Q1 2021 Karat Packaging Inc Earnings Call
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on a touchdown.
To withdraw your question. Please press Star then 2 please note. This event is being recorded.
I would now like to turn the conference over to Roger Pond out with Ponder Wilkinson care packaging tire from please go ahead.
Thank you operator, and good afternoon, everyone and welcome to care packaging first quarter 2021 earnings call, which also happens to be the inaugural quarterly call since karat completed its IPO.
On April 15, I'm, Roger Palmdale with Pinedale Wilkinson coach packaging Investor Relations firm it will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan you and its Chief Financial Officer, and 7 before I turn the call over to Alan I want.
To remind 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 karat packaging IPO registration statement as filed with the Securities and Exchange Commission copies of which.
<unk> are available on the SEC's website at Www S. E C Dot 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 cared packaging undertakes no obligation to update any forward looking statements, except as required by law. Please.
Please also note that during today's call, we will be discussing adjusted EBITDA, which is a non-GAAP financial measure as defined by SEC regulation G.
A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure.
Is included in today's press release, which is posted on the company's website.
With that it is my pleasure to introduce and turn the call over to Alan you Alan.
Thank you Roger we're pleased to be here with you today, our first quarterly earnings call that the publicly traded company. We began trading on NASDAQ under the simple T. R. T April 15th when we price 3.95 million shares at $16 per share I'm proud to.
Terry packaging team for their hard work and dedication in completing the IPO process and helping us get to this point.
And we'll talk more about the financial aspect of our IPO in a few minutes.
To set the stage, let me first tell you a little more about our company.
Packaging is a specialty distributor and then your thoughts for a wide range of environmentally friendly disposable full service product and related items, primarily used by national and regional restaurant and foodservice setting throughout the United States.
Our products include <unk> and take out containers back table wears tough lich Hillary stores specialty beverage ingredient equipment glove and related product our eco friendly true first line offers quality sustainable focused products that are made from renewable resources 1 of the company.
Distinguished characteristic is that we also offer customized solutions, including new product development and design printing logistics services. Our business has been strong and growing we reported solid first quarter financial results that we like our ability to deliver customized solutions and quality product to 8.
Diverse and expanding customer base.
Net sales for the quarter grew at a robust rate of 18% with particularly strong performance in our distributors and online channels. Our goal is to be the leading singles force providers to a broad set of customers for all of their disposal foodservice products. We aim to do this through a combination of initiatives that includes rolling off.
Base business, what incremental revenues from existing customers, expanding our customer base, increasing sales through our online channels and overtime per screen strategic acquisition.
'twenty 'twenty 1 first quarter result reflect progress in all of these areas, particularly in our online channels, which commands a higher margin and grew 8.2% during the period.
Positive progress we've made in the first quarters was partially offset by the negative impact from a severe winter storm in February that cools, our Texas plant for 10 days as well as by significant increase in freight costs sales rebounded strongly in March and have continued at a robust pace so far in the second quarters.
Much of the increased demand is being driven by restaurants across the country that are reopening at the same time as the pandemic winds down demand for environmentally friendly products also is up as well as demand through our online channels like most companies with international operations we.
Also experienced a significant increase in freight costs in the quarter Ocean freight rates have more than double over the prior year and expert believes these costs will continue to run at high levels until early next year.
We took action in the first quarter is to pass on these higher costs to our customers through a series of targeted price increase that will continue into the second quarters. There's action gives us increased confidence in our ability to protect our near term margins. We also completed the acquisition of a set of cup in the first quarters expanding our menu.
Bacterin distribution footprint in Hawaii, we intend to use the new facilities from manufacturer paper straws among other products what parts of income we have now 6 distribution centers and 3 manufacturing plants and we're continuing to evaluate other acquisition targets.
We want to leave adequate time for questions. So I will stop here and turn the call over to Ann to discuss our first quarter results in detail and.
Thank you Allen our 'twenty 'twenty, 1 first quarter results reflect strong top line growth and gross margin expansion offset by an increase in operating expenses principally related to our gross net.
Net sales increased 18% to $76 million in the first quarter sales to distributors, our largest channel grew 18% and online sales advanced 82% in the quarter. As you know we've made significant investments in our online channel because we.
Viewed this as part of an acceleration in shift in consumer preference towards food delivery.
Sales to National chains also grew 18% in the first quarter as we continued to expand business with existing customers sales to retail channel fell 29%, primarily reflecting a shift in ordering by our retail customers to our online channel during the <unk>.
Pandemic, many retail stores have found it easier to place orders quickly on line.
Gross profit increase.
21% from 22 million in the 'twenty 'twenty, 1 first quarter sales through higher margin channel.
[noise] Alertly online sales drove a 70 basis point increase in gross margin despite higher freight costs as Alan mentioned.
Operating expenses increased 29% to $18 million in the first quarter, principally reflecting higher shipping cost expansion in our work force and facility cost increases as the company continues to grow as well as higher professional fee costs related to our.
Public offering were approximately 400000 in 'twenty 'twenty, 1 first quarter.
Operating income declined 8% in the first quarter, primarily due to the increase in operating expenses, partially offset by higher gross profit.
Operating margin declined 140 basis points, primarily due to the pressure from higher freight and shipping costs.
Other income increased approximately 4 million year over year in the first quarter, primarily due to a decrease in net interest expense that resulted from changes in the fair value of interest rate swap positions. We recorded a gain of $1.3 million in 2020.
1 first quarter versus a loss of $2.4 million in the same period last year.
Well then for income tax expense increased to 1 million in 2021 first quarter, primarily due to a higher effective tax rate of 28% in the quarter compared with 26% in the same period last year, we expect our effective tax rate to approximate 27% this year.
Net income amounted to 3 million in the 2021 first quarter compared with less than 1 million in the same period last year. The increase in net income attributable to Noncontrolling interest is primarily due to changes in interest rates swap positions at global wealth are variable.
This entity used to manage certain facility.
Because interest rates swap positions are primarily held by global wealth Theyre associated gains and losses are reported as net income or loss attributable to noncontrolling interest in our income statement.
Net income attributable to parent packaging, Inc was $1.8 million or 12 cents per diluted share in the first quarter compare with $2.5 million or 16 cents per diluted share in the same period last year.
Adjusted EBITDA on a consolidated basis increased slightly to $6.8 million in the 'twenty 'twenty, 1 first quarter consolidated adjusted EBITDA margin declined 30 basis points to 9% in the 'twenty 'twenty 1 first quarter.
Adjusted EBITDA attributable to parents packaging increased 14% to $6.1 million in the 2021 first quarter adjusted EBITDA margin attributable to care packaging declined 30 basis points to 8% in the first quarter of 2021.
Net cash provided by operating activities increased to 5 million in the 'twenty to 'twenty, 1 first corridor, primarily due to improvements in working capital relative to the same period last year.
Capital expenditures declined year over year, primarily as a result of the purchase of manufacturing equipment and construction of our facility in New Jersey last year.
As Alan mentioned, we completed the initial public offering of our common stock on April 15 of this year, resulting in the issuance of 395 million shares at public offering price of $16 per share the IPO along with the exercise of over allotment option by the company.
Lead underwriter provided the company with gross proceeds of approximately $73 million. We use a portion of these proceeds to pay down an aggregate of 50 million in principal balance of our loan obligations.
I'll now turn the call back to Alan for closing remarks, then we'll be happy to answer any questions you may have Alan.
Thank you and our competitive position as a rapidly growing specialty distributors and select manufacturer of environmentally friendly disposable foodservice products and related items has long served our customers and employees well, we believe our profile as a publicly traded company only serves to enhance our value.
<unk> proposition in the marketplace.
Nimble supplier of a wide range of products for the foodservice industry. We believe that carry packaging has tremendous advantages that differentiate us from our competitors.
'twenty 'twenty, 1 first quarter result, deliver solid growth in revenue and gross profit even as we worked through industry disruption and cost pressures were pleased that sales demand picked up nicely towards the end of the first quarters and we expect strong demand to continue in the months ahead before.
Before we begin Q&A section I wanted to personally thank the entire karat team for their hard work and dedication to excellence. This is an exciting time for all of US and you have our commitment to work diligently towards achieving our collective goals and growing their company and enhancing our value for all of our stakeholders with that I will turn to.
Paul over to the operator, operator for Q&A.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys if at anytime Youre question, that's been addressed and we would like to withdraw. Your question. Please press Star then 2 at this time, we will pause non.
[noise] materially to assemble our roster.
Okay.
Uh huh.
Our first question will come from Michael Hoffman with Stifel. Please go ahead.
Thank you very much Alan and congratulations on your first public company earnings call.
I'd like to start with.
The.
Backdrop on demand.
And your ability to fulfill yeah, we understand broadly that the restaurant and food services industry sort of ramped up order activity.
And then I would like to sort of tease out the strength of your supplier network and how you've been able to continue to meet your fulfillment.
And in part because of the quality of that supplier network. So the customers getting fulfilled even if the share overall demand is super high Youre still meeting their fulfillment needs.
Oh, Michael and thank you for your question well first of all.
When the economy opens up in March. So we did we were expecting an increase in the demand for packaging.
And we are.
We did order shortfall procure more product overseas.
In the month of February.
And when the economy really actually open up into March and April.
We did we actually saw a sharper increase in demand.
Which really drove the entire industry.
So.
In the distress on the supply chain matters.
If the work is just to supply our existing customers would it be net perfect world, but all of a sudden all of our not only our existing national chain accounts other.
Are there any channel count that we hadn't been working what we would didn't discussion came to us for assistance ask for assistance and.
That's that's 1.
Our supply chain also that kind of off balance just like everyone else and we are wondering.
Ordering more product, where she's to overcome those issues.
They have to become better in terms of helping the other national chains and as well as our existing customers. So that's something that we are doing our best.
To supply product to our existing.
Existing customers, which we have a little problem issue it but.
New customers that are come.
<unk> talked for us would be assistance, we're doing our best interest and helping them on that part.
So there's been an opportunity to gain share as well as continue to meet your current customers fulfilled by me.
That is correct.
Okay, and then from most you alluded to cost increases between raw material and freight now how do you profile with a sort of a pathway to price increases from a modeling standpoint are we looking at these predominantly pass throughs. So it's an increase in revenue offset to expense.
No.
Net nature would be margin dampening, but that's not going to say bad thing, you're just you're offsetting expenses as opposed to gaining any leverage from them.
Well I'm always see that word Daniel revenue at the same time by passing through the increase in expenses and I just also.
We're increasing our margins.
From the revenue side and also on the margin side by selling our product offering. It online. This is where we see a key driver for our margin, it's selling a product online and that is something that we focused last year and we've continued to focus this year and this is something that we're we're very supportive of.
E Commerce sector sector Scott.
Want to make sure that those customers are out there I'm not able to get the product with the local distributors are able to purchase online and and get their products to meet their store niche.
And so last 2 from me did you have very big P.
P. P E builder and <unk> 'twenty that you had to overcome or is that real over that tough comparison is really in <unk> 'twenty.
1 versus $2.20.
Michael we really okay.
Michael that 1 that was that was a great question Michael So in in Q1 of 'twenty to 'twenty..1 we saw P. P revenue at 800000 compared to $2.5 million in Q1 of 2020.
What's the what we found in negative contribution margin in.
In Q1, 'twenty to 'twenty compared to 68% year over year.
So we definitely do not see the P. P E Tran continuing well see it to be less than 1 million are less than $500000 per quarter for the rest of the year. So the impact would be very minimal.
Okay, and so you have a tougher compare in <unk>, but you've also demonstrated in <unk> that you're you're offsetting those comparisons from your expectation that <unk> would be to offset a really strong you did almost 19 million of PV and <unk> of 2020. So your anticipation is you'll offset that comes from the demand side.
That is correct.
Okay will you give us some sense of how we should think about how revenues are going to fall in Brooklyn, and aggregate EBITDA ranges for Q2, given the level of price increases you've been doing.
So Michael can you. Please clarify that question I just want to make sure I address it to the point, yeah, I, probably didn't ask it very well okay. What what is what how would you frame how to Qs 21 is.
What are going to come out from a sales and EBITDA.
Overcoming P P and the level of price increases that you've been pushing through to offset freight labor and then there's some demand driven pricing because.
Oh things are so so there's such strong interest in some of your product how do we think about what <unk> earnings you could kind of revenue sales and the EBITDA is going to look like for 2020 day.
It's a great question Michael So in Q1 are to address Q2 I'll share than what Q1. Some in Q1, we have grown our revenue 18, 1% year over year without including PPE without pizza, we have grown 22 per se you over here. So we will continue.
To see the income too of a 'twenty 'twenty, 1 our growth will continue to be exceeding that 18%.
Excluding PPE, so basically we're going to be growing our oh, our organic growth above 30% and this is what we're seeing for Q2 of 'twenty 'twenty 1.
Okay. Thank you very much graduated from the first quarter. Thank you.
Our next question will come from Ryan Merkel with William Blair. Please go ahead.
Hey, thanks for taking the questions.
First off I was impressed with your gross margins and I know Alan you mentioned online sales, but you also mentioned freight was a it was an offset how big was the freight headwind. This quarter and then importantly, do you expect to cover freight costs with price increases in the second quarter.
Yes, Ryan in the first quarter, we did see a freight increase significantly almost nearly a 50.
<unk> 50 per channel more increase compared to last year 2020.
And what we what we did was we actually had a passel birthrate increasing pricing.
Back in January February and March so we'd have numerous price increase in different segment of the <unk> product line and we also are looking to continue to.
<unk> price increase in April and May and June.
Just to see how much the fragrance.
It is a free house continue talking about the second quarters, and we are looking very carefully in terms of proactively.
Mark do you, let them our prices to offset the freight increased costs.
Okay. So it sounds like you're maybe still in a bit of a chase on freight. So it's it's unclear at this point if freight will be a headwind.
Or more neutral in the second quarter is that fair.
I would think that freight in second quarter, so far in the month of second quarter, it should be neutralized or stabilized.
That's the point, we are right now.
Okay.
Got it Okay, and then I wanted to dig in and the online sales a bit more you know what some other drivers are and mentioned the shift to E. Com due to the pandemic and that makes sense, but what else is going on restaurants are reopening I think you were planning on increasing your marketing spend any new products, just what else is driving that.
Well this is 1 where we see it in the marketplace be.
Domestic manufacturer and those other income.
Orders are our competitors are struggling in terms of keeping up with capacity.
Even national chain accounts are convenience stores and we've seen some national chain account convenience store placement water online just individual stores just to try and do with doing whatever they can possibly do you make sure that they don't run out of a cup or a straws napkins or any raw material supplies and.
It seems like more and more people going online.
Because we've seen that other competitor of ours. They are just struggling in terms of keeping debt demand.
So the dog.
There's a there's a sharp increase in the demand in the disposal packaging when all the restaurants open at St. Punch. So that's where we see people are going online to find product now.
And we see more and more people and as people get used to order product online, we see that they will most likely stick with it just like when you take out.
People are more used to ordering takeout rather than going into a restaurant dine in we see that trend will continue.
Okay.
Okay, and just lastly are the the retail channel weakness, what what's driving that and do you expect that to turn around next quarter.
Well, we do see the other turnaround the next quarter, that's more and more retail stores opening up.
<unk> heard that many retail store unable to open completely due to a lack of labor there's a major shortage of labor in the West Coast also up.
Anywhere you go in the U S. So rushed our restaurant owners are having a challenge to overcome that and we do see its getting better and some states are easing off with the federal assistance, well hopefully that that will help them a restaurant to get the stuff they need to open up reopen their businesses.
Great. Thanks, Allan nice quarter I'll pass it on.
Thank you Ryan.
Again, if you have a question. Please press Star then 1.
Our next question will come from Jake Bartlett with Truest. Please go ahead.
Great. Thanks for taking the question and congrats on the first earnings call.
My first question probably.
Probably to you Alan was was it the mix of products I'm, you know I'm wondering specifically how off premise from to go product mix is doing as well as the tough business, whether the top business has been recovering.
Quickly what is really you know how is that how is the product mix shifting.
Thank you okay well.
During the pandemic, we saw cup business dropped sharply and has come back slowly, but the first quarter at least because most of this is the opening up we've seen that the restaurants are opening the cubs.
Really we all owe a hopefully a public debate has gone up with the tough business. So on the Paypal side are we seeing a more of a steady.
In terms of demands on the take out side well, whereas on the cup side. It has really grown sharply, especially when whether it is heating up more and more consumers are using the cups and as well as the restaurants opening in dining the fast food chains are allowing customer to use their software.
So the demand on Cup has really increased.
So that's 1 other thing I think that's pushing the shortages in supply.
Right.
So with me.
Okay, Let me clarify that question and perhaps supplement a little bit more but revenue for pets and related cut from that Cup holders and Cup jackets.
Combination of all of that Cup related products came in at approximately 20 million or about 25% of total revenue in Q1 of 2020, 1 I'm I'm still still slightly down about 2% from Q1 of last year, However, staying steady compared to Q4 of 12.
<unk> 'twenty in terms of the take out containers.
We did see that the take out containers, the hinge containers glue 211 million or <unk> 15 per cent of revenue in Q1 of 'twenty to 'twenty..1 are basically up from $9.5 million in Q4 of 2020 and 8 million in Q1 of 2020, so low.
Some of the trend that we have been seeing and Jake and trust from our product mix.
I'd say the other the other thing too is that we see a trend in our product mixes that are food products are in terms of steroids and bowl that glu to about 13 million in Q1 of 'twenty 'twenty, 1 up from 10 million in both our Q4 and Q1 of last year a day.
Great that's really helpful.
My next question was on your manufacturing.
First part of it is what percentage of your sales, where we're manufacturing that you manufactured yourself and is that do you expect that to increase in the near term low given.
Given the shortages and given the you know the the.
A shortage now and the time it takes for you know from free to build across the you from Asia.
How how will your manufacturing ability.
You out here.
The GAAP that is a great question and so we continue to see our mix between our our manufacturing and versus the sales from the goods that we import to be roughly between that 85 up to 15% up which we manufacture them and so what weighted.
We view our manufacturing capability is that to to supplement to be a flexible resource to our customers in terms of having product availability, but we do have a limited number of skus that we manufacture ourselves at our Chino in our Texas facility and so we do still continue to see it.
Per cent of our goods, our revenue will come from manufactured goods and about 85% to continue to come from our goods that we import from overseas.
Okay and does that Jake yes, yes, we are looking to increase our manufacturing.
Make sure that we don't do not run out of product for our existing customers rather than just 100 per cent focusing on imports.
Also this will reduce the cost of freight as well. So basically we're all like answers where our revenue is growing and our manufacturers domestically is also growing with it.
Yeah.
Got it got it that makes that makes sense and then I.
Other question about the retail sales and the decline there I think earlier in the script you mentioned that some of that was shifting just into the online channel and I'm wondering.
1 maybe how much of the increase in online sales.
We're due to that shift of customers that used to be buying through the retail channel and then you know as part of that I believe there's very different.
Merch margin contribution.
Our margin profiles for the retail and the online retail is less so all they know.
Opting to pay more buy in and just for the for the convenience.
Ordering through the online channel.
So Jake that that's that is another great question. So in terms from our dollar amount fall off on line.
Q over Q, we saw on line increased by 4.7 million or 70% are in terms of retail we saw a decrease by $1.1 million or negative 16%. So in essence net is that shift from retail to 2.2 online in terms of.
And so we definitely see that there is a shift to online in terms of dollar amount and also in terms of the fact that we continue to see a contribution margin expansion through our online channel.
Okay.
Jason Let me ask Didier to answer your question, Yes, we see that customers are willing to pay more in line just to make sure they get the product.
Right now yeah.
Yep.
Okay and then the last question. Although you do have a few moving debt just the you mentioned the cost increases the freight and I believe resin as it was also higher and you're taking price to offset that.
How do you view large gross margins in 2021 relative to 'twenty 2 to 2020 do you expect just to the net impact of those 2 things to be a drag on on gross profits or gross margins or or a benefit.
So again, we continue to see that and we're gonna be able to maintain the gross margin expansion are in in 'twenty 'twenty..1 so we have effectively pass on the increases in our raw materials as well as our increased our freight and duty cost.
To our targeted customers in in January and February we did see that to be a drag however.
March we rebounded very strongly in March and saw a gross margin above 32 per cent in March and so we're we're very excited about the fact that we're seeing that trend are.
Are you now and into the.
The next few quarters.
And so we definitely are able to maintain our margin expansion.
Okay, and then I actually have 1 more and then I'll stop hogging the call but.
The question was on character I believe the sales mix in the fourth quarter was.
Was it was about 8% I think in 2020, it was 6% what percentage of sales were karat Earth and in the first quarter of 'twenty 1.
Eco friendly a great. Another great question from eco friendly products in Q1 of 'twenty 'twenty, 1 comprise roughly 20% of our total revenue compared with Q1 of last year, which was a slightly below 20%.
So eco friendly products have.
<unk> increased slightly compared to Q4 of 2020 from roughly about 17% in terms of our eco friendly line.
It was roughly about a 5% a 5 and a half per cent for us in Q1 of our F. 'twenty 'twenty 1.
But equal friendly products comprise roughly about 20 per cent.
Great. Thank you very much absolutely.
Thank you Jason.
This concludes our question and answer session I would like to turn the conference back over to Mr Island, you for any closing remarks.
Thank you operator, and thanks to everyone for joining us today.
And for your support and interest in our company. We look forward to speaking with you again soon on our second quarter call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.