Q4 2023 Karat Packaging Inc Earnings Call

Participants

Roger Pondel; IR; Karat Packaging, Inc.

Alan Yu; Co-Founder, CEO, and Chairman; Karat Packaging, Inc.

Jian Guo; CFO; Karat Packaging, Inc.

Jake Bartlett; Analyst; Truist Securities

Michael Hoffman; Analyst; Stifel Nicolaus and Company, Inc.

Ryan Meyers; Analyst; Lake Street Capital Markets

Presentation

Operator

Good afternoon and welcome to the carrot packaging Fourth Quarter and Full Year 2023 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Roger Pondel, Investor Relations. Please go ahead.

Roger Pondel

Thank you, operator. Good afternoon, everyone, and welcome to carry Packaging's 2023 Fourth Quarter and Full Year Conference Call. I'm Roger Pondel with Pondel Wilkinson Kurt Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce the Company's Chief Executive Officer, Alan Yu as Chief Financial Officer. Jan go before I turn the call over to Alan, I want to remind all of our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10 K as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.SEC.gov, along with other Company filings made with the SEC from time to time.
Actual results could differ materially from these forward-looking statements, and Kerry packaging undertakes no obligation to update any forward-looking statements except as required by law. Please also note that during the 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, I will turn the call over to CYOL. and you, Alan.

Alan Yu

Thank you, Roger. Good afternoon. Everyone. sales volume for our 2023 fourth quarter grew 7% over the prior-year period. Although revenue was again impacted by unfavorable year-over-year pricing comparison and by startup delays from several new national and regional chain accounts, we estimate that approximately two to $3 million in revenue from new accounts was pushed into 2024. We are starting to work on orders from these new accounts. Now as part of our strategic initiatives, we continued to scale back U.S. manufacturing during the fourth quarter, which further enhanced gross margin to a near record high of 35.7%. Sales from manufacturer products in the fourth quarter were 16% of total net sales compared with approximately 27% last year.
We expect our gross margin to remain at a higher levels because of our initiatives and the continued strong US dollar sales of our ecofriendly product grew 11% in the fourth quarter over the prior-year period. This category represented approximately 33% of total sales which exceeded our expectation versus 31% last year. We are continue to develop new and innovative ecofriendly products to meet increasing customer demand and expand our customer base in 2023. We opened new distribution center in Chicago and Houston and double the size of our Washington State distribution center with the move into a new 100,000 square feet facilities. These new distribution centers are fully operational and contributing nicely to geographic and market penetration as part of our growth plans for 2024.
We recently signed a new lease for a distribution center in Arizona. We're taking possession of the warehouse now and are expecting it to be fully operational early in the second quarter. We are planning on opening another distribution center in the south east region this year, together with a sales force expansion, we are further penetrating key U.S. markets in the south Midwest and Pacific Northwest region and expect the growth in these market to more than offset a decline in the California market or weaker conditions in the restaurant sector throughout the state.
Our operating leverage in Q4 2020 threes was impacted by a write-off vendor prepayment of $1.1 million to purchase certain PPE product in 2020. So in a pure IQstream inventory supply shortage caused by the pandemic. We are focusing on implementing automation and AI technology at all of our facilities in 2024 to further enhance efficiencies and productivity. Additionally, we are actively evaluating strategic acquisition opportunities this year as market valuations are showing signs of reality and normalization with current strong operating cash flow as well as the Company's liquidity, strong balance sheet and positive long-term outlook. Our Board of Directors in February again authorized an increase in the quarterly cash dividend payments, $0.3 per share from $0.2 per share last quarter and from $0.1 per share since the regular quarterly dividend policies was initiated in August 2023. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company's financial results in greater detail. Jian?

Jian Guo

Thank you, Alan, and good afternoon, everyone. As Alan mentioned, we delivered another quarter of significant margin expansion and business performance. As I go through the key financial metrics here, I will be talking about certain misclassification adjustments made in the fourth quarter of 2023 for the full year amounts within the income statement with no impact on net income. The prior year amounts are not adjusted due to the immaterial impact on the overall financial statements. Net sales for the 2023 fourth quarter were $95.6 million, including an adjustment of $6.5 million of online platform fees for the full year, which resulted in an increase to both net sales and selling expenses, net sales were $92.7 million in the prior-year quarter. Sales volume increased 7.3% over the prior year quarter, which was offset by unfavorable year over year price comparison as we have passed on savings from ocean freight and raw material costs to customers primarily in the last quarter of 2022 and first half of 2023 by channel.
Compared with a year ago. Sales to distributors, our largest channel was lower by 6.0% for the 2023 fourth quarter. Sales to national and regional chains decreased 3.6%. Sales to the retail channel decreased 5.2% and our online channel sales were up by 68.2% including the impact of 63.7% on the adjustment of online sales from fees. As discussed earlier, we are encouraged by the volume growth in our business as well as the growth of our ecofriendly products online channel and the increased geographic penetration in the East Coast, north east and midwest cost of goods sold for the 2023 fourth quarter was $61.5 million, which included an additional import duty reserve of $2.3 million and an adjustment of $3.9 million of certain production expenses from general and administrative expenses compared with $63.0 million in the prior year quarter, which included an out-of-period inventory write-off of $1.7 million.
Gross profit for the 2023 fourth quarter was $34.1 million, which included the additional duty reserve and the impact from the adjustment discussed earlier versus $29.7 million in the prior year quarter. Gross margin expanded 370 basis points to 35.7% in the 2023 fourth quarter from 32.0% for the prior-year quarter. Gross margin in the 2023 fourth quarter included a negative impact totaling 240 basis points from the additional duty reserve and impacts from the adjustment discussed earlier. Despite the unfavorable year-over-year price comparison, gross margin benefited from our efforts to scale back manufacturing in the US in favor of imports, which carry higher margin and improved operating efficiency.
Operating expenses in the 2023 fourth quarter were $29.5 million or 30.8% of net sales compared with $24.9 million or 26.8% of net sales in the prior year quarter. Operating expenses in the 2023 fourth quarter included the negative impact of a vendor prepayments write-off and the adjustments discussed earlier, totaling $3.6 million. The increase was primarily driven by higher labor costs, increased rent from additional leased warehouses and workforce expansion. Such increases were partially offset by lower shipping and transportation costs, stock-based compensation and bad debt expense.
Net income for the 2023 fourth quarter was $4.2 million compared with $4.5 million in the prior year quarter. Net income for the 2023 fourth quarter included the negative impact from the additional duty reserve vendor prepayment write-off and a tax adjustment of 200,000 totaling $2.9 million. Net income margin was 4.4% in the 2023 fourth quarter compared with 4.9% in the prior year quarter. Net income margin in the 2023 fourth quarter included a negative impact from the duty reserve vendor prepayments, write-off tax adjustment and the adjustments discussed earlier, totaling 350 basis points.
Net income attributable to carriage for the 2023 fourth quarter was $3.9 million or $0.19 per diluted share compared with $4.5 million or $0.23 per diluted share last year. Adjusted EBITDA, a non-GAAP measure in the 2023 fourth quarter was $8.6 million versus $9.9 million in the prior year quarter. Adjusted EBITDA in the 2023 fourth quarter included a negative impact of $2.3 million from the additional duty reserve. As discussed earlier, adjusted EBITDA margin was 9.0% in the 2023 fourth quarter versus 10.7% in the prior year quarter. Adjusted EBITDA margin in the 2023 fourth quarter included a negative impact from the additional duty reserve and the adjustments totaling 230 basis points adjusted diluted earnings per common share was $0.24 per share in the 2023 fourth quarter compared with $0.3 per share in the prior year quarter.
We believe carat is well positioned to execute on its future growth strategy. We finished 2023 with $110.3 million in working capital compared with $84.5 million at the end of 2022. As of December 31st, 2023, we have financial liquidity of $59.3 million with another $26.3 million in short-term investments. I will now close with our 2024 outlook. Net sales for the 2024 first quarter are expected to increase low to mid-single digits from the prior year quarter. Based on the current competitive environment and the new business outlook, our gross margin goal for the 2024 first quarter is approximately 37% to 39%. For full year 2024, we expect net sales to grow 8% to 15% and gross margin to be in the range of 35% to 38%, assuming no significant increases in ocean freight rates. Alan and I will now be happy to answer your questions and I'll turn the call back to the operator, we will now begin the question and answer session.

Question and Answer Session

Operator

(Operator Instructions) Jake Bartlett, Truist Securities.

Jake Bartlett

Great. Thank you so much for taking the question on. My first is on the sales in the fourth quarter and backing out or backing out the online sales adjustment, there was a it was lower than the guidance. And even I think, you know, if you add the $2 million to $3 million that they kind of moved forward into the first quarter of 14, it was below guidance. So the question is what is driving that Omnia? What's versus expectations? What really drove the lower than expected results in the fourth quarter for sales?

Alan Yu

Jake, let me answer that question. Well, first of all, we did see a slowdown in the customer's purchasing product for inventory impact in December especially the month of December, we saw a significant slowdown in all of our distributors are taking orders on that part. And one of our reason is that our main chain accounts are saying that they were Overstock and the business was not as good as last year. So that was one of the main reasons that we had a really slow in December Okay.

Jake Bartlett

And I remember on the stocking or maybe destocking from distributors is an issue or a different dynamic in the fourth quarter that maybe had gone away. Is this is this maybe a return to normal kind of behavior from the distributors? Or are we still in kind of abnormal territory with Tom, how they're behaving right now?

Roger Pondel

We understand that doing every year into it, especially at the end of the years in December on our customer goes on vacations and they tried to destock whatever and return inventory that are excessive. That's kind of a normal seasonality, things on one way to avoid that, we'll be adding additional new account new businesses to have offset that, especially this year now that that it's different and large, though, actually last at the last quarter was different. The prior year from the prior year period, people are concerned, it might be a shortage. So they tend to stock up during the holiday, but last quarter, especially in December, people understand that there's abundant inventory out in the market, so they wouldn't be too concerned about, but bring too much inventory into their warehouse.
And I believe that most companies are or most of our customer distributors are overstock in the inventory in the warehouse that they're struggling with the warehouse spaces in the past year when they should have spaces to actually release additional spaces. But now the warehouse space that becomes so expensive, people are trying to reduce their warehouse stores base to reduce their cost of operation.

Jake Bartlett

Okay. And then the last question on sales, Ellen, this is describe the pricing environment. It feels like part of why the sales, particularly those sales were kind of expectations and guidance was March down and in 2023 was because of just pricing in your your desire to pass along price uplifts on lower cost on through price have we stabilized there? Or do you think that you feel more confident that pricing is not going to continue to come down in 24 and that maybe is kind of bottoming and will grow from here?

Roger Pondel

Well, yes. In 2023, I would say that in most industries, especially packaging industry, we're seeing everyone is seeing prices coming down due to overstocking due to the lower cost of ocean freight do it due to lower cost of the raw material. And we're seeing basically not only bottom, we're seeing a kind of a rebound a little bit in terms of pricing in some categories like the glove, like certain categories that are in shortage that from overseas. So that's what we're seeing right now. We're seeing. But I would say that we're pretty much we came to the bottom in the fourth quarter and it started a little rebound in first quarter of 2024.

Jake Bartlett

Okay. I'll pass it on and jump back in the queue. Thank you so much.

Operator

Michael Hoffman, Stifel.

Michael Hoffman

Hi, Alan. Jen, can I have some modeling questions about 2024. So we just get all the details. So could you give us a little of your thoughts about where SG&A lands, interest expense taxes and then lastly, free cash flow answer either a dollar amount or a cash conversion ratio of your EBITDA, just so we can complete the model.

Alan Yu

So Michael, let me take that but yes, yes. So let me take that question. So we have provided some high-level estimate of which we provide to the revenue and gross margin don't necessarily go down into all the details. But on that, we can definitely share some of our thoughts here. And again, as we mentioned in our guidance, the four years that are on the full year performance a lot of that, especially for the second half because it's just a caveat. The second half of 2024 is going to be assuming we don't have significant changes in the ocean freight rates a high level when we're thinking about, I think, Michael, you're asking operating expense and interest expense and cash flow, right?
So operating expense, I would say high level. This is the area of focus for the management team right now. And our goal is to continue to improve the leverage there. I want to say 2024 high level operating expense on a full year basis, it's probably going to be fairly consistent or a little bit better than 2023 when you take out the some of the discrete items that is that we incurred in 2023. I think overall operating leverage is going to improve and that albeit we do expect to see some improvement, especially related to labor cost, partially offset by our increase in rent expense, somewhat fixed expenses as we continue to expand our warehouse space, the high level that's the operating expense, operating leverage interest expense year over year. I don't see significant changes there.
The term loans and again, these are the term loan that we have global wealth, which is our consolidated variable interest entity these are there, Tom, those are global wealth books, so not our operating entity, but again, they are both term loans of that in fixed rate, we don't expect significant changes year over year in interest expense, free cash flow, we do believe our free cash flow is going to be continued is going to continue to be really, really strong in 2024. We talked previously about that pivoting to me more asset-light model, focusing on the import as opposed to I'm making heavy investment on a CapEx investment here domestically. So we do expect to continue with that model into 2024 and continue to expect strong free cash flow in 24.

Michael Hoffman

So when you could just give us a sense of some cash conversion of your of your your EBITDA, I mean, you had just to put it in perspective, I mean, you during the 70s percent of your EBITDA converted into cash, should we assume that that carries into 2024 as well, but the cash flow from ops less all capital spending.

Alan Yu

Understood and understood. I would think it will be it will be it will be in that range. It would be ideal range. Okay. And then Tom and John, can you help us a little bit about Thank you for the details on sales year over year change in the segments. When I when you look at the ones that were negative, what's the balance between price and volume? Like is there positive volume, but really negative pricing. So the whole thing is negative. And so I'm trying to get at is that there was a decent underlying volume number, but I'm overshadowed by the resetting of price for raw materials, lower freight, all that stuff.
How do I think about that across those segments? You saw in the fourth quarter of 2023, the volume did increase I believe, Jan with it, um, what is the percentage volume increase overall, but and how was that distributed across the four segments, the operating line, when you think about that directionally no positive negative from distributors, national retail versus online.

Roger Pondel

I would say that the on mainly online sales volume was more of a positive and into the, I would say, the retail segment, it was positive in the distribution segment. I would say it kind of evened out a little bit, but mainly our growth in the volume is more on the online as well as the national chain account.

Michael Hoffman

Okay. And then you alluded to this a little bit, John, about cadence, but can we talk because you're going to start the year at a much stronger gross margin and finished the year lighter to get to the average of the guidance. Talk to us a little bit about how to think about that cadence? Is there anything lumpy about it? Or do I just sort of gradually bring it down all year long to work out to get to the midpoint of the range? Well, there's nothing I think if you're referring to 2023 or if we have 2020, 24 or 2023?

Alan Yu

Yes, for the guidance, you start the year at a 37 to 38 or 39% gross margin in the first quarter, but the full year is below that. So is that a gradual decline every quarter? Or is there how do. I think I'm just trying to our modeling thinking about the cadence so very steady online each quarter. So I get to a blended average for the full year outlook.
Well, this is how I met Jim had mentioned earlier that there's a very big uncertainties of contract renewal for the Ocean Freight in May of 2024. So we kind of know exactly what's client, but it might what might occur in the first quarter and second quarter. But we big uncertainty is what is the USD is going to weaken or maintain strong as we are today. And the OS. was ocean freight is going to maintain. The current level is going to increase if it increased how much it increases. So kind of put a cushion in terms of the last two quarter of the end of the year. But we know that our volume is going to be strong.
Our expected volume this year, we're hoping we're looking for a goal of a 15% growth margin, not gross margin, 50% growth in volume wise. That is our goal that we're looking to shoot for and in terms of, of course, the gross margin we're also adding in on that there's some change in terms of a calculation classification. We used to have the CapEx and they are doing at the operating level, but now starting 2023 or 2024 will bring the CapEx into the the on the on the top of the levels so basically that will affect the gross margin also. That will be one of the big aspects that will affect the margin.

Michael Hoffman

Okay. So just so I think I understand you are being conservative about the direction of ocean freight in your guidance. But it's a point of opportunity if in fact, to go if the ocean freight proves to be consistent at current levels. Is that what I'm hearing that I hear that correctly, I may be misunderstanding what you're trying to tell.

Alan Yu

Yes, that is correct. If the ocean freight maintained stable, then basically I would say that this is definitely beneficial for us during Q4.

Michael Hoffman

Got it. Okay. That's what I thought you meant. Right. Thanks.

Alan Yu

Thank you, Michael.

Operator

Ryan Meyers, Lake Street Capital Markets.

Ryan Meyers

Hey, guys, thanks for taking my questions on first one for me. So if we think about the revenue guidance range of 8% to 15% growth. What would you need to see to come in at the high end of that range? Is that more of a stabilization in pricing or even a little bit of improvement in pricing. Just wanted to get a good understanding of how we potentially could see that 15% top-line growth for 2024.

Alan Yu

Sure, Wally, Mike, but Ryan, in the past year due in part to pandemic, our Company has been growing double digit every year year over year. And last year was a much different environment because in 2022. There's a major spike in ocean freight and that we add to at the price of cost of goods sold and the reselling prices based on that. And there was a deflationary factor during the last year, 2023. But in 2024, as everything stabilize, our selling volume is going to increase with adding new sales rep that's going out has been gone going out there in the street selling to more new video chain accounts.
And we're already seeing that we're adding on several dozens of new accounts in the past few months basically. So we're adding about 2030, 40 accounts are, I would say, 40 accounts, every quarter's distribution and chain accounts. And with that said, that's going to add a lot to our top line as well as our existing customers. We're adding additional new items such as napkins and other new category that we're selling in that we're looking to bring in this year, additional 3 to 400 SKU that will also add to our top line. On top of that, we're looking at our acquisitions this year, as we mentioned during our IPO, that one of the things that for our growth strategy has started looking at acquisition target in the past years on we've been looking at it, but the price was not that reasonable.
And we're seeing that people who are looking to sell the business that we're potentially looking to acquire are becoming more realistic numbers that we can see that we can look into now. So if we were to hit the 15% range, I would say that would have a small acquisition. I'm not going to we're going to talk about large acquisition, but we're looking at this small site acquisition.

Ryan Meyers

Got it. That makes sense. And then if we think about the softness that you commented on in the distributor and national channels in the fourth quarter. I just wanted to get a good understanding of how much of that was driven by just the California market versus how much of it was the overall system as a whole California market.

Alan Yu

In the fourth quarter, we saw a decline of almost like a double digit decline in terms of California year over year on the restaurant environment, California, it's it's really bad in this industry and also as well as competitiveness does a lot more importers and California restaurants are not doing well, especially the mom-and-pops that are serviced by distributors through the chain account, however, is doing but much better than the distributor, this mom-and-pop shops, which we're seeing a lot of restaurant closing and going out of bankruptcy, and that's we're seeing fourth quarters in California.

Ryan Meyers

Got it. Thank you for taking my questions.

Operator

Jake Bartlett, Truist Securities.

Jake Bartlett

Hey, thanks, and thanks for the follow-ups here. My first was just on that discussion on guidance, Alan, and you had mentioned volume expectations of 15%, but the guidance is 8% to 15%. So is that is that just a follow on of the lower pricing that we had by the end of the year? And just helping us understand the dynamics I know there's this mix that goes on as well and it impacts sales growth. So maybe just help us match the 15% on volume growth in the 8% to 15% revenue guidance?

Alan Yu

Yes, we're volume wise is per case count. The case counts could be something that's worth $3, $4 bottles or something that is $80 a case so that's where we're seeing the volume growth is our we're calculating by the numbers of bottles, a number of cases that we're selling the year-over-year comparisons, and we're already seeing we're still seeing the growth starting in Q4, especially that on November and December of last quarter last year. And we're seeing already seeing some strong growth this year already in the first two months with the first three months of this 2024, ready with the new a customer that we're just acquire regionally and also the potential customer that are in our pipeline.
We're seeing this number to continue to grow. So 15% is I would say that is more of a conservative number that we're going to. I'm going to say in terms of volume growth and based on the number of customer that we have in pipeline. But this can be average because, of course, we're looking at the second quarter and third quarter is always our strongest quarter versus our first quarter and fourth quarters in terms of volume growth wise. So we're going to be looking at our 50% is our target in terms of apps growth on quarterly wise and in terms of revenue on revenue, we have a kind of a strong base already in the 2023.
And we're seeing that with these volume growth in new account adds, and that's where we see the revenue growth at 8% to 15%. Of course, that is a revenue guidance that we want to be conservative because in 2023, we have a very we kind of have a decline in our revenue growth from 2023 compared to 2022 so we're trying to catch back in terms of 2024 to grow beyond the the revenue we had in 2022.

Jake Bartlett

But just to understand the offset to volume growth is negative, is negative mix or negative prices are up some revenue would be higher than the volume I assume. So why is revenue growth slower than volume growth pricing, you are right where they already have.

Alan Yu

So we are having to compete with our other other vendors for pricing. So we're doing both competing with other vendors as well as selling more higher price volume-wise in online.

Jake Bartlett

Okay. And then the question on operating expense or G&A of growth, I just want to make sure your comment. You said it was you want to improve versus 23. That's on a percentage of sales basis. You don't expect the absolute G&A or operating expenses to be lower year over year, except that I just want to make sure that that's the right message.

Alan Yu

That's correct, Jake, it's the leverage, the percentage in percentage of sales.

Jake Bartlett

Okay. And then just on the adjustments for the new online sales platform, fees kind of moving from, I guess going into selling increasing selling expenses and retail sales, also the production expenses on moving out of G&A to cost of goods, how should we think that just for modeling, you're not telling us how much they were per quarter in 23, but it should we just divide those adjustments by four and assume that that's the right kind of impact on a quarterly basis as we look to model 24 and beyond.

Alan Yu

And that should be that should be pretty close with the only caveat I will add is a couple of caveats. There is the online platform fee along with a significant growth of our overall online sales. I would expect that amount to increase. But in 2024 compared to 2023. On the production expense, I would expect 24 amount to be slightly below the 23 amount because of their continued skill batch of the overall domestic production activities here.

Jake Bartlett

Okay. And then lastly, on the import duty reserve, is it the same kind of way to think about it there that maybe should have been higher earlier was taken all at once here or is that not how that works? So just how would it how would by taking this reserve now, how would it impacts on the next three quarter COGS, it would be higher because it because you would have if that was a reserve as if you reserve more appropriately on on an ongoing basis you'd have higher cost of goods sold. Is that how we should think about?

Alan Yu

Can I just make sure I understand your question correctly. You're talking about the breakdown for the duty import duty?

Jake Bartlett

Yes, yes.

Alan Yu

Okay. So this what I we actually don't expect a significant change in 2020 for currency based on the best information that we currently have. The reason why we had an increase in the reserve in this charge, which you are right, if it impacted Q4 cost of goods sold, the reason why we had a impact was there was a change of estimate. It was a contingency. It was a loss contingency we previously reserved and took a charge reserve and eight of our based on our best, I'd estimate at that point in time that in the second quarter of 2023, we had a investor investigation going on. So we took a reserve back in Q2 2020, but Q2 2023. As forward to Q4 2023, we had some updates in our estimate updates in events and circumstances that helped us better. We estimate this reserve and this loss contingency.
That's the reason why we recorded an adjustment to this charge. We are as of right now, based on the inflammation and ASSISTANT provider from the console, we do not expect significant changes and in 2024. That being said, as we as we as we think about this reserve amount as of 1231, 2023, this is based based on the best estimate that we currently have, there might be future options that we would look into on. But as of right now, we don't expect significant changes in 2024 related to this in to this to this discharge.

Jian Guo

Jake, let me add to what Jim has mentioned. This reserve is a special duty reserve space on an item that we have imported from overseas and on this basically that everything all the investigation has confirmed finalized. So in 2024 and onwards, we will have to deal with this any type of an important issue on this particular product. But and for the moment, we reserve on, are we going to see a cash payout anytime soon?
No, it might be and a couple of years down the road since we are going to appeal. And this is this high throughput, $2.3 million or $3.5 million is the highest reserve or putting that work very likely this reserve would change on to a different amount, which is we're looking at a lower amount. The amount of dollar amount that will change, but this is the highest the most we will see in terms of the duty that we're liable for basically raise.

Jake Bartlett

That makes sense. I appreciate it. Thank you.

Operator

Michael Hoffman, Stifel.

Michael Hoffman

Thanks. From the M&A, just to be clear, given the quality of the cash flow, I presume you would be able to fund the small M&A that you're thinking about all from sources that you generate. So it's self-funded, correct, yes. Or unless.

Alan Yu

Yes, I mean, we're basically we have over on us, $100 million has that like I like Jan mentioned in our report over $100 million in cash flows in terms that we can use that utilize which we're not going to utilize all of it on. But for sure, that's something that we have we can do self-funded.
Okay. But the big statement being is that there's nothing on the radar that you're going to drive the leverage on this can be self funded off of cash and the leverage stays relatively stable?

Michael Hoffman

Yes, yes, we and also we are we are going to generate even more cash this year. Right, right.

Alan Yu

That's what I'm trying to get out.

Michael Hoffman

Okay, thanks.

Operator

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

Alan Yu

Thank you, everyone, for joining our of our 2023 fourth quarter earnings calls. And I would like to say, thank you all, and have a nice day. Thank you very much, Maria.

Operator

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