Earnings call transcript Q2 2023

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Operator

Good day, and welcome to the Karat Packaging Inc.

Second Quarter 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 with PondelWilkinson, Investor Relations for Karat Packaging. ahead. go Please

Roger Pondel

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

company’s the over with www.sec.gov materially call could Private control, along SEC statements, in other with the to forth Karat to remind Packaging most the that by and today’s are from Risk may time. undertakes as update Securities Before of forward-looking forward-looking no required time want which meaning the obligation Litigation law. XXXX. of I many the made results forward-looking Form Exchange forward-looking set our statements with at to Securities I on which of differ turn Reform section copies XX-K the website Act to are company’s Factors to Alan, except from and are beyond the available those the numerous within include call of any these statements filed the statements, Such including company listeners conditions, as subject filings SEC’s Commission, recent Actual of

release, by non-GAAP on adjusted press in defined that, measures to earnings as per GAAP call, also is adjusted are financial which the Regulation we website. the and financial is most company’s this measures included EBITDA reconciliation during of measures margin diluted comparable Please EBITDA, share, note will G. the posted be today’s adjusted directly discussing non-GAAP A which SEC

Alan? CEO, turn over to I the that, Alan will with And call Yu.

Alan Yu

our the services afternoon, eco-friendly everyone. our for prior shipping the over quarter, by revenue quarter and disposable revenue XX% for period, you, for the charges, category prior Sales logistics from anticipated foodservice period. price Roger. results. volume impacted achieved Sales grew year increasing we reductions demand core second product the product and lower with quarter remains X% excellent year during Thank in being Good over the strong. grew second Despite

Our total product eco-friendly to XX% the sales. objective category be at of about XXXX for is

to environment sustain the with certain the multiple that gross were price were the associated as of margin write-off materials able despite levels and industry-wide record of for machinery and We implemented equipment. well as deflationary raw disposal reduction

on improve and continue expansion We implement initiatives import our margin management to to more distribution, inventory asset-light rates. and drive growth focus and fill

challenges expect Chicago the We and September and to we end our of operational be warehouse, before through in are opening operational the of XXXX. some Houston currently working both warehouses fully

completed, Florida. looking substantially additional achieve certain and strategic maintain footprints of U.S. are greater locations, with margin. locations for the the we Arizona able expansion of back as with Together We import items, space such in also in warehouse manufacturing and were scaling combined to

I our we received a joint plus of interest. in full also a selling of have want investment $X of to that and Taiwan our portion project payment completed transaction venture million of mention

to a confidence in of dividend Board’s initiatives dividend our strategic quarterly shareholders. also Board share. future our cash value initiation and share. as earlier flow. Directors the Karat’s announced we strong demonstrate cash Board approved are policy, returning These the regular and declared operating Our per The commitment today, special producing a $X.XX a model distributions current $X.XX of to of declared per operating dividend and of Accordingly,

to Chief results company’s over discuss Financial I to Jian financial Jian? the Officer, will in turn our detail. now Guo, greater the call

Jian Guo

demonstrated we strengthen company’s ability our margins position. our able you, business liquidity and quarter Thank challenging the comparison, revenue and implement Alan. strategies, enhanced to year-over-year second Despite again results were a uphold to XXXX

from $XXX.X well year offset product as and million quarter, second XXXX revenue, the primarily ago. to Net reductions decrease by the was The sales services for million in shipping in to logistics due increase as mix. change anticipated, a lower $XXX.X and as partially X.X% pricing decreased volume

largest XXXX and distributors, regional by second channel to online X.X% was sales to channel the X.X%. modestly. national the decreased And Sales for sales our quarter. lower chains to increased Sales XX.X%. channel from channel, the By retail decreased

the leading Alan for over products at product provider year foodservice with in our ago. offering. compared the enlarged mentioned, our sourcing is our part As represented X% year second expansion more total prior and and Eco-friendly on eco-friendly our quarter. product grew XX% even core XXXX volume in network based category XX% of quarter a disposable increased the this Karat second of period, a in sales products XX%

the significantly increased prior XXXX for in quarter to second the XX.X% profit million $XX.X by quarter. million year $XX.X from Gross

Our in million disposed gross quarter U.S. a includes write-off in certain we and raw equipment the of of as machinery this profit $X.X of materials

margin for impact margin Gross gross margin prior materials quarter Gross quarter decline X.X% XXX of last a XX.X%. increased ocean XXXX sales point to second year. net XXXX, in amounted compared The XX.X% costs, the which a sales write-off. of of by second to which in net benefited was the quarter basis in expansion of significant year the freight raw with included second XX.X%

Operating million, compared included sales $XX.X XX.X% to Operating million $X.X second year our in the current in which expenses million expenses certain XX.X% net back manufacturing of the or scaling of was of in in out on disposal impairment quarter quarter. of $XX.X due prior million and machinery $X.X of sales XXXX the with or were expense locations. quarter net loss

XX.X% $XX.X and XXXX to support bad debt reflected costs reduced second and our higher expansion, this expense shipping marketing growth were expense from sales higher additional million in expense, by leased which workforce and impact, partially offset Excluding run transportation expenses rate sales, operating the online warehouses. rental or of net the quarter

rose to per $X.XX million or second from attributable XXXX X.X% prior quarter quarter for diluted the income income $XX.X $X.X to the the to Net diluted share advanced share rose second the year. second per or X.X% ago. $X.XX margin year from million year million in Karat for last a Net million same $XX.X XX.X% income $X.X XXXX the quarter XXXX from in quarter quarter. in Net to

Adjusted EBITDA, to in the XXXX company margin non-GAAP in prior quarter. of a second million quarter. of the adjusted net XXXX quarter the expanded a year to XX.X% million increased from EBITDA for record $XX.X $XX.X from Consolidated measure, XX.X% sales second

Adjusted diluted with $XX.X the another $XX.X up working share XXXX $X.XX to share of in million $X.XX $XX.X per finished ago. from earnings investments. at million in million We share the a per capital, liquidity million with common year $XXX.X rose of per quarter end financial and from short-term

The down the the market and year-over-year, to strong the end XX% net to be growth the cut. forecasting are X% but condition third overall price of of quarter believe to approximately for remains our X% tail industry we’re XXXX, into fourth further we we towards Moving we anticipating for for deflationary, line sales are XX% quarter. top

be decline and start reflects delays expected third shipments That additional fully chain to quarter certain this The accounts in agreements quarter with that chain new of new accounts a operational. earlier year-over-year the revenue anticipate and signed warehouse operation to unanticipated was the in to strong delayed the implementation delayed two capability by primarily warehouses fourth said, we our year.

over prior XX% up to we quarter. approximately Accordingly, XX% net year sales expect by the to be

XX% benefit raising operating current XXXX to to as XX% at our gross XX.X% full margin performance. our initiatives We’re versus also goal year XXXX our continue for and growth to around be

I operator. now call and and answer Alan the to will be the questions, I’ll back your happy turn to

Operator

[Operator Instructions] The first with Michael question go ahead. Hoffman from comes today Stifel. Please

Michael Hoffman

Hi, Alan, Jian.

a incremental and down be materials in an is clear, the then in delays decline a Just XQ upside price It’s it’s about resetting not delay raw activity? of freight. activity, to related to pressures in and

Alan Yu

Coast, see looking Texas region, as are Atlanta, Florida the and the waiting the Oklahoma and is have momentum sales get permitting running us warehouse strong, mid-July. Yes. We especially up and Chicago, do region, and Houston. also were it But racking training. delays We in same for operational the to to with very delays and the in East people

we’re – the of And currently, every shooting we’ll don’t already. on customer, overloaded warehouse we’re one ready. we tight our telling And have for So because enough get and it September. it’s hang

just South Carolina have stop overloaded. because we even shipping it’s product warehouse, to

Michael Hoffman

Okay.

demand. not ability fulfill warehousing timing to a repeat in So delay? I’ll is up just reduction a the start myself related your seeing to is, of because issue you’re This

Alan Yu

to have seen reemphasize, we no Coast, reduction in West I softening there want is demand Michael, in but East and in Coast. Midwest the the

Michael Hoffman

Fair are unusual million out somewhere we And that level that going math, margins gets the the there’s of Okay. million. million you sort year. All gross quick sales, do I’m we single-digit. $XXX million to right. to around for if to so that enough. of models, us it way $XXX then just in And just the sort rest then assuming G&A, – to the low nothing play set you’re of describing settling $XXX and in – $XXX on helps it, sort of are

that of in all come well. in through margin EBITDA So upside should as gross

Alan Yu

Jian, answer can this question? you

Jian Guo

can I take Michael. Yes, that,

if from probably full to single-digit will [ph] we low that, is see compared the year. the total revenue last hear on question modest did your perspective, what the modeling So correctly, line, top [Technical we I year a Difficulty]

margin SG&A in with upped last the the SG&A are guidance the expecting significantly margin. on although for leverage full our full expected year, obviously, remarks We we’ve our I fairly overall, guidance prepared leverage the going think gross on provided to year perspective, – from consistent be our we updated is year. gross

we that that. So margin adjusted be we are our higher to – than seeing are said, expecting EBITDA

Michael Hoffman

Right.

or gross we is through big to it’s there’s for I And So EBIT heard based be and so a just about background EBITDA, clear, into to not model I incremental up expect say. most I million SG&A think you the the apologize margin in step sales voice. of $XX of coming that on And outlook. what the translate should $XX million

Jian Guo

That’s correct.

Michael Hoffman

in I’m public setting. a

Okay.

right. what two All those Okay. needed Thanks. That’s things. I

Alan Yu

Thank Michael. you,

Operator

Ryan Street from with Lake comes Please Meyers question next The ahead. go Capital.

Ryan Meyers

for Hi questions. my guys. taking Thanks

in in I know past. the been team priority First one for the has a sales investment me.

ramp-up So look just to accelerate as growth of how the sales team in gone kind and curious now that has like looks right QX? here we what

Alan Yu

Yes.

– the sales in reps we recently just hired the more We looking and Coast two more also East in new Northwest. three – have Midwest, a two are the three to and actually

sales on So additional on recruitment. the we rep track are

Ryan Meyers

little of unpack of more. the That’s you kind that some you’re help of then weakness a performing just well bit broad-based eco Is helpful. you understand Was West if kind Coast, Just wondering business? Coast? could across that seeing on West the of it. that are what kind the products there. And Got us the in seeing guys

Alan Yu

Coast restaurants in softness streets streets are Los in closing What the Angeles, the in Coast, California, West the seeing were are mom-and-pop closing the at the have decline not p.m. that in catering people after And through versus eating dining. channel, walked we remained are stores, street, X:XX and And p.m., especially XX:XX distribution we especially we’re the lot basically XX:XX San anymore the the many doors p.m., a they at they to the chain and those seeing also, We in shut I’m West some Francisco, X:XX But restaurants. region, and in of part. Northern heard are going restaurants activity that there’s California, strong. in have seeing out

seeing goods what in chain support So their of the but sold numbers. to restaurants West Coast, gone the closing, of prices, has we’re cost store up, growing Even terms has the their maintain up, basically, gone are the sales strength mom-and-pop the the rent able they’re this raising at. has is

Ryan Meyers

for taking Thanks super questions. my Got helpful. it. That’s

Alan Yu

Thank you, Ryan.

Operator

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

Ryan Merkel

are sales half. accounts the Hi, delay, delay the Alan, are issues? ask at those to same is separate the Yes. I in your the in those about chain the change and Or warehouse thanks. national things? wanted second

Alan Yu

another switching Normally, issues. is need inventory item chain and setting always over separate we over another be they from account. deplete. the switching codes, with the also, they’re national are a if vendors from These the up to there There’s might timing dealing leftover understand the some there –

there’s an these chains. So always issue for like that

or X on the it to example, August pushed to XX. So to be even we were anticipating like, start for – though date, September back X, might October if

of that’s that spaces the warehouse is is is increased and our product shipments because the down key issue originally same to customer transfer the because that key the we shut we we the move days tend the Now, in overloaded, new warehouses. items of shipment and to also like why seeing space to last locations move have so we into other Texas delaying a is the warehouse had to we're or different we’re of it and because the and our to product couple with adding California a overloaded, – change versus year. Carolina product the we location have around also or ship in be – that to when organize we South to – warehouse, problem another shorting this product or warehouse them That’s is have

we're using as warehouse. racked and ocean vendors, Carolina a warehouse facility We're South up for now, they're as be just because new in right next they rack in fully that. started New week. the Chicago So the Houston have from freight to is warehouse Jersey. warehouse the storage delays Chicago But waiting for for the and have California overloaded delay the entire we Houston, to the existing as well getting racking begin and the and operation racking

and objective, know as part Florida is see. getting we of the So we're even what originally was Arizona in warehouse though into I why That's as well because this that rushing – another because now, of we pushing that if kind end happens. looking the it end really year of even forward that when ago start might the of be year but know we we're

Ryan Merkel

Yes.

about Got replacing and down shutting you Okay. And should just is imports, the how and with it. facilities Are be it that has mentioned thinking helped margins. gross that import about you items talking primarily we expanding California there then it?

Alan Yu

in increasing rental labor, manufacturing, scaled costs back facilities. in electricity the and Well, with California, we increase in

in well lot California items, actually we'll a back and scale items. And we eco-friendly So overseas products we into bring of already. moved new these as as

PLA of also, is PLA And a are lids we first lot for of part in a only, For introduce plastic. our of for about just type type different to bagasse considering PLA. example, and still people [indiscernible] lids. are and one of of They're only product. looking paper different cities A are place

You compost until can't unless decompose have site. a it – commercial you

put they So it decompose just decompose. – paper can will with the lid, ground, basically the on

we're also, that using composable container eco-friendly. least that so made start content content. the items plastic we're even recycled the recycled our and different So looking or looking looking cups – at existing with are plastic are hinged going XX% plastics, the the with new at And we're the through to at added to virgin

are the we're forward in to moving items. new that So things focusing these

Ryan Merkel

Thank right. All Okay. you.

Alan Yu

Thank you, Ryan.

Operator

with next Truist ahead. question Bartlett The comes from go Securities. Please Jake

Jake Bartlett

a going the trying of kind going to what margins gross to Trying freight cost, have expect back for Great. figure so low implies forward? out follow-up. – about that margins into unusually Thank you the think diverged guidance. year. kind original benefiting – just still right also, freight kind and or a I little taking gross of costs? over sort just I is backing so from I level if believe instance, expectations, I'm Or half ocean what me the of gross want the – here, much XX% out wrong kind gross question. have margins figure right are on it for to Mine much margins that. in I that correct and of the to from of of the And normalized on then But the is forward? is the that

Alan Yu

earlier here's freight second that we Well, up go pretty the anticipating gone mentioned we're quarter. XXXX, seeing not as told. ocean super up has We're in it in are ocean been a low Jake, thing. August XX. the was benefiting the past, freight we've our XX%. starting the We freight but even as in it from much back what coming up to ocean the That's report fast, in back but more But

going freight, example, to $X,XXX certain double and nearly in go $X,XXX, be $X,XXX it to areas. ocean we For paying up is [ph], were

how of just the for sustain went not it was cost freight three, the and sustainable, it that's four weeks, long we because up, ago, in don't going ocean months basically, know again. and fell two to So down

don't still sensitive of also sold. manner freight a be, So we which timing really our is in goods we're where chunk ocean going cost of a that things is to big the know of

who the much it's right now. there's to can So going not say really where normalization be

Jake Bartlett

it. Got

third that that given from should fourth here? commentary, Okay. think then And way margins comes cadence think in Is higher the about level. gross it we to down I quarter in the expect right that the and the

Alan Yu

quarter, we At gross quarter, yes, margin. current moment, should Fourth this third it's higher a unknown. see

Jake Bartlett

And packaging mentioned out volumes. comments I you Okay. the trying on dragging just foodservice the have wanted the in X%. figure about volume volumes across what up been And might were I was then disposable else of What that to core dig think down. to kind the I'm up volume overall the business?

Alan Yu

is Well, here's has has number items. is down the quarters. past, we logistic The other food that X%. up had dragged from containers also The the service past as as our in packaging That segment that neighbors. nearby the has packaging, in core – segment disposable for service. significantly pulling That port and well thing dropped shipping the gone our our business the

Jake Bartlett

Okay.

going I Okay. – of on of is delays And for running which like accounts kind had encouraging. this kind some that I that generating. it's you've chain happen, process, a had we've pipeline to there, signed Just understand question think now, but getting about we accounts additional the trying matter have there's and you've and in a on you've been you've talked couple visibility you you've to might of is – up more My business the chain XXXX? quarters of and in those whether expect new of signed. mean, signed is, that

Alan Yu

Yes.

also more that at We of not and pipeline, are our we account, but chain in of quarter. generated, this seeing and second more also just the have national of pipeline in end a beginning year we supermarket. list And

starting first warehouse the We warehouse need year, to understand to capacity our the – after in to do fourth convenience our the targeting terms that without will the – increase we need able storage, are correct we storage. we the in not be of thing customer service quarter during is We stores this manner.

Jake Bartlett

is, And a last you dividend. Okay. question initiated then

well. growth are as You company a

the of an So cash actively to seeking to of way. company? we acquire company, returning another being shareholders, maybe you're your look How a should fast the capacity kind is not growth that maybe but time pretty this generate indication that at same at

Alan Yu

invested we're One of lot manufacture that cash that to strategic holding account And equipment decided we're dividends of to that shareholder. in that on distribution we past that reasons a a the something, warehouse years, the is available two but our cash is accumulating to first definitely the returning accumulating become any manufacturer. that can CapEx strategic have well past is more putting significantly we we in still – year, quarter, the we're can we more if or dividends the even center significantly. product. $XX returning or – not cash not deposit This We're In our cash. line time as one mentioned utilize the of location we to acquire, into expense earlier the credit, is we quarter or off years Yes. But clienteles there as partner the could consecutively. or a with that – the we're shareholder, two over be drop million in going in we hand the with invest to a first of have need

Jake Bartlett

Got it. really so much. Thank appreciate you I it.

Alan Yu

Jake. you, Thank

Operator

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

Alan Yu

and look Have joining be your to in day. to we for third you Again, all everyone participation. you, you second quarter very – Bye-bye. a forward again call. thank Karat Packaging sharing nice of Call our quarter, for the much Thank conference Conference

Operator

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

may disconnect. You now

Karat Packaging (KRT) 9 Aug 232023 Q2 Earnings call transcript