KRT - Earnings call transcript Q2 2022

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Operator

Ladies and gentlemen, thank you for standing-by, and welcome to the Karat Packaging Second Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Roger Pondel, Investor Relations for Karat Packaging. Please go ahead.

Roger Pondel

Thank y operator, good afternoon, everyone. Welcome to Karat Packaging's 2022 second quarter earnings call. PondelWilkinson, Investor with firm. Pondel Roger Karat Relations Packaging's I'm Guo. introduce pleasure Chief its It Jian my to Chief the Officer, and will be Yu momentarily company's Alan Executive Financial Officer,

on to of my to Alan CEO, undertakes company's defined is which is these the posted call from also those Alan, forward-looking materially comparable company's numerous non-GAAP Before adjusted XXXX. which website. statements with Alan? by SEC I included Factors obligation release, along share, to it the time. we the that I are financial Such most And law. including www.sec.gov, could call forward-looking the forward-looking during the set by meaning as from the include note that, conditions, time pleasure in are financial which adjusted of A section SEC within the Regulation GAAP of over G. may now recently Form call on in Yu. differ the forward-looking beyond will the as reconciliation Karat at forth Risk Reform Private is that measures turn directly and with copies over the with most Please measures Securities today's measures want other remind Litigation to many our turn XX-K the Commission, today's to press the adjusted of available to results and website earnings control, company's as listeners today's Actual diluted statements, the Exchange company of to statements Packaging statements, EBITDA are discussing non-GAAP filed EBITDA, required filings subject which SEC's with to call, Act per except no Securities update are be of and margin made any

Alan Yu

afternoon everyone. you, Good Thank Roger.

paced the XX% offering, XXXX reflect particularly quarter comparable Our the strong results friendly grew in our was environmentally for growth sales broad-based The a period. channels. second which positive prior all XX% our over performance products, by categories, to distributor year continue demand across

continue Karat including impacted fewer diligently We that added and negatively $X we in I May. warehouses, delays wallet distributors several roster. by million were with customers, and California resolved. was existing manufacturing our through fulfillment to to between approximately Hawaii, we our shipping working in caused Sales by plant due of June new entire other been and gain in China The order customer received delay our and facilities shipping Karat for two new it. wholesale inventory to have and team Southern transitional, overflow issues, May the thank leased share

product cities As States to and regulation rapidly biodegradable states demand and more for Styrofoam plastics, is the compostable new the and single-use world and growing. ban United around in enact

and national We position are leadership food for accounts its grocery to Karat our service chains from in disposable experiencing compostable committed product. product. increase is eco-friendly

to factory our well. bagasse Technology As to XXX% in square innovative is we progressing and Earth announced provide Green April, compostable XXX,XXX state-of-the-art manufacture foot offerings, joint in The continue venture new Taiwan annually. service food to expected to plant production approximately of completed to before containers product begin produce where ahead XXX end The is this expected be of schedule, is year. of and the product shipment automated

We the double partner are capacity lines Taiwan manufacturing in discussion to with production extend to our mid-XXXX. by

US manufacturing to proprietary using initiative build in our in processes the Taiwan bagasse accelerate to plan the XXXX, the facilities. new of a plant we Additionally,

eco-friendly improvement rates, continued our further proceed product believe continued operating XXXX, we recent fulfillment from our efficiencies. expect we with the growth and in lines, warehouse into As we expansion

$XXX in million million the range million, for XXXX quarter. XXXX of quarter for be the third We third $XXX.X the up are currently targeting $XXX net to sales to from

be to same reiterating total the freight are we benefited the sales favorable in higher Despite as capitalization million expected year. of $XXX increase the versus XXXX the with in significant in the and For Gross currency the year last XXXX. million to of XXXX, the foreign $XXX we've full second guidance, in range duty our $XXX million costs products, net period from rate. quarter, XX.X% margin achieved eco-friendly gross margin well in XX.X% margin as exchange with consistent

XX% full margin the gross average. XXXX for on Our goal remains year to XX%

currently some rates. in We drop seeing ocean freight are meaningful

our ocean gross I want absorb of average freight XX% confident margin the to leave can we costs, accomplish higher to adequate for we questions. we As are full that still XX%. year time

Jian Jian? our will the discuss in over to Officer our turn Financial call financial Guo, results So I Chief with detail. to that, greater

Jian Guo

Alan. you, Thank

year, Alan in consistent we and $XXX.X existing was second the margin of to well second sales retail the revenue and to costs from reflecting XX%, to duty in improved partially the increased By increased reported same new and some driven quarterly and the in Overall, customers. solid expect post-COVID channel, quarter costs. net The significant XX%, year. for year the last channel top adjusted EBITDA sales $XX.X total another reopening. to rate distributors, largest freight for total growth quarter ocean-freight and as delivered our from products of efficiencies channel exceptional for to million increased million was second increases on the We the increase the Gross to the record to sales increase in increased currency of decrease from Sales of with year, to growth the period and million online operating as percentage as product, XXXX increase sales to rates, labor eco-friendly expanded X% As products increased a in continue to XX% quarter. same costs by percentage our XX.X% XX% leverage. last and channel quarter price freight, benefited for freight mentioned, achieved XX% in of chains national sales falling quarter last regional sales margin net duty second sales strong XXXX higher a despite second we along shift $XX.X second the due With the our the million grew net rising implemented growth eco-friendly and services. freight XX% offset in logistics higher XX.X% in period Gross half profit XXXX. XXXX. XX.X% favorable XXXX current last from a from the quarter costs $XX.X margin XXXX with to of quarter. Gross and and exchange from as abatement increased of from

$XX.X sales net The the the second per increase XXXX was share Net XXXX an to $X.XX $X.XX deliver XX% in quarter are manage the for demurrage a with prior year million $X the inventory year gain $X.X focus XX% same in $XX.X second of year. labor or $XXX,XXX same of compared mix quarter. to the the for overflow, for lower million included temporary million diluted ago. year XX.X% to of capital million income the XX% income with the XXXX compared the product difference million our in or in June three was quarter million common costs, $X.XX $X.X the forgiveness, additional last for million, for optimizing operating net the expense. $XX.X from We improving efficiencies in a to last net higher attributable same confident quarter debt quarter XX% per $X.X the XXXX excluding from currency our income on $X.X margin goal million compared same last second decrease full on and expenses with provided forgiveness for primarily a offset the sales packaging of ago. adjusted forgiveness. the by EBITDA million loan higher million gross year. year. was EBITDA gain million by debt. second also $X.X last used from Net effective year-over-year primarily XX% $X.X more of in or the in Consolidated $X transactions second debt were quarter increase second the of foreign taxes our included for a to $X.X cash of increased net also the last XX.X% which of versus and with was year tariff Adjusted XX% increase last year income million The quarter reflects quarter in a share margin attributable for Adjusted the diluted operating was gain quarter. costs same tax Operating the income cash compensation ended share continue management. XX, or was $X.XX from reflected prior for and for in The compared compared from earnings forgiveness and with on gain to transfer we million net XXXX diluted months compared expense for was Other year. COVID-related The $X.X stock-based Provision million $X PPP second period rate fees, included on and illness, was year, $X.X of including for warehouse partially including Net with prior the operating of $XX.X about million activities incremental $X rent quarter million million per million activities primarily gain second one-time working quarter period quarter or year. XXXX for year $X.X interest quarter quarter. XXXX the the

our we in of the $XX.X manufacturing capital, We its another the Taiwan. is $XX.X $X.X million regular with working During growth in up with CapEx, compared principally Karat invested at We positioned set execute and believe end well on future machinery venture the million strategies. XXXX second million joint in finished for to $X XXXX. quarter to million quarter,

line the its Global As the of under $X credit under liquidity million XXXX, had this With we borrowing of additional and line. million refinancing of availability term June XXXX, of $XX.X loans million. one gained XX of of outstanding Wells company of June $XX.X in additional

growth to Alan other operator. and shareholder answer to liquidity further be our call continue I'll your questions. And to support business I back the expand options to turn and to enhance happy We now the will explore the value.

Operator

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

Jake Bartlett

Thanks is question. question fill my first for taking Alan, my on Great. rates.

fill the the you think rate on changed what should about improved rest kind the update of demand? really You rates -- quarter? for meet. softness has much is demand if I or any than also get on of talk sort seeing can you whether higher whether sales could growth you're you then, of limitation the fill-rates -- that in or sales. your give think that you picture to from are really or the that an can improving right And And how the first confirm how now talked trend year? how us But fill you helping than

So of volume risk. a if for is low could But us that you would helpful. pretty demand kind that frame help be

Alan Yu

Sure Jake. Well you. thank

the seeing still all, facility one largest Texas the are fill that out associates. received. rate most of of our our fill of of First we we order We're which our purchase rates, is at

at quarter The XX%. was second

start under customers we of item basically secondary have operate was product able they warehouse. or California up out So it But had a and much to shipped. rate the warehouse the fill the California short emergency orders. to getting just vary in for the to warehouse needed of California -- to in to We be the almost that XX% lease would inside to the better. item was except XX%,

of one was So the issues. that

customers transfer did parts into we because So New products. of move And moment move we're this Carolina we up also at that trying other in to Jersey need warehouses, into second now more, in Washington a stock South to have product quarter, -- right Texas. of different product States the lot and our

growing Actually have -- softness in it's demand So it. even the I now. softness The do seen for No, been basically and stronger is compostable doing there market especially market. than product faster that's not it's ever. what demand -- I've in right the market? see Is is the growing we ecofriendly the

be to I've seen County Mateo October Xst. restaurant requiring example, the starting For compostable September is Xst, products using Hawaii starting San that every

prior with gearing now. pandemic right that everyone their XX% product saying up ecofriendly the overall a week was to is they national chain of we volume. takeout account So And spoke line their last to and were

packaging. different accounts? their to seeing usage And that, existing entire going at chain kitchen, And with into increased they're added is looking where that to with this we're of the from disposable mention to the the the today, volume. of four that, kitchen volume entire even As not grow the is they branded virtual virtual the this kitchen of trend XX% packaging, more industry moving ghost

Jake Bartlett

second focus a impact I That's and of to the on there you. One in the duty. spot is ocean whatever Thank impact And quarter? margins I Asia quarter missed that from that, first the in freight year-over-year. weekly from I been Great. have really second was West tracking was about East And what Was gross to know freight capitalization they're the big then, Coast currently might just there and quarter. but seeing impact is moment. XX% in for in we've of helpful. wanted I'm down any rates

So the through? freight that mean, a see ocean the the I see there should you when quarter really is of should falling rates -- two we dramatically flowing or through coming gross is delay? margin? benefit question when do with mean, benefit sort I of

Alan Yu

year. increase to started freight ocean The last Sure.

freight that -- of our a headwind conference when first products to dropped is peak the is freight that's say, brought favorable a drop. When growing. we that saying rate. because freight in ocean had drop; capitalization -- the the using capitalization it higher the because to And see quarter from call, in mentioning it there's we freight started it early, quarter had in first duty ocean So the would to freight That's earnings, started fourth I we going quarter. lot And the started first May. were the quarter a earnings in June. in last not early we a drop, we rates to first had we the be -- was everyone And when of year where

at say, the rate favorable basically, much from, spot June, quarter, duty quarter and into second and freight of freight So of tremendously third see in the we will fourth wouldn't see capitalization tailwind a would a today. we the to has And $X,XXX dropped gain the yes but I starting currently quarter. the $XX,XXX end

Jian Guo

did to impact the $X.X and about during unfavorable second great. add quarter, of Okay, comments have to Alan's Jake, to freight from the just capitalization we on question, your answer an million. duty

fairly impact start we gross the freight so benefit fourth have the decrease ocean XXXX. quarter significant margin. on and was from So to quarter, it a then probably third of expect also the about, later the Alan to now in our to quarter third in did what part the in see talking rate of the more And

Jake Bartlett

going a was that Taiwan, bagasse the then prove -- be impression Great. you was question, going the produce my effective labor-intensive my last And I the could way it's to JV, the that were to process. typically way. you very to automation in an know,

out sure the making kind point? But to So to feel and cost effective. then, US, sounds it's of decision that the you're this going bring US. if you -- whether do you've it of to successful I'm bring you're to not you've it might if And you see like how proven kind the automation but at it the to like try automation works

Alan Yu

to year, progressing point, bring and earlier But US. or -- see everything. and basically this and Last it production start our this at Taiwan to The seeing yes. Well, we set well. it's is up are in workable thought very was

And that So the US. other train to we are going in Taiwan already in of tried demand that manufacturing get operational. we know we should Basically, bagasse That's second hire compostable is that able the why have and there and be widespread be confident to people manufacturers the larger into it we Taiwan already been domestically. jumping for are product investment. has bring phase to

chain experience, world, is actually from bagasse want domestic -- very lot higher in China. a basically, we would market. say, issues they're the accounts manufacturing would other different using see they compare company are buying that also the into that we that the it lot especially, of that, of reduce much and partnership, to accounts domestic a done are developing our of type are XX% now, Right States. of our us. far, the any the And can facility chain China is that would equipment equipment the I their I of I've the these more, partners not more see with that well. have -- basically, are of that parts manufacturer them that's and if versus products mainly, if the to so are seen equipment, rates. bringing reliance We domestically, from our advanced say out in a to still already and and manufacture efficiency we majority and I over too these our think of we very And actually product spoken our wouldn't there already we like supportive because of spoken support of where manufacturing United would I haven't many are gaining market I think behind lot to support would chain from the manufacturer price -- Chinese we other And

Jake Bartlett

very you, much. Thank Great.

Operator

Our from Michael next comes from Stifel. question Hoffman

Michael Hoffman

very you much thank Jian, Alan, the for taking Hi. questions.

follow can capitalized million On a you've of freight couple in dollar headwind the inventory we side, added -- turns, not was sequentially. think fairly in million and given have are great, and the there the falling so the XQ, significant to pressure way then reversals, of if but We're as through a inventory commentary rates in $XX number. see of XQ probably, about still going that, that to

Alan Yu

Yes.

ocean the freight in duty going we're time, capitalization it freight looking QX at because compared and some at decrease significantly. right the seeing inventory same point, are our favorable in significantly to has are gain in where inventory increased we QX. to have We we this That's And QX QX. our dropped see to

Michael Hoffman

Okay.

a current inventory is. higher duty you've though, whole a clear than that's bunch market be freight that's and to on of got sitting Just the

in isn't mean, quarter lower more this get until third a and that's at it, the the inventory drag, got -- I to turn coming turns? rates. You stuff you in get inventory So

Alan Yu

wouldn't necessary Yes, quarter, say, first in, a at the a quarter. And higher it's cost. in higher The say, not I drag. a wouldn't came Michael. second I the costs inventory in of lot

has freight a already rates, dropped. been had that quarter second brought first have product The quarter we much higher depleted. already The the in

where the weeks see our six of we second -- it's inventory that. and I to back, of we I starting basically, our reason basically in said our the seen, that, in of already at of brought the the we month, that's end starting any the terms And reflecting of have -- period in we is the prices cost going adding we'll week. normal ocean -- these reduced also now, coming all by freight that is next the market. are rates. inventory and quarter in. in basically, the a at right especially -- that have would And products significantly, most rates. we our we're not the for all new inventory will be reduction quarter, by drop in third And lower So And freight quarters. And shown be inventory market this end And internally, decrease

So be a it segment wouldn't market drag this point. our at on

Michael Hoffman

be be to in repeat just not XQ, it clear, duty neutral should So in positive and to drag XQ? freight million $X.X the should

Alan Yu

be say be -- will in It it'll QX. I that would neutral.

Michael Hoffman

it Okay. turn should And then

Jian Guo

And Michael

Michael Hoffman

Jian. ahead, Go

Jian Guo

you Thank wanted color the Michael. a I there. Hi, to provide question. for just little

right. Alan So I is think exactly,

inventory days. a XX is little our If about turn our at over average turns, inventory you look

the cost, As capitalization as well cash-based far freight costs sort as ocean total piece. as the including of duty and

costs of already about said If freight as unfavorable percentage quarter, expect you current the represented we net impact I of this look the total we the from capitalization. the the quarter, decrease over the sales, ocean to When the our freight which million total expectation a impact from that including to $X mid-teens. for see at look included to little second ocean capitalization, third at XX%

of So sales decrease a and expect, basis quarter, probably ocean third net your points do XXX as if the freight point basis total in XXX we duty question. our that answers set to roughly in

Michael Hoffman

contract in trying contracts the you I was you with May, up your spot are to at. of in to what world did if end versus get did. That's, signing -- containers? of And take -- mix a like a and did, rate you having are lots contract you where What on Perfect. the

Alan Yu

rate. lower starting that's the match question. a May. the is in than agreed ocean ocean a everybody contract Well, rate, of signed reduce very all freight contract realized And in end liners, April, to rate contract to -- spot good shipper as the spot Yes, have rate much the the

Michael Hoffman

your mix in high, really contracting year. the So have been earlier would

Now it's spot, is I'm hearing. more what

Alan Yu

on Everyone now. is spot Yes.

Michael Hoffman

prepared sales it. ecofriendly if the said I'm in And I sorry, you missed percent remarks. -- then of what was that

Alan Yu

Jian, you the have number?

Jian Guo

Yes, teens. it's still in the high

probably sales. percentage is as are total a we -- seeing year-over-year net As high increased by of roughly it it X% in sales, teens, of the a total still percentage

Michael Hoffman

So sequentially, but year-over-year. basically flat up

the sort So things, a level to still product we've on demand that of settled access is to based of in the and trend of higher. but current nature it drive

Alan Yu

see we trend higher. a Yes much

Michael Hoffman

Yes and….

Jian Guo

be to trend once obviously, the the start by the start out is Taiwan. get manufacturing venture to of Alan to the as that -- talked we boosted in in joint once venture And -- going products joint about Taiwan,

Michael Hoffman

Right. anything remember am XQ hearing what correctly, be in a I USA. And production if onshore It's XQ, gets this but really at? in before should looking it I

Alan Yu

correct. is That

Michael Hoffman

issue, distribution fulfillment with? And Chino it centers, of have able into be all this labor the you challenges Okay. then to customers? some was the be people, to enough And million the deliver it in move other of just out $X the to function goods of order a been the redistribute to of dealing to didn't then to you've able

Alan Yu

those seven also that staff a California, that that quarter, was one Actually in June, have labor May the costs. much call cases increased for we second we the quarter also the seen some -- to we higher early and like temp that's of more agency there's product house sick, the getting are additional are There to even We've have eight at And short face of end things, X% shortage open of cover COVID that never end operational X% cases. and And our did a And to five seen challenges. days so in out. hire we actually of added we've on one staff Yes. shortages. related we just people, during increase second force, or calling to and in in of lot second many actually July. -- challenges. of But labor

Michael Hoffman

is back? And think $X else say a it get to might fair that not million somebody it fulfills or revenue you recoverable that million, ultimately, do $X you is actually

Alan Yu

will get that But shipment the the because one in find We in out of of there, us, of days a back half strip know a America that probably [ph], can't we some of delaying it product the and shortage will they of someone we we they we thing restaurant find -- needs a everyone items out, else. from shipment from of is, out of had were delay North didn't about course, that California. out for XX if

pretty order order we we're up. Amazon orders caught online Even online caught product. of today for in now we're delayed much were terms pretty shipping and up much after So

-- and rates. fill So more increase we're looking to

So I say from recover $X that of last shortages million that quarter. XX% we would

Michael Hoffman

in And remarks New better Jersey, made the South were XQ? they in fulfillment those into Carolina be moving on would expect distribution to your XQ centers you rates you comments based opening than out of and about Texas, in those product

Alan Yu

that's our goal. Yes

Michael Hoffman

Okay, great. Thank you.

Alan Yu

Michael. you Thank

Operator

from comes next Paul Our William question Blair. from Dircks

Paul Dircks

afternoon, Good you. Thank everyone.

particular contributed in what any deflation the the price products And to do see on looking expect price us plastic my Could So, maybe side on for the first quarter? of in business? is you quantify question forward, price. you

Alan Yu

quarter. a the the deflation I in terms the will we in not But what on on the do effect see price price deflation, lead on -- price remarks of question paper. on the the the the

on the know to go That's XX% hand early this what looking material, supply. already possibly a drop actually past drop. is higher everyone terms seeing end you feed, raw manufacturing -- so movement in operating drop of in in most seeing has that the cost, operational haven't the storage guess I labor the in still to everyone everyone of next a material materials; Styrofoam there demand cost of of a haven't we we're plastics. into all about of is at -- especially the plastic transportation in, cost product for paper or So of the Plastics price year, the did also the year. we higher this plastic raw out softness shortage to paper Domestically, season, looking actually even warehouse, next are looking in I the are increased, potentially seen And that the terms cups to any when getting other -- terms raw of seen summer moment, price but at of switch right looking containers. now year, the is

the product. outgrow still the so far So, demand of the availability

some growth as that's all is the the the So of the I not -- Would right market still now. XX%. part takeout products, in for of right just that I that things the soften There we're forward? the most issues is what supply seeing that but how earlier haven't seen is much mentioned in area. continue We'll see of it I in now but product moves,

Paul Dircks

maybe question I guess, And sales basis, could chains quite year, last thinking national conversations sequentially, your your That’s a talk also sales you the and Alan with a of is only retail next Yeah. about On about were helpful. sequential up my bit how it's modestly. customers? progressed the little cautious seasonally perhaps as July? year. we we tone those a more into bit than those or change months maybe last a got summer of lower moving had? June talk growth the saw conversations that Did get and you into about into you rate conversations what Can

Alan Yu

Sure.

Zone Boba supply -- product. One product is our softness our we've of seen the Tea that

volume. we're sales of drop seeing Now a in the terms

opened That this economy their when end expensive that drink Boba chain go a do a or high up up As to as might see upward But or offering. supply supplies. continue to year we for drink into account are saw we the looking of more Boba national in incorporate a terms was last trending everyone craving year. chain trend softness --

one And what wallet are able we're existing national back most national to chain national increase now to are increase of terms chains. the discussion been we they've we of to account our and with That's discussion store. strategies in Now that our talking travel accounts. customer share our chain in purchasing meet meaningful account and chain for of chain large open account, some national with the we're our to

We be also know we we've product when with in are quarter. with of it chains because letting national that chains we most get distributor quarter take firm their and national looking this sense the -- and this in the that during -- to of which fourth growth the -- third add the a will the we've added same quarter are does and approval, with it's our looking markup, were at testing. be time quarter all time to long second And line And usage the chain everyone will third despite a or actually account, sample chain majority to third in account deal new the into that's we of the get growing -- done which added the additional in announcing year. the close have

sales an trend in into So that for will XXXX. increase

Paul Dircks

Can rich introduction your profitability would margins in guys us offers? the the with the product help US the on eco-friendly facility? the margins most good, currently share you margins Karat would facility new you Very US of products? Could question those products be how you in other facility my affected portfolio? compare those these us is how with to Taiwan, yet be final can that that understand bagasse and have those And of did the

Alan Yu

most for Well, a are product the need bagasse plastic. aspect having is there's in it. banning key of places Regulations a

even not or polypropylene they're the plastic. the reusable So allowing

change to the all restaurant product bagasse such into So or sugarcane the as has line. compostable basically

operational I In wise is is is the terms the to than -- reliable. expense overseas. of the think that US would in domestic. be definitely USA. it that margin benefit going higher is is made is It in It But

of come it's port there in made down ship if disruption? a and see Our made customers overseas chain visit facility the can What or in how blockade a the actually there's if if a is the certain versus China. it's what to part supply

necessarily coming looking not we too it. of is product as far pricing-wise off terms for overseas in benefit the are the as the see will compared where long people aspect not that to that's from the see that price So

how it In first of higher will because be that to we that receiving existing say costs. to -- will with domestic existing to there's see a don't we mix of not the US part -- the material can going have recycle reduce operational margin-wise, operational will the in I'm we and raw raw blend in I our -- margin and can be material when into see or that in we that sugarcane plants into we actually expense paper the the be terms going from be material -- our paper pulp will started wheat our

material to So use to this is are able our produce how we where we product. recycled raw see raw effective material the

Paul Dircks

I appreciate the Thank color. you.

Alan Yu

Paul. you, Thank

Operator

That does to call the conclude to turn for remarks. today's over Yu Alan questions. I like closing would now

Alan Yu

you We Operator? quarter. for call Again Thank for you Packaging with look second day. you very wonderful a and the Well quarter. Karat have again thank all the joining in third everyone. thank much you to nice forward speaking conference

Operator

does ladies today's and you, you Thank conclude call. for participation. gentlemen. This Thank your

You may disconnect. now

Karat Packaging (KRT) 12 Aug 222022 Q2 Earnings call transcript