Q2 2021 Karat Packaging Inc Earnings Call
Good afternoon, and welcome to the current packaging second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by question Neustar key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Roger Palmdale. Please go ahead. Good afternoon, everyone and welcome to secure packaging 2021 second quarter earnings call I'm, Roger Kahn down with Palmdale Wilkinson packaging <unk> Investor Relations firm. It is my pleasure momentarily to introduce the company.
As Chief Executive Officer.
Our new chief.
<unk> financial officer, and Sabiha before I turn the call over to Alan I want to remind all listeners that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factors section of the company's IPO registration statement as filed with the Securities Exchange Commission income.
Copies of which are available on the SEC's website at Www Dot FCC that goes along with other company filings made with the SEC from time to time.
Actual results could differ materially from these forward looking statements and Canada packaging undertakes no obligation to update any forward looking statements, except as required by law. Please.
Please also note that during this call we will be discussing adjusted EBITA adjusted EBITA margin, which are non-GAAP financial measures as defined by SEC regulation G.
A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in today's press release, which is now posted on the company's website and with that I will turn the call over to CEO Alan you Alan.
Thank you Roger good afternoon, everyone. We're pleased to be here.
All of you today, our business continued to grow at a robust pace earlier today, we reported solid second quarter financial results that reflect strong demands and the companys progress and its nimbleness acid, leading suppliers of customizing solutions for a diverse and expanding customer base.
In addition.
Increasing agitation of environmentally friendly products and solutions continue to drive demand for the foodservice industry.
And particularly for care of packaging.
For the second quarter net sales were ahead of expectations, increasing 12% year over year with strong performance in our national online and distribution channel.
Excluding the personal protective equipment and products that we primarily so in the second quarter last year during the height of the COVID-19 pandemic.
Our rate of comparative sales growth for the second quarter on our core business was nearly 70%.
Online sales rose, 22% year over year in the second quarter, and we continue to shift our sales mix towards high margin channels sales through national and distributor channels also increased at a double digit pace.
Retail sales were lower year over year in the most recent second quarter, primarily due to PPE sales in the last period in the prior period.
Gross margin in fiscal 2021 second quarter declined year over year, primarily due to increases in freight and material costs.
Well as a comparison to the heightened margin PPE products that we saw last year.
And what you explained shortly in more detail, we saw a significant number of PPE products in last year's second quarters. These products carry higher margin closely to 50%.
Which is higher the higher the margins on our traditional products.
Freight rates have risen to the highest rate we've ever seen it.
We expect these rates to remain at high level until early next year.
The response to the current and anticipated increases in freight rates and to protect our margin we instituted multiple price increases in the second quarter.
As a result.
Margin increased 110 basis points sequentially over the 2021 first quarter.
By higher freight costs, we continue to take action to pass on higher costs in July with the largest price increase in our company's history.
Our positive momentum has continued into the third quarter, what is secular tailwind we're seeing in the restaurant opening consumer spending services and adaptation of environmentally friendly products, helping to drive the demand in support of our business. We're also seeing high demand for our beverage line up higher.
Margin bubble tea supplies, which is adding to our growth and profitability as.
As a result, we're currently targeting net sales to be in the range of 100 million to 102 million in the 2021 third quarter more.
Moreover growth in high margin online sales and the actions we've taken to pass on higher freight costs.
Given us confident in our ability to improve our gross margin in the third quarter relative to the first half of 2021.
At the same time, we are also are driving greater efficiency in our operation.
We're better leveraging our cost base.
At our largest facility in Texas.
The increase also increasing.
Output.
<unk> also recently expanding our network through the acquisition I'll say warehouse building and the addition of a distribution facility in South Carolina.
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 2021 second quarter results reflect strong top line growth offset by a decline in gross margin and an increase in operating expenses.
Net sales increased 12% to $95 million in the second quarter.
In last year's second quarter, we shifted to impart PPE products to meet a critical need during the height of the pandemic and support our growth.
Sales of this product peaked in last year's June quarter at $29 million.
Since then PPE sales as expected.
Fine.
And represented less than 1% of total sales in this year's second quarter.
Excluding PPE products.
In the 2021 second quarter Rose.
69% year over year.
Sales to distributors.
Largest channel grew 14% and sales to national chain expanded 38%, primarily due to more business with existing customers.
Online sales rose, 22% in the quarter as we continued to make significant investments in this channel.
Sales in the retail channel fell 41% from a year ago, primarily due to sales of PPE products in last year's second quarter.
Alluding PPE products, our sales in our retail channel were up slightly year over year. We also increased minimum shipping requirements to better manage tight labor conditions.
It's shifted a portion of our sales mix from retail to distributors and enabling us to better utilize staffing resources.
For reference the tables in our earnings release issued earlier this afternoon break out sales of our traditional products, excluding PPE by channel.
Gross profit decreased 3% to 28 million in the 2021 second quarter, primarily due to a decline in gross margin, partially offset by higher sales.
Gross margin was 29, 7% in the 2021 second quarter, a decline of 440 basis points compared with 34, 1% in the same here as of last year.
The gross margin decline, primarily reflects higher freight and material costs as well at the high margin PPE products sold in the last year's second quarter.
As Alan mentioned, we've taken actions to pass through higher costs in a series of price increases.
Progress to date is evident with our growth margin trend, which was improved from 27, 4% in the fourth quarter of 2020, and 28, 6% in the 'twenty to 'twenty, one first quarter to 29, 7% just reported in the second quarter.
Operating expenses in the most recent second quarter increased 47% to $21 million, principally reflecting higher shipping costs.
Payroll expenses associated with workforce expansion and temporary labor and increase in facility costs and higher professional fees.
Costs related to our public offering were approximately 600000 and a 2021 second quarter.
Operating income declined 53% to $7 million in the 2021 second quarter operating margin was seven 3% compared with 17, 1% in the same period of last year, primarily due to the pressure from higher freight and shipping costs.
Other income increased approximately $5 million year over year in the second quarter due to a gain on PPE loan forgiveness, which we borrowed last year.
Provision for income tax expense decreased to $2 million in the 2021 second quarter from 4 million in the same period last year.
Our effective tax rate was 14% in the second quarter compare with 28% in the same period last year.
Primarily because the 5 million gain recorded on the forgiveness of the PPP loan is not subject to federal income tax.
Excluding the gain on debt forgiveness, our effective tax rate in the 2021 second quarter would have been 23%.
We expect our effective tax rate for the 2020 wanted us to be in the mid 20% range.
Net income amounted to $9 million for the 2021 second quarter compare with $10 million in the same last year.
Net income attributable to current packaging, Inc, with $9.6 million or.
50 cents per diluted share in the second quarter.
Per with $10.1 million or 65 cents per diluted share last year.
Adjusted EBITDA on a consolidated basis was $10.1 million for the 2021 second quarter compared with $16.5 million a year ago, and $6.8 million in the 'twenty to 'twenty, one first quarter.
Consolidated adjusted EBITDA margin was 10, 7% in the second quarter.
Paired with 19, 4% a year ago.
And 9% in the 2021 first quarter.
Adjusted EBITDA attributable to care and packaging with $9.2 million in the 2021 second quarter adjusted EBITDA margin attributable to Karen packaging was nine 7%.
Net cash used in operating activities was 2 million in the 2021 second quarter comp.
Pair with net cash provided by operating activities of 7 million in the same here last year.
The decline primarily was due to changes in working capital in particular increases in inventory and accounts receivable that principally reflect our growth.
Capital expenditures were significantly lower year over year, primarily as a result of the purchase of manufacturing equipment and construction of our facility in New Jersey last year.
I'll now turn the call back to Alan for closing remarks, now we'll be happy to answer any questions you may have.
Alan.
Thank you and our business continued to grow fast recapture positive secular trends in the foodservice industry.
As a nimble supplier of a wide range of products carry a packaging is able to respond more quickly to market conditions than our competitors, which we believe give us a tremendous advantage our 2021 second quarter deliver solid growth in sales as we proactively worked through our cost pressures we're pleased that.
Demand continued to be strong, which we believe will contribute to another solid sales performance in the third quarters with that I'll turn the call over to the operator.
Operators.
For Q&A. Thank you.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
And the first question will come from Jake Bartlett with Truest. Please go ahead.
Great. Thanks for taking the questions and congrats on some great top line growth here.
My first question is about the upside to sales that you saw in the SEC.
Quarter, then the strong guidance for the third or are there any particular channels, that's driving the upside or is it fairly broad based.
Right.
Jason.
If you can hear me well.
Can you hear me.
Yes.
Okay, well this is why I see.
The title is what I've seen the second quarter is the online sales I've seen more and more people are ordering online I've seen there's a disruption in the supply chain throughout the U S, especially income market.
Every one of you go out to a national tenant it could be.
Any national Chinatown.
I asked him for a cup normally they have a point of comp now they'd probably tell you that we're out of the cup.
We have a styrofoam Cup.
In some places they don't even have Styrofoam Cup well I heard in the market.
Every manufacturer is strongly in having a challenge in terms of producing regardless of Styrofoam Cup paper Cup or plastic Cup. This is where we see.
Everyone when people can't find the product in.
The normal distribution channel or the restaurant people. They go to online we see a lot of people going online buying our stores our bubble key supplies. So what Andy just mentioned earlier.
The conference that you described one of our biggest sales growth as we see it.
Almost double.
Like a 100% growth in the bubble to supply.
Hey, Matt.
This is something that we've never seen in the past year.
The boss a double digit pace.
Couple of digit growth year over year Cup demand upside increase.
What when people like I was talking to customers in Las Vegas, and Florida people are traveling now youre going to everywhere.
Flights and they're using pumps going to their favorite restaurant, they're going through the hotels hotels aren't buying clubs like crazy the Las Vegas everywhere. He goes off with people and they're holding a plastic double a paper Cup. So the demand has really gone up and.
Especially in the second quarter when the economy when the economy opens up so just a rusty all these.
The catalyst of growth.
Actually it's carrying over to the third quarter why just on their back orders what behind three weeks in shipping product imagine if we're caught up this is it.
We just don't have enough people to to pack the orders and ship right now, whereas this is a challenge I do see everywhere in the market is facing that regardless, just Cisco U S food or bonds or anybody that's Amazon, even Amazon having challenge not just hiring people to get the product shipped in timely manner.
So January.
Let me follow up with what Alan just shared.
In Q2 of 2021, we saw our food products grew to $21 million or 22% of revenue for Q2 of 2021, which is over 200% year over year and over 60% Q over Q.
The main food growth drivers, where Sarah boba pop and pearls and powder.
In terms of cost of revenue for Cup cockpits holders Cup jacket.
<unk> came in at a robust approximately 20 million or 27% of total revenue in Q2 of 2021 and this has been up about 30% breast compared to Q1 of this year and significantly up over 200% from the pandemic glow of.
Q2 of 2020.
Another trend that we are seeing is your food containers for us remained roughly at about 15% and customer premise remains approximately at 19% for the company in Q2.
Great. That's really helpful. That's actually my next question, but just just to build on that and what percentage was with environmentally friendly.
Whether it's.
Earth or just how else your appointment and maybe if you could share both as a percentage of sales in the second quarter.
Yes.
Eco friendly sales approximated a $17 million in Q2 of 2021 or roughly 18% of total revenue.
Kris from about $14 million in Q1 of 2021 and $8 million in Q2 of 2020. The company continues to see strong demand for paper of food containers are Hot Cup cold people Cups and boat to go containers.
In terms of Earth.
As a percentage of sale, we continue to see it at steady at about 5% of total revenue for Q2 of 2021.
Great and then my last where my next question is.
It was up.
Fairly significantly in the second quarter from the first quarter. So how should we think about the back half of the year in 'twenty one is the SEC.
Quarter, a good run rate or should we expect a similar kind of growth.
For the quarter as we move throughout the year or just any help on what we should expect from JV going forward.
Yes, so we should expect for Q3 to be similar to that of Q2 of this year.
Okay.
And for fourth quarter kind of a similar as well or any reason that that should be DPA.
That should be similar expectation as well into Q4.
Okay, and then last question.
So you don't want how Boeing I Wonder JV I wonder.
To add to what Eric mentioned earlier in Q3.
In our conference call. We did mention that our Q3 earnings is going to be around $100 million to $102 million, which is a.
30% to 33% year over year growth.
I think that that is.
It's going to be higher than our Q2 numbers and this is one of the reason is we see a.
Strong headwinds continue into the third quarter that based on the second quarter numbers.
A headwind headwinds.
A headwind of what.
Oh.
Yeah, Yeah got it got it great Great and then just if you could frame up what kind of pricing.
In the system in the third quarter versus the second quarter. How much has that you mentioned it was the largest U.
You increase in July and in the company's history. If you could help us just frame what the year over year pricing is at this point what it what it was in the second quarter that'd be great.
Sure in the second quarter, we we took some price increase in April and also in June.
In the different categories, but in July end of July we actually are supposedly 10% to 18% price increase there.
Nearly across the board with the exception of somebody national chain accounts.
But this is like the our largest ever increase because we've seen the ocean freight has gone up tremendously.
Since.
June.
In June July and August this month, we've seen ocean freight continues to go up and it's actually deterring a lot of our competitors from stopped importing the product even with the high cost of Ocean freight.
Most of our still unable to get enough containers space to bring their product mix. Here. This is what costing a supply chain disruption in the U S is that even.
Even if you pay.
More like almost tripled the amount of money that you used to pay last year.
No guarantee of getting a container space.
Got it great I appreciate it that's all very helpful.
And the next question comes from Michael Hoffman with Stifel. Please go ahead.
Hi, Alan and thanks for making time for me this morning or this afternoon.
My question center around the cadence for the remainder of the year. So we've got a meaningful improvement in reps.
EBITDA actually came in about where you all thought it was at the time of the IPO I guess, maybe we as sell side analysts for a little more ambitious.
But it came more or less in line with your thinking so how do you feel about that original IPO EBITDA net of global wells that was about $38 million or are we still on.
To be able to do that.
Accounting for this challenges with freight and labor, but really good demand and sort of balancing all that out.
Michael that is a great question. So in terms of our EBITDA margin.
We continue to.
Have confidence to our EBITDA margin will be between now.
9% to 12%.
In terms of yeah, so that should lead us on trend to be between 36.
$238 million roughly for the remainder out of for the rest of the year.
Okay, so a little bit low on the lower on the ball on the low end. The high end is still sort of reflects where we're starting in and in fairness.
No.
Precedent and inflation pressures and you're working hard to price it through and manage costs.
Yes, I mean, absolutely I mean, what we have seen is that in.
In spite of the rising freight and freight.
Freight costs.
While we have been able to do as we have been able to protect our gross margin. We went from 27, 4% in Q4 of 2022, 28% in Q1 of this year and then 29, 7% in Q2 of this.
This year. So we have been very proactive in protecting and and also expanding our margin in a very tight market the past few quarters right.
So we do continue to expect that again, our EBITDA margin to be within that 9% to 12% range, which would lead us to be about that 36% to 38% in total EBITDA for 2021.
And then speaking about gross margins.
We've talked about that approximately this is a 30% gross margin business. So would we given the pricing initiatives. Some mix trends strong demand where are we headed towards the third and for the remainder of the year. So a further sequential improvements.
And that is our expectation Michael and and then the remainder of the year for Q3 and Q4, our expectation is we're gonna be at.
At that 30% gross margin range.
Okay, that's terrific to hear that.
And I believe Michael M mentioned last quarter, our goal for the 2021, 29% to 31%.
And.
We have already seen in the second quarter at.
29.7, 29, 8% already so we're already near get 30% already so we are still shooting for a 31%.
You know that's that's our goal basically when we first started discussing.
Discussing the India IPO, yes.
Terrific.
So lots of restaurants have been able to get open well, we've all heard the same stories of challenges with labor and all those things, but the interesting question I have is.
Moving from takeout to.
On the curb to end door dining menu started changing and how some of those menu changes then showing up in your business.
Part one and then there is this increasing announcement of expanding number of dose.
Just wanted to say goes chickens, and I mean does that ghost kitchens.
Kitchens.
Also impacting the business.
Well social thing when when when Russia was shut down, but mostly where we're using takeout we've seen a rise in demand on the Paypal containers.
And then if I could pick up containers.
Drop in the Cup business, and the napkin and unwrapped utensils.
And become cultural lineup product, but when the restaurants start to open up we saw it even a larger increase than that in the cup with the fountain drink what they were when they were closed people are using less cup now when would you open up the phone something everyone start scrambling to restock their cut cut cut that they use.
As well as napkins utensils the item that we basically was we're not moving during the pandemic started to really move.
When restaurants start to open up and we've seen one of our customers were telling us that when the pandemic. When there was a pet them when they when they shut down the indoor dining there Paypal the drive thru was basically car was a wrap around care.
Sweet in a in a shopping mall with a drive through when they opened up the indoor dining they basically at a double.
The store size about my business. So as you know most of these high volume stores, where there's more drive throughs and when they open the indoor die.
They opened two more.
New stores for every one of their location. They have that's what's under a scenario of the Carson has been telling us.
And I guess like I said earlier, when what restaurant open up when the hotels open up when the resorts opened it up and also the the tour.
Tourist attractions that have opened up the.
The demand has skyrocketed.
Okay.
Last one for me M&A is something we've talked about that was one of the purposes of the IPO was to create a balance sheet that would allow you to start looking at M&A.
Civic packaging, you let off with.
How would you frame where your pipeline is the prospects of possibly finding another opportunity like a pacific packaging or or or even something different can you talk to us about that.
Yes, we are we have we see some oh and then I have been looking and discussing with several companies and we're looking at we're doing the due diligence and also we want to do the right thing and making sure that there's a there's a bright mix.
We mentioned in the IPO, we were looking for a company with a sudden issue that the leadership the management team, but also the product offering and another thing is the locations. So these are the things that we're looking at.
And we have been.
Yeah.
And with a couple of these companies.
And we've got a gathering more information on that part.
Alright terrific. Thank you for taking my questions. Good luck for the rest of the year, it's an interesting operating environment.
Great. Thank you.
And the next question will be from Ryan Merkel with William Blair. Please go ahead.
Hey, thanks for taking the questions. So.
So first off island in this market with major shortages is your import model is that winning in the marketplace are your fill rates better than your competitors.
I have to say, yes.
If you've covered the industry well and I'm sure you can talk to any one of our industrial.
Industrial sector a manufacturer.
Everyone, that's having shortages.
And.
One main reason the shortage is it could be a supply issue raw material supply issue.
Mainly it's a labor issue the major shortage of labor that is one of the main reason that there's a supply shortages in the market.
It's just really hard to get people to come to work and nowadays environments.
Everyone is hiring but it's really tough, it's a challenging market and labor. It's not just what the manufacturer. That's 40 restaurants I've spoken to a lot of restaurants, they have to shut down their diet indoor dining because they can't find enough people to watch and cleaner.
Indoor area dining area.
Some of the managers in our distributors they have to drive a forklift and low to no the truck.
I would make deliveries.
Everyone's just take that challenge so.
So basically the only alternative is important.
Now when we we saw.
Actually we kind of have a new every year that when the summer comes there's a there's a short almost a shortage. So we have a month and a half a shortage in arm with our product. So we could.
Phil There were slow and then we started ramping up our import.
In June and July so right now our Weyerhaeuser pack.
And I believe are still ways is better in California, but we're trying to get the product into the <unk>.
Texas, and New Jersey area, and that's one of the challenges everyone is facing there's more supply issues in the <unk>.
East coast than the West coast, because that's just the Osha line that the ocean freight container trades are unable to get to the New York area. The East Coast area. So everything is coming to the west coast and Ray of whats going into the East Coast, which is that's why they're talking a great congestion and the logistic also.
I would say that every logistic, including U P. S. Fedex 40.
The wound carriers they are maxed out their capacity Theres major delays you can see that every website is telling you that there's a delay in shipping there's a delay in delivery.
Expect delays, but.
But I would say our fill rate today.
Today is definitely better than our.
Most of our competitors.
Right now.
Okay.
Can you sort of hit on my follow up which is you've got ocean freight rates going Crazy you've got the congestion you got containers coming in late and delayed how are you managing that how are you importing product effectively and having these high fill rates when theres a lot of other people that are at play.
Some challenges.
Oh, well, we actually took the Uh huh.
The initiative of placing the order you know Beth.
So we actually like.
Conference call, where we're nimble that's how we're able to compete in the marketplace.
We're small and we're nimble so we moved fast.
We saw there's a height of rising demand in the bubble tea line product with Cup business. We immediately placed additional orders with our overseas partners and manufacturers and they started shipping.
We actually order more than twice the amount of what we normally what orders and and also at that time basically they're all actually arriving now and that's one of the reason, we're able to fulfill a lot more of our customers.
Actually we're helping out a lot of these national chain accounts that ran out of cup. The lead out of straws I laid out the two containers well basically helping a lot of people out you have you covered the restaurant industry and you would talk to he's a national chains, you would don't if people are absolutely actually told them.
It comes with all the cup they might be able to help you I mean, that's that's that's what's going on out there.
Yeah.
Great. Okay that helps and then just lastly, we hit on this a little bit, but just wanted to be clear in the quarter for gross margins. They did your price increases cover your.
Raw material cost increases and freight increases.
I believe it did.
I mentioned, our second quarter gross margin was actually higher than the first quarter.
Because the largest increase in the raw.
Cereal was in April and May It was the increase was the largest increase in the raw material is not in the first quarter. It was in the second quarters. So basically if we have not implemented the price increases our gross margin will fall below the first quarter number.
In essence, we actually were able to increase it from 29, 2% to 29.7 I believe.
And that's due to the fact that we were proactively oh about passing on the increase to our customers onto our products.
Yes, yes, and and to clarify you know we went from 27, 4% in Q <unk> Q4 to 28, 6% in Q1, and then to 29, 7% in Q.
Two two asset to Alan's point, yes, we have been able to to increase cost efficient to cover the the rising ocean freight and higher material cost and then you know contribute to the additional margin expansion sequentially over the past few quarters.
Perfect very helpful. Thanks, a lot.
Absolutely.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Alan <unk> for any closing remarks.
Well. Thank you all for joining our conference call and we will definitely continue to work hard to increase our shareholder value and we look forward for a.
Better next quarter. Thank you all have a nice day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Mhm.
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