as a revenue stream, just like some of these platform out there.

We do see that we can -- we want to better utilize our 40,000 customers online to see what else we can offer them as a one-stop shop.

Paul Dircks -- William Blair -- Analyst

That's helpful. And I guess, maybe quickly to follow up on that. Is it your expectation that there would be a major step-up in your expenditure in terms of your website? Or how quickly should we expect to see some of these new ideas implemented online?

Alan Yu -- Chief Executive Officer

I don't see much of an expenditure now because most of our expenditure has been spent last year and the year before. In the past two years, we -- operational expense has been higher than I would say this year is that we spend more money on the technology, our warehouse management system within the last two years as well as our online upgrades that we mentioned in our past quarter earnings calls, and we spend millions of dollars on the upgrading of our online system. Right now, I would say that what we need to spend -- we will be spending is on people. the people to manage bring in new products to people to manage how to find partners that would like to use our platform to sell their product as well.

So that's what we're going to be investing. It's people versus the website this year.

Paul Dircks -- William Blair -- Analyst

That's helpful. Last one for me. You had mentioned that you expect ocean freight rates to remain elevated over the course of 2022. But recently here, we're starting to see rates come down a bit.

So my question is, can you remind us if those rates do continue to come down, how quickly we should see those affect your P&L? Are we -- could we perhaps see some margin tailwind from this later in the year if we continue to see the current change persist over the course of the year?

Alan Yu -- Chief Executive Officer

Sure. The reason I said we expect the ocean freight to be outlook remain elevated is that timing well last year, we saw it came down for a brief period of three weeks, four weeks, five weeks and it went back again. Right now, we see that, yes, the ocean freight has come down in the past four and five weeks, mainly due to the lockdown in the part of China. Now what happened when the port opens, reopens? Are we going to see the rates go up again.

So we're not -- right now, we're just -- we're not changing our stand in terms of how the rate is going to drop majorly. So we're going to wait and see and until the port opens from China and see how it goes because I'm sure I want to support open, there'll be a lot of factories in China that want to ship the product in the U.S. And with that said, they might raise the price again or if the economy still continues to stay at this low left end that perhaps the ocean freight will come down. That was -- like you said, with that said, and it will help the margin in terms of the third quarter, not the second quarter.

But one thing I would mention that it's helping the margin is the domestic freight -- truckload rate has come down due to the lack of product coming from overseas. We've seen the truck rate coming down, but at the same time, offsetting by the LTL carriers raised their domestic shipping by nearly double. We used to ship $400 now it's being -- we're being told that it's going to be $800. But of course, a lot of these are actually paid for by the customers.

So we're seeing -- the market is still not in a normal mall right now. It's -- there's a lot of changes in the market for shipping.

Paul Dircks -- William Blair -- Analyst

Understood. Appreciate the color. Thank you.

Alan Yu -- Chief Executive Officer

Thank you.

Operator

And the next question will be from Michael Hoffman from Stifel. Please go ahead.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

Hi. Thank you. You can tell from my voice that's why Brian asked the questions, but we have some follow-up, if I could. With regards to the ocean freight, how much is your freight cost at contracted rate versus the spot rate?

Alan Yu -- Chief Executive Officer

Yes. We have purchased -- we have contract rate, which last year, our contracts were at average about $4,500 our current year contract rate of $10,000. And that is one of the reasons that we mentioned that we expect the high end -- the ocean freight to be elevated at the same time because if you look at it, actually double -- more than double the years contract versus last year. The good thing is we're able to get the noncontract rate from the trade orders at about $9,000.

So even with that, it's still higher than the contract rate from last year.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

What percent of total freight is contracted versus spot?

Alan Yu -- Chief Executive Officer

Last year, I would say 40% -- 50% of contract delay versus the stock rate. This year, so far, the contracts start May 1. So far in May 1, we only took maybe 10% of our -- 20% of our contract rate. The remaining 80% we'll be using market rates.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

OK. So if the trend is favorable, you might actually get the freight as a tailwind because you can lean on the spot rate for some of that.

Alan Yu -- Chief Executive Officer

OK. So the next question is about capitalizing freight costs. Within the full year guidance, how much have you assumed you're capitalizing freight as a dollar amount versus the $6 million in 1Q? And within the capitalization, what's the time line to amortize that off?

Jian, can you answer that question.

Jian Guo -- Chief Financial Officer

Yes, I can probably take that question. Hi, Michael. if I was hearing you correctly, your first question about how much we -- how much of a benefit we got out of the capitalized palliation of ocean freight costs in Q1. So to answer that question, we capitalized approximately -- roughly $6 million in Q1.

But as I previously mentioned, in my prepared remarks, even with the benefit of roughly the $6 million, the total ocean freight cost was about $15.2 million or 14.4% of net sales in Q1. In terms of how quickly that we expect to amortize, if you will, the benefit over the -- on the P&L, our current estimate, and this depends on the volume of the purchase that we are making in the second quarter as well as the third quarter. Based on our current estimates, we do expect that we'll absorb the majority of the benefit from Q1 in the second quarter, they might be -- they probably will be just a little bit over -- that we would recognize over the third quarter this year as well. I mentioned previously, I just wanted to provide a little bit more color on sort of the expectation for the second quarter gross margin, even with the expected hit, if you will, from the ocean-frecapitalization, we still reiterated the full year gross margin goal of 31% to 32% on average.

And that's because we expect we are seeing some favorable impacts that we believe will pretty much offset the negative impact from the ocean freight capitalization in Q2. So to name a few of the continued shift toward the higher margin products, operating efficiencies, some of the gains on the foreign currencies, I mean we are seeing continued favorable impact from quite a few factors.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

OK. So just to make a little bit of a finer point, which I think is important is the full-year guidance is not predicated on having capitalized freight for the full year. You're going to basically reabsorb it. And this is more of a timing difference on when that expense that pushing -- some portion of that expense was being recognized in the context of thinking of capitalization being 5- and 10-year amortization type cycle.

So I think that's an important observation. Am I wrong about that?

Jian Guo -- Chief Financial Officer

The full year -- if I'm understanding your question correctly, Michael, our full-year guidance on the gross margin is with the expected enhanced some auction free capitalization from all quarters.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

I -- if I understood you correctly, so what you're saying is you capitalize 1Q, you're going to reabsorb most of it and to a little bit in three. So that you fully absorb it within the P&L, and you're still going to make your numbers.

Jian Guo -- Chief Financial Officer

What numbers -- I'm sorry, I didn't --

Michael Hoffman -- Stifel Financial Corp. -- Analyst

Yes. Sorry. I'm losing my voice. You've given a margin guidance for gross margin and what I'm hearing or correct me if I'm wrong, is that gross margin is not going to be dependent on you having capitalized expense.

You will have reabsorbed the timing of that capitalization in 1Q by the time the full year is over.

Jian Guo -- Chief Financial Officer

That's correct.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

Yes. I think that's an important point is you're not getting to your numbers by capitalizing an expense for the full year, it's more of a timing issue.

Jian Guo -- Chief Financial Officer

You're absolutely right. Obviously, we touched on the improvement, right, that we're making -- that really was driving the margin expansion. The margin expansion was not really driven by the capitalization. The capitalization just caused a little bit of fluctuation between the quarters, if you will.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

Yes. But I mean, it did help your reported number, I mean, one and two, but for the full year, you're not making your number by having capitalizing expense.

Jian Guo -- Chief Financial Officer

Yes, you are absolutely right.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

Right. I think that's an important comment. And given the inventory build, has that improved your fulfillment? Because, Alan, you alluded to fulfillment did pretty meaning plain 4Q has fulfillment -- is fulfillment rebound?

Alan Yu -- Chief Executive Officer

Yes, our fulfillment is definitely better than last quarter and also last year's same quarter. We had a major fulfillment issue last year, all the way to the entire year, I would say. I would say first quarter is better, and second quarter will be even better.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

OK. And lastly, labor has been a challenge for you, but you didn't bring it up this side. So is making decisions like adding warehousing or what have you, you can staff that and you're feeling better about labor availability on a relative basis?

Alan Yu -- Chief Executive Officer

I would say labor is definitely better than the beginning of the year. More people are looking for a job now. And I would say that it's -- I mean that's one thing that can help us shift the product and grow the business is making sure that we have sufficient labors. Yes, I think it's better now, maybe better situation better than previous quarter and last year also.

Michael Hoffman -- Stifel Financial Corp. -- Analyst

OK. That's the rest of my question. I apologize for my rusty voice.

Alan Yu -- Chief Executive Officer

Thank you, Michael.

Operator

And the next question is a follow-up question from Jake Bartlett from Truist Securities. Please go ahead.

Jake Barlett -- Truist Securities -- Analyst

Great. Thanks for taking the follow-up. Mine is on the pricing. And you mentioned that the -- essentially the pricing was about 20% in the first quarter, half of the roughly 40% revenue growth.

So the question and that kind of was implemented throughout 2021, you taken a little bit more in '22 already. So what is -- how much of pricing is contributing to the 22% to 23% revenue growth that you expect in '22?

Alan Yu -- Chief Executive Officer

I believe Jian mentioned 50% of that 23% is contributed to the price increase that we had last year, especially toward the end of last year. We are seeing the price increase. We're using the new price now that we raised back in October, November and of course, January this year. And this is where we're seeing that the benefit is that 23%, 50% of that is the price increase.

Is there going to be more price increases down the road? I would say, yes, particularly on the paper product because we have just received additional price increase from our source that is telling us that there is still challenging in terms of paper raw material. So there is still be more additional price increase down the road on the paper side, not necessarily on the overall product line, but on certain products, there's going to be a price increase.

Jake Barlett -- Truist Securities -- Analyst

So just to clarify, because I understood the first question about pricing to be about the first quarter specifically, but it wasn't. So you're saying that about -- so 11%, 12% pricing is what you expect on average for the whole year of '22?

Alan Yu -- Chief Executive Officer

The growth of the -- if we're saying that our growth this year has been 25%, 23% year-over-year growth, about 10% of that is on price increase.

Jake Barlett -- Truist Securities -- Analyst

OK. And then maybe just to ask a question about what -- in the first quarter, how much of the 39% revenue growth was from pricing.

Alan Yu -- Chief Executive Officer

Jian, Do you have that number?

Jian Guo -- Chief Financial Officer

Yes. So as we were just talking about, Jade, the total first quarter year-over-year growth, a little over 50% was from the pricing increase? And maybe just also to add on to Alan's point, as we think about the impact from the pricing increase for the full year 2022, I would agree with Alan that it's probably going to be roughly half of the total revenue growth or maybe just a little bit less because obviously, when we're comparing year over year, last -- the first quarter last year, we -- I mean this is -- we're comparing year over year a lot because a lot of the -- most of the price increases that we implemented last year was from the second half of 2021. So as we head into the second half of this year, the year-over-year impact from the pricing will be a little bit less. But overall, I would agree with Auto's comments for the full year.

Jake Barlett -- Truist Securities -- Analyst

Great. That's helpful. And then I got a cost now, too. The other question was on capex for the year.

And I think that includes the deposits paid for property and equipment. But how much do you expect to spend on capex in 2022? And does that include the investments related to the JV? And if not, maybe just kind of break that out as well.

Alan Yu -- Chief Executive Officer

I would say that majority of the spending that we're seeing in 2022 were actually spent in 2021. We've been using our 2021 because we have to pay a deposit down last year to get the product in this year. And over 50% of that was already paper last year and moving forward this year that will be seen in the product such as the automated robots. And as you mentioned, the JV, the investment, I would say that's part of the capex that we're looking to spend in terms of no more than 5% of our revenue.

That's still our goal.

Jake Barlett -- Truist Securities -- Analyst

OK. Thanks a lot. Appreciate it. Just with the JV, I mean, are you -- how does the JV work in terms of your investment in the JV?

Alan Yu -- Chief Executive Officer

JV, we're investing approximately $6 million in the first phase. And basically, the production should be starting later this year about around the fourth quarter of this year into full production in 2023. And Carewell take over 50% of the product products that's produced out of that manufacturing plan. And the other 50% will be sold to other clients, could be in Australia, it could be Japan, could be other customers in the U.S., private label branding for other manufacturers.

That's what the goal is on that JV.

Jake Barlett -- Truist Securities -- Analyst

Great. Thanks a lot. Appreciate it.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Alan Yu for any closing remarks.

Alan Yu -- Chief Executive Officer

Thank you, operator, and thank you all for joining us today. We appreciate your support, interest in our company, and I look forward to speaking with you again. Thank you very much. Have a nice day.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Roger Pondel -- Investor Relations

Alan Yu -- Chief Executive Officer

Jian Guo -- Chief Financial Officer

Jake Bartlett -- Truist Securities

Brian Butler -- Stifel Financial Corp. -- Analyst

Paul Dircks -- William Blair -- Analyst

Michael Hoffman -- Stifel Financial Corp. -- Analyst

Jake Barlett -- Truist Securities -- Analyst

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