KRT - Earnings call transcript Q2 2024

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Operator

Thank you for standing by. My name is Celine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Karat Packaging Second Quarter 2024 Conference Call. [Operator Instructions] I would now like to turn the call over to Roger Pondel, Investor Relations. Please go ahead.

Roger Pondel

good Quarter and Conference and Packaging's to operator, Second XXXX Call. you, afternoon, welcome everyone, Karat Thank I'm Roger Pondel firm. with PondelWilkinson, Karat Packaging's Investor Relations will and momentarily Executive pleasure Guo. be the It Chief company's to Officer, Financial Chief introduce Yu; Officer, Jian Alan my

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

Alan Yu

volume grew afternoon, quarter the year X.X%. second sales Good grew sales for everyone. prior Roger. period you, over X.X% and Thank Net our XXXX

business national with accounts. the signing Our new expand pipeline of chain regional and to continues

than However, back anticipated the at initiation of software the longer due mainly quarter, not the taking in administrative of we demand procedures account in which the to during recur to chain end expect and larger year. some new orders certain categories, do is setup

capacity. in effect margin pleased to XX.X%, the higher to that steady see in for ocean resulting are started We certain earlier freight product part goods that in in announced despite lower late at August gross mid-May. rates rates moderated initially locked quarter and freight costs which to Xst, held somewhat enabled July, in from were rates at that Ocean take second time were that with ocean significantly spiked increased Freight higher year. us freight when contracted demand imports to tariffs this more pressure ship

demand subsequent We expect freight expect vendor freight ocean continued margin. full-year gross our normalize to for we rates after meet be pricing, dollar, the to to reduced rates, tariff better goal softened strength effective dates. With start the U.S. to into of able to and visibility

in the typically and markets contributing especially last quarter, represented positive disposable July. Sales percentage there million keeping were a significantly in in believe the for products products growth eco-friendly eco-friendly our essentially the of quarter. Sales from establish with growth emphasis total with for of imported asset online impact second XX% to XXXX, U.S. our long-lasting the priority the inclusion in impact XX% and second Sales positive online product warehouses an XX.X% and fees of in to of our grew the to single-use of the XX% for year on second net in from manufactured last in inventory demand initiative category, warehouses support of outpaced stronger approximately geographic the items. the second saw perspective, included large and most year. XXXX. new same XXXX growth Eco-friendly life quarter have as even of compostable are second platform products total remains an a a that of $X.X last yielding increased strategy in in channels, approximately sales. is sales results margin that sales eco-friendly for year, We our on overall sales positive this products strategic pipeline across results. Our should our be year will the We From business for the existing compared in is highest and which to the positioned compared half we and Karat. this in quarter carries

XX% in sales to further to penetrate year-over-year, than year-over-year are exploring end we up and of performance to year. were Further, opportunities preliminary robust strategic the July marketplace. into we more continue this by acquisition continuing the expect Our the

payment of of Officer, company's $X.XX dividend now special Lastly, financial of Jian? to share. I and quarterly share, detail. discuss regular results Guo, on our Financial a August call $X.XX Chief the Xth, per dividend, our Directors Board to will turn cash this a greater over authorized per Jian in

Jian Guo

Net for were XXXX for the Alan. second million sales $XXX.X $XXX.X the same last quarter from quarter X.X% year. you, million, Thank up

quarter. second of impact in the goods related as which to X.X% in sales, higher $X.X write-offs from compensation were of an year million, plan Gross raw freight platform Net certain XX.X% X.X% a to scale the offset prior net in of and to share, the with million income of locations. Gross increased non-GAAP million, quarter. Operating cost a the gross XXX partially inclusion million diluted per plan as increase included second to profit in and locations, XXXX was the income of second inventory EBITDA fees partially was reserve versus XXXX inventory in the and to with up Net was related in a basis higher the due adjustment to million volume prior-year as quarter executing in platform in increased online unfavorable also rent certain year quarter quarter and the disposal year-over-year the expense, was the increases $XX.X scale reserve $X.X XXXX executing decrease and year. goods was prior measure quarter the duty sales distributor $XX.X of quarter the to percentage marketing was in stock-based of quarter online platform compared $XX.X the the to related materials second certain XXXX materials X.X%, with the of As income and for XX.X% sales sales total the Alan for quarter. of million, on compared in or with mentioned impact Net and vendor XXXX in increased million $X.XX of certain million disposal Gross and higher million on or fees By $X.X pricing fees compared for in the for $X.XX million costs very which the freight expense ago. per margin last to compared back ago, $XX.X inclusion to XX.X%, to X.X% $X.XX still XXXX $XX.X increase $XX.X year the The as included costs for of challenging XX.X% certain second included impairment expenses XXXX quarter. remains compared The net earlier, year quarter production quarter quarter the XXXX decrease in costs quarter, of quarter. XX.X% compared margin equipment sold. Adjusted time, to earnings the $XX.X a sales XXXX back executed due quarter. Adjusted of net prior in locations. Net in $X.X of product and sales These part was adjustments environment XXXX the X.X% the scale in distributors included as benefited retail last channel national back margin about of net plan negative or a up percentage sales, mix, sales lower with resulting by product second the goods was raw XXXX adjustment $XX.X and production grew quarter share the sold machinery, and Gross for competitive. Cost Karat per favorable XXXX we pricing from prior machinery share versus machinery, primarily loss a by in common in production increased diluted of quarter with online the the sales. lower. XX.X%, per current were to quarter. primarily and sales, cost inclusion year write-off second and million of impacted or margin second $X.XX quarter prior-year certain were comparison. year. expenses impairment offset increase and regional the second as per a of production from second as diluted prior year the was X.X% in second second in earlier. to share versus our expense were production disposal slightly Sales import points discussed expired expenses. XXXX the prior And the platform the same of the online fees, were was percentage the in sold pricing margin sales $XX.X the channel, second year online the in the in online in XXXX compared channel benefiting quarter. At Such year earlier. Operating million and to with EBITDA, year. Adjusted second we chains and of included share as in in increases quarter the a discussed from second quarter $XX.X million, compared X.X%, net warehouse duty discussed prior loss and margin a was expense XXXX was quarter expenses certain for with for the costs, sales same million earlier. products attributable

ended $XXX.X end with quarter at working of in $XXX.X capital million compared with second million The XXXX. the

million $XX.X million another have financial in As of June short-term XXXX, XX, $XX.X investments. of liquidity with we

XXXX We sales digits over third to quarter. the to high-single by increase prior-year quarter the net for mid- expect

for gross XX% approximately quarter is to the Our XX%. third margin goal XXXX

and call grow turn XXXX back to questions will we to the I'll and to XX%. Alan to sales digits year, expect margin gross For the to range and your now I answer the operator. full in net XX% of mid-single happy the be be

Operator

the question Merkel William of from line [Operator first comes Ryan with Instructions] Your Blair.

Ryan Merkel

Great.

new the are First off, the with taking sales growth macro is in longer? traffic there? also change on for issue Or 'XX? why restaurant pressures change Is maybe also big business lower weighing Alan, the the there

Alan Yu

XXXX That's having that of referring are were Because reiterating my and XX% considering a where for to understanding we a than XX%, to higher What higher X% range would we our is seeing. is will continuously range XXXX. And at And it be of of going we the actually be have estimate. it if merger to? acquisition, approximate -- growth lower what to overall been total. the Without estimate. we're acquisition, be the the sales

don't I change we that. -- our you do lower? believe guidance can sales So Jian,

Jian Guo

the full XXXX. mid- high-single to now, are digit for guidance XXXX, for expecting sales of we for right the quarter the third So for year

digit mid-single expecting we're the from basis, year. full-year prior the On

Ryan Merkel

when out cut you X% I thought guide, answering if prior up question. the I'm Alan, wrong, to it And me started was thought I you correct the Yes. XX%.

I think included that M&A.

a to change. mid-single for 'XX from year going big full That's X% to you're of digits. kind now Yes. So XX% the

Alan Yu

that believe it like accounts the I were some hit earlier Jian versus earlier, expecting Well, Correct. to of later. mentioned we chain

product. in now, that converting pushing So on Jian time, in chain guidance still this sure at that we're our very being we faster conservative can the is of our to But meet terms right terms of right -- move I now believe part. we're for into making

Ryan Merkel

it. Got

you it. thought that And Or I missed Alan, then, online you total continue. stronger Can you July or I'm just eco-friendly? that specific business mentioned to Was would just a you reiterate think that those comments? and was Okay. is sorry, mentioned comment? I

Alan Yu

Yes. double-digit seeing in July, believe growth revenue-wise. I we're

seeing at part year-over-year are And So accounts July. comp. we're of basically, not comparison segments all hitting -- latter it's chain

Our bubble growing. supply tea is

actually goal. this last for very strong. And Jian, actually seeing growth $XX basically, is mentioned -- quarter, a mentioned is goal was about I million going online revenue XX% I'm we're I And million year-over-year $XX this believe, revenue. Our now, was pushing for year online online that we quarter Right our online.

So feature to part LollicupStore.com added the -- buy items more and and that a is the customer second volume putting about additional staffing new Amazon a Shopify, into our FBA our online, discount of how do on XXXX, part. push strong into we volume in and changing can seeing on we're adding that also get our that we're

our that. Basically, to be over growth. we foresee sale online very So is XX% year-over-year likely

So from end our we initially, for this million million. of the almost goal year. up $XX That by to sales is projected $XX online

Ryan Merkel

Got it.

Okay. encouraging. That's very

Operator

from And your next Bartlett with the question of comes line Truist. Jake

Jake Bartlett

sales the My in from conservative? next there deceleration. X was that July quarter the you so months July Or to Alan, follow-up just guidance just being the for the Is would implying Great. the down level? coming decreasing being comment. pike a that think a is but growth be the first something is mentioned, up the last XX%, high-single on mid- you digits,

Alan Yu

trying is growing, make overall the very We basically. I hit business be and to to other We're conservative, encouraging. business able we're to one the we that sure said, want that like thing. number, is that's see But

Jake Bartlett

second Okay. missed And quarter, your in guidance. the you

think the But just are the little a will mentioned I that accounts, in longer extent sustain? pricing to confident will than expected. environment that the weak as prepared you given competitive the You release, or taking on But onboarding there of is decline environment? to remarks pricing in is pricing risk Or these prices the was how the kind that pricing continue what your well. new a mentioned press

Alan Yu

and have been that of forward we move in stabilizing, continuing ensuring the competitive pricing market that also any taking we don't market very the clients. to see -- terms ensuring we in Well, and we're shares lose

for looking -- regardless clients, are clients clients. old savings clients new our of of All existing

items as But lower of that's high ocean well be saving quarter actually freight. situation from that terms also of on freight, of ocean that's meet So of cost. in with we've as with to one able dollar, we'll to the our the really in the even terms gross we But a it's is the shortage with been that, have able and increase strong client what several their to support quite of bit the increased course, margin pass to ocean our second vendors basically we're our the been that the with is how containers, freight doing more that doing to raising negotiating still in on get them prices. in goal helping

Jake Bartlett

Got those could it. -- And just who Alan, the you how and work to us as of this for freight all there. close is aren't rates ocean dynamics -- the

call, through of that had you contracted, had rates you the mentioned April On last XXXX. locked you

if understand you current how guess, of I to I'm you're the environment through contracted So struggling impacts 'XX. rate April

the context year? you the dynamics contract? Just and you go are help for what understand confident off on makes of in in us And the there and the remainder freight how then, the rates

Alan Yu

of -- add because the ship -- situation a $X,XXX did in season $XXX most companies Well, the to and U.S. we they to freight they rate container their add -- a rate And back added that we the to demand can liner knew ship. April, a contracted freightliner, in higher each the a in contracted a and ocean reduced shortage, peak they ocean And certain just surcharge. same the there elected rate. that's like time shipping our $XXX, is that signed was because At containers the the the that end

to our the is a that they us have not spot rate, to ship the the we though even market. What needed able the giving rate were -- done they're product. container contracted in they've numbers exactly raise in So rate we

more of containers contract rates originally our freight additional $X,XXX wanted -- with. Unfortunately, would to versus have to were that to of didn't out have XX% use that rate with didn't -- we containers to if -- we we that contract contract near And $X,XXX to the So contracted rate York, the amount containers of smaller elect of sign to from is our money like ship find sign and container, to have out they or some the they which rate at the to go rate price They if paying product. like container, of the almost almost our needed were importers New and out we of the able to a -- amount people, go get anywhere $XX,XXX rate had with other containers triple the to forwarder $XX,XXX that pandemic. competitors the other quadruple skyrocketed only contract. of signed we the sign during

Jake Bartlett

or that mitigating question, maybe election, might of for of this possibility last you're Presidential an And of a implemented. being Alan. factors possibility to environment contingency And In what taking kind the the risk for potentiality? there Karat, in there that is just what with the Can speak happens Okay. whatever tariff you that eventuality, measures broad be? kind

Alan Yu

Sure. tariff, implementing on just December. tariff and different different and items August, tariff, but We've has July, tariffs on a U.S. regular additional not starting and noticed that been anti-dumping October, categories

we've of doing past So into finding vendors in And purchase been and what we China is we've that's we've something been Malaysia, the years. world. different had that from done our moving Asia like from the part other Vietnam, before

a increase as going the XX% getting tariff shipment on the even the reduced it to raw China are material XXX% So aluminum, our meet not hit as going to more. And the just from get are to only the even with reliance tariffs. on tariff, U.S., really purchase in that from that's in has much with importer, manufacturer, manufacturer additional China everyone us, be need high not

bring immediately manufacturers U.S. even for for look domestic But announced everyone And increase factory in alternatives. the back can to to production. prices. have have everyone So not definitely

We've the looking on We're on working that item working so. have right and will now. also vendors. done have match for the that everything SKU we and new same we're of to ensure the additional on quality that testing they So

going what country case and in Asia that's mitigate. In that Mexico basically of start So now on issue deal partner the every price we've and to be of It raising increased country, I will comes to sudden be and to with. among a categories a has that the done in all tariffs. also think a new broad right being President Europe tariffs that everyone increase an that's

like be time. raise just everyone just us, that everybody. that price at their has that with would be wouldn't it said, So it -- to And

Operator

question next line of Street Your Meyers from the Markets. comes Ryan Lake with Capital

Ryan Meyers

for is, The there you first was is if environment Just your in Or you me food one what demand seeing seeing good overall just on maybe kind Alan, what of like? so a any and get food across Are kind at service the some could levels? I wondering issues of there? comment of softness any of we service customers? that overall traffic looks understanding you're

Alan Yu

We're of Sure. chain well not are some definitely chain fortunate orders are as is accounts for the actually and getting doing doing -- many account doing increasing accounts, chain especially And Very us. chains well. from that that well.

really have not about fast what They're especially food shops. than the of softness pop most side, chain seeing. is But we're -- in California seeing If and part not, Fortunately, close. side, mom the accounts, restaurant we environment we're especially chain. fast-casual to That's doing chains, the national better especially they're of in surprisingly closing. that they're not our doing distribution California. well, customers it. In are better distribution

Ryan Meyers

for it sounds there given, the accounts range like original guidance X% XX% then had to that high end you And the guys acquisition. an at the

the and comment just year maybe on seeing that about you thinking can for how rest maybe of kind what we be environment? M&A So maybe you're in the this of should

Alan Yu

into see that manufacturing certain of partners of it's we discussion in a Well, are Even categories like we're And to on partners to discuss so that hit that potentially right tariff. high and as we're do the terms different of working with in even being now that the into a brought U.S., item partners in what previous actually, basically potential merger can with Texas, some of acquisition. and because have that we the U.S., looking with capability There question about overseas bring partnering can items And speak we're we now, domestic still that we do additional with I'm some producing manufacturing tariff. right a up their tariff. bring venture joint part. seeing terms

also increase the bringing we to So can manufacturing we're revenue basically, the sales thing U.S. that by now. right back That's doing and one

discussing On adding a segments, with SKUs. shares would the revenue a industry, with that into enable company to or -- side, I us supermarket mean, of buying tap different company also partnering we're

goal of is increasing adding by increase Our customers. our revenue additional share SKU, well basically our wallet as as

Ryan Meyers

Okay. Got it. helpful. That's

Operator

from comes the Butler question Stifel. next line Brian with of Your

Brian Butler

you of kind year half on back guess, for for think to full guidance mid-single quarter. mid- for digits the digit I inferred 'XX. back and Just, of growth high-single the third the the of When

half? going thinking -- or So does for from that I for quarter-to-quarter back be suggest you're is mid-teens fourth be very growth? the to Am quarter to quarter almost about strong, that expecting fourth correctly progression

Alan Yu

We're fourth thinking for correct. of is quarter. double-digit growth That the

Brian Butler

then And when... Okay.

Alan Yu

the been in company our double-digit seeing have growth. we Again, past,

happy stronger a back seeing third that even the think fourth to and strong the we're I that in that third starting quarter quarter. we're we're quarter in trajectory a having the quarter quarter, we're

Brian Butler

national client, of getting about from administrative rolling into kind through some And benefiting And that signing, does that how is the roll think the we how 'XX? -- should of the process? larger some -- account that finally, into

Alan Yu

true. Yes, that actually is

expecting that see and Some of large fourth quarter. that's for the the a accounts chain into the roll third adding end is where we segment we were we're the of to that the going additional growth. quarter national chain seeing actually It's quarter into accounts. And third

Definitely, XXXX right different see a an seeing we're other And something online stronger plastic, that items. that's to now. papers in with going And of switching and sales. compostable we actually a XXXX? accounts product from stronger things, chain see into into type Styrofoam are these increase of a some And going we're that to

quarter and in quarter moving starting in third in increase XXXX. to that's online Additional sales, fourth already

Brian Butler

in about points. year XXX second the kind And year, XXX the you we Do what's margin EBITDA puts and basis the last behind between about this we mean, then were and saw compression? of that basis bridge I a thinking and kind compression the point down quarter, of that takes, Okay. the have

Alan Yu

-- That I would question. Jian answer will ask Guo that

Jian Guo

Yes.

looking adjusted last So to the between EBITDA operating this there year's bridge you're biggest if you margin year's look EBITDA at at, the Brian, margin, adjusted the is expense. if gap

As we between about remained quarters. growth talked our earlier, consistent margin the

really So the is section. expense operating gap biggest the

that account of operating support the in Some items remarks And the marketing the categories, online -- growth. we of the of about expenses. the operating of increases certain expenses prepared sales our would we're are talked the the for in certain year-over-year. investments variance to the majority Those in then that terms fixed expense that making, of examples the examples some for also are example, there

Brian Butler

that that selling what expense talking is -- in up those you're is was Is And XX% about? things quarter. because showing selling the second that expense the year-over-year up like in

Jian Guo

you mean, a right, I that's expense, selling comment. The are great

are if looking a comparison little including in if Alan an highlight, earlier in we're as that reported online it's XXXX, say mentioned this previously versus starting the the -- at this I QX at was of platform sense line quarter year selling adjustment I you're offset well, being the against the is of sales. there selling expense to it Although item, do fee, should which that bit there was in want -- expense you only looking expense a apple-to-orange selling included

as from accounting that's the of increase adjustment an a we that's in discussed selling significant expense well. sort fairly that earlier So

Brian Butler

freight back I percent fourth Okay. that we trend so a in should maybe you then some revenues? cost freight of third on that provide the maybe, quarter? as And Can how look does guess, and -- the the the in how half costs, quarter

Alan Yu

Sure.

freight. As a I to in if getting a XX% container seeing were our we ocean ocean to out, quarter out of surcharge, as freight as second of our contract we're peak well season contract to freight that mentioned the increased that forwarder, due that, really earlier from significant increase

California down and prices July freight East as $X,XXX We The starting have more seen $XX,XXX come non-contract even the and Coast to high to rate August. ocean Coast. as in was West

$X,XXX. contract we're Now any rate our starting really below down using it's not August. out fortunately, now of And containers

July, contract But we in of we the to taking still So we that don't on so run that in some have out rate, August, any we were without product our non-contracted containers needed containers. taking stopped customers.

we're not season that's Even we're And above surcharge, less for August is U.S. and peak to $X,XXX, available, for the that and containers basically paying there companies tariff more they the but this paying was Europe peak surcharge, season hitting So shipping a fact due though the stopped products, are basically the $X,XXX the thing. extra the good rate. container that that. because become have was a vehicles Europe, needed Xst, in electric people those into ship shipping that to

ocean removing that fourth to back go now. season the is seeing we there rate. can basically right be should the And surcharge contracted So customers quarter the liners more we're containers freight available U.S. that the for original the peak

year. of freight So fourth the this come even the ocean during quarter will more down

Brian Butler

Okay. And then...

Jian Guo

just the there So, a line just Brian, just little a little more -- model. to on get a more color color

lag sales, about, of year of great insight ocean a net see freight real-time half expecting think inventory terms terms of net we the modeling expecting into what of months do typically reminder, X because the just roughly we're turn. just as in second of just getting to in and the So half sort second range to freight, do for of out X% in the I trend, right, of I the Everything sales. the we recorded year. XX% that's financials of how terms it's obviously, terms wanted rate a to about ocean the of overall, just are the Alan between on in talked

in start, as of the we quarter. the financials the So quarter. in that improvements as that third second in second well -- the obviously, the rate part first will the that as the ocean get the impact And reflected will getting in on quarter, in fourth late seeing we the third benefit quarter half of said, see primarily half the spike of second

Brian Butler

built that's into gross for margin your clear, year. be to And of to the full kind forecast Right. XX% XX%

Jian Guo

Correct.

Brian Butler

you the the going improvement on about Right. EBITDA to compression some suggest like think Is higher XX% are year? fixed costs those operating you down line, EBITDA we're -- profit gross margin some seems on in gross And going a see of and margin. would fair at the on the that line, to the because year-over-year to But probably selling. way that EBITDA for to if XX% and it look cost full

Jian Guo

margin be previously to we On communicated for the think on that think And to I basis, full-year the adjusted XXXX. I long-term high our we're -- is our meet goal EBITDA still mid-teen. full-year goal track for

Brian Butler

Mid-teens.

And one on last an Okay. update. one then maybe

in kind Do You is you forward? where that of some and the have an talked expanding past pieces. had distribution on continuing you strategy beyond stand of maybe lines that the if and pressed packaging about the update to product be

Alan Yu

to actually food food Yes, frozen -- we're segment looking segment. the

So and of a we're containers in adding truck, looking refrigerated state cold we're the containers, also refrigerated Texas. warehouse adding we're to build storage

domestically. sell. goal able what we other to we can be There and things that frozen food, items distribute XXXX other also what possibly that's frozen might terms manufacturing and So of dumpling, be in might

Brian Butler

Do requirements an you estimate have for the capital that? on

Alan Yu

to don't going be. know requirements we Right how now, capital much

We that yet. have not estimated

Operator

over concludes now remarks. That conference Alan Yu, closing I will back session. turn the Q&A our CEO, to for

Alan Yu

forward and Goodbye. Have to continuing and a keeping evening, everyone. operator, up us remain great you, Karat's you progress. of We you our support. confident We appraised appreciate of for about all joining today. look we Thank thanks to your future

Operator

for concludes joining. Ladies call. gentlemen, that today's you and all Thank

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Karat Packaging (KRT) 8 Aug 242024 Q2 Earnings call transcript