Q1 2024 Karat Packaging Inc Earnings Call

[music].

Operator: Thank you for standing by. My name is Cass, and I will be your conference operator today. At this time, I would like to welcome everyone to the Karat Packaging Incorporated first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Thank you for standing by my name is cash.

Cass: And I will be your conference operator today at this time I would like to welcome everyone to the carrot packaging incorporated first quarter 'twenty 'twenty four earnings conference call all lines have been facing mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the call over to Roger Pondel of Investor Relations. Please go ahead.

Roger S. Pondel: She progressed Tara if all the way to number one on your telephone keypad. If you would like to withdraw your question Press Star One again I would now like to turn the call the call over to Roger for adult Investor Relations Pease go ahead.

Roger S. Pondel: Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging's 2024 first quarter conference. I'm Roger Pondel with Pondel Wilkinson, Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce you to the company's chief executive officer, Alan Yu, and his chief financial officer, Jian Guo.

Roger S. Pondel: Thank you operator, good afternoon, everyone and welcome to care packaging as 2024 first quarter conference call.

Roger S. Pondel: Roger Pinedale with Honda Wilkinson, Kurt packaging <unk> Investor Relations firm it will be my pleasure momentarily to introduce you to the company's Chief Executive Officer, Alan you as Chief Financial Officer, Jim <unk>.

Roger S. Pondel: Before I turn the call over to Alan, I want to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factor section of Karat's most recent Form 10-K, as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time.

Roger S. Pondel: Before I turn the call over to Alan I want to remind everyone that today's call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

Roger S. Pondel: Actual results could differ materially from these forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements except as required by law. Please also note that during today's call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the Most Directly Comparable Gap Measures to the Non-Gap Financial Measures is included in today's press release, which is now posted on the company's website. And with that, it is my pleasure to turn the call over to CEO Alan Yu. Alan

Roger S. Pondel: 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 carrots. Most recent Form 10-K as filed with the Securities and Exchange Commission copies of which are available on the Sec's website.

Roger S. Pondel: Right.

Alan Yu: Ww Dot FCC dot Gov.

Roger S. Pondel: Along with other company filings made with the SEC from time to time.

Roger S. Pondel: Actual results could differ materially from these forward looking statements.

Roger S. Pondel: <unk> undertakes no obligation to update forward looking statements, except as required by law.

Roger S. Pondel: Please also note that during today's call we will be discussing adjusted EBITDA adjusted EBITDA margin and adjusted diluted earnings per share, which are non-GAAP financial measures as defined by SEC regulation G. A.

Alan Yu: A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website and with that it is my pleasure to turn the call over to CEO Alan you Alan.

Alan Yu: Thank you Roger good afternoon, everyone.

Alan Yu: Thank you, Roger. Good afternoon, everyone.

Alan Yu: Sales volume for our 2024 first quarter grew 3.5% over the prior year period. Net sales were about the same as last year, but it included certain items that impacted year-over-year comparability, which Jian will discuss later in this call. We are encouraged by our first quarter performance. The growth initiatives that we implemented last year are starting to bear fruit. Our new business pipelines continue to grow, and our product offerings continue to expand. We are adding new customers and gaining a wall of share with existing accounts.

Roger S. Pondel: Sales volume for 2024 first quarter grew three 5% over the prior year period net sales were about the same as last year, but included certain items that impacted year over year comparability, which Jim will discuss later in this call.

Alan Yu: We are encouraged by our first quarter performance asset growth initiatives that we implemented last year are starting to bear fruit.

Alan Yu: Our new business pipeline has continued to grow and our product offering continue to expand we are adding new customers and gaining wallet share with existing accounts.

Alan Yu: Sales for manufactured products in the first quarter were 12.4% of total net sales, compared with approximately 23% last year. In keeping with our asset-wise strategy in the U.S., we have an emphasis on imported items. Sales of our eco-friendly products rose 6% in the first quarter over the prior year quarter. This category represented approximately 34.5% of total sales versus 32.6% last year. Eco-friendly products remain a priority for Karat as we continue to develop new and innovative products and build up inventory to meet growing demand from customers.

Alan Yu: Sales for manufacturer product in the first quarter were 12, 4% of total net sales compared with approximately 23% last year.

Alan Yu: In keeping with our asset light strategy in the U S and emphasis on imported items.

Alan Yu: Sales of our eco friendly product rose, 6% in the first quarter over the prior year quarter. This category represented approximately 34, 5% of total sales versus 32, 6% last year.

Alan Yu: Friendly products remain priority for carriage as we continue to develop new and innovative products and build up inventory to meet growing demand from customers.

Alan Yu: We also achieved a near record high gross margin of 39.3% during the first quarter. With better visibility into ocean freight rates and new contract rates locked in through April 2025, combined with the continued strength of our U.S. dollar, we expect our gross margin to remain at a higher level. Our operating income in Q1 2024 was impacted by a non-cash impairment of $2 million of the right of use assets for our city industry lease in California.

Alan Yu: We also achieved a near record high gross margin of 39, 3% during the first quarter with better visibility into ocean freight rate and new contract rates locked in through April 2025, combined with the continued strength of our U S. Dollar we expect our gross.

Alan Yu: Margin to remain at a higher level.

Alan Yu: Our operating income in Q1, 2024 was impacted by a noncash impairment of a $2 million of right of use assets for our city of industry lease in California, with a shift to optimizing our new Arizona warehouse space and away from California, a future rent expense will be.

Alan Yu: With the shift to optimizing our new Arizona warehouse base and away from California, our future rent expense will be reduced. Our newly established distribution center in Arizona is now fully operational, which will provide meaningful efficiency for Karat in the southwest region. We are continuing to look for other distribution centers in the southeast region this year to further penetrate and grow key U.S. markets. Additionally, we are exploring strategic acquisition opportunities to further penetrate the marketplace. Given the company's liquidity, solid balance sheet, and positive long-term outlook, our broader directors again authorized an increase in the quarterly cash dividend payment to $0.35 per share on May 7th from $0.37 per share in the preceding quarter.

Alan Yu: Reduce.

Alan Yu: Our newly established distribution center in Arizona is now fully operational.

Alan Yu: <unk> will provide meaningful efficiency for Karen in the southwest region. We are continuing to look for other distribution center in the South East region. This year to further penetrate and grow key U S markets.

Alan Yu: Additionally, we are exploring strategic acquisition opportunities to further penetrate the marketplace.

Alan Yu: <unk> strong operating cash flow as well as the Companys liquidity solid balance sheet and positive long term outlook. Our board of directors again authorize an increase in the quarterly cash dividend payments to <unk> 35 per share on may $7 30 per share in the preceding quarter.

Alan Yu: A regular quarterly dividend policy began in August of last year with an initial payment of $0.10 per share. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company's financial results in greater detail.

Alan Yu: Our regular quarterly dividend policy began in August of last year with an initial payment of 10 cents per share.

Jian Guo: I will now turn the call over to Jan Guo, Our Chief Financial Officer to discuss the company financial results in greater detail Jan.

Jian Guo: Thank you, Alan, and good afternoon, everyone. Net sales for the 2024 first quarter were $95.6 million compared with $95.8 million for the same quarter last year. Sales volume increased 3.5% over the prior year quarter. As Alan mentioned earlier, net sales year-over-year comparisons are impacted by the virus. Our Q1 2024 net sales were understated by $0.7 million related to products shipped and recognized as revenue in 2023 and not delivered until 2024. The related impact on cost of goods sold and growth margin was $0.4 million and $0.3 million, respectively, for Q1 2024.

Jian Guo: Thank you Alan and good afternoon, everyone.

Jian Guo: Net sales for the 2020 for first quarter were $95 $6 million.

Jian Guo: Impaired with $95 million.

Jian Guo: For the same quarter last year.

Jian Guo: Sales volume increased three 5% over the prior year quarter.

Jian Guo: As Adam mentioned earlier net sales year over year comparison.

Jian Guo: Impacted by.

Jian Guo: Items.

Jian Guo: Our Q1 2024 net sale.

Jian Guo: Understated by point $7 million related to products shipped and recognized as revenue in 2023 and not delivered until 2024.

Jian Guo: The related impact on cost of goods sold and gross margin was $4 million and 0.3.

Jian Guo: $3 million, respectively for Q1 2024.

Jian Guo: In the prior periods, we had assessed the impact of the lag between shipping and delivery on the previously issued quarterly and annual financial statements and concluded it was immaterial. The impact will not be recurring in future quarters.

Jian Guo: In the prior periods, we had assessed the impact of the lag between shipping and delivery to the previously issued quarterly and annual financial statements.

Jian Guo: Concluded it was immaterial the impact will not be recurring in future quarters.

Jian Guo: The amount of the revenue deferred for products shipped in March 2024 but not delivered until April 2024 was $1.9 million. Additionally, net sales for the 2024 first quarter included $2.2 million of an online sales platform fee. By channel, compared with a year ago, sales to distributors, our largest channel, were lower by 3.3% for the 2024 first quarter.

Jian Guo: The amount of the revenue deferred for products shipped in March 2024, but not delivered until April 2024, with $1 9 billion.

Jian Guo: Additionally, net sales for the 2024 first quarter included $2.2 million of online sales platform fee.

Jian Guo: By channel compared with a year ago sales to distributors, our largest channel was lower by three 3% for the 2020 for first quarter.

Jian Guo: Sales to national and regional chains were up slightly. Online channel sales were up by 9.0%, which benefited from the inclusion of online platform fees of $2.2 million, as discussed earlier, and sales to the retail channel increased 5.0%. The distributor channel remains challenging, and the overall pricing environment is still very competitive. However, we are seeing encouraging growth momentum in the other channels, primarily driven by our continued geographic penetration in the East Coast, Northeast, and Midwest regions and growth in our eco-friendly products.

Jian Guo: Sales to national and regional chains were up slightly online channel sales were up by 9.0%, which benefited from the inclusion of online platform fees of $2 $2 million as discussed earlier.

Jian Guo: Sales to the retail channel increased.

Jian Guo: <unk> zero percent.

Jian Guo: The distributor channel remains challenging and the overall pricing environment is still very competitive.

Jian Guo: However, we are seeing encouraging growth momentum in the other channels, primarily driven by our continued geographic penetration in the east coast, North East and Midwest region and growth in our Eagle for any products.

Jian Guo: Cost of goods sold for the 2024 first quarter was $58.0 million compared with $57.7 million in the prior year quarter. The increase was primarily due to higher freight and container rates earlier in the year and increased import volume and the inclusion of certain production costs in cost of goods sold, partially offset by lower product costs for certain raw materials and finished goods as well as favorable foreign currency exchange rates. Gross profit for the 2024 first quarter was $37.6 million versus $38.1 million in the prior year quarter.

Jian Guo: Cost of goods sold for the 2020 for first quarter was 58.0 million.

Jian Guo: Compared with 57 7 million in the prior year quarter.

Jian Guo: The increase was primarily due to higher freight and container rates earlier in the year, an increase in volume and the inclusion of certain production costs in cost of goods sold partially offset by lower product costs for such as raw materials and finished goods.

Jian Guo: As well as favorable foreign currency exchange rate.

Jian Guo: Gross profit for the 2020 for first quarter was $37 6 million versus $38 1 million in the prior year quarter.

Jian Guo: Gross margin was 39.3% in the 2024 first quarter compared with 39.8% for the prior year quarter. Operating expenses in the 2024 first quarter were $29.5 million, or 30.9% of net sales, compared with $25.4 million, or 26.5% of net sales, in the prior year quarter. Operating expenses in the current quarter included a non-cash impairment of $2.0 million of the operating right-of-use asset for the city of industry lease that Alan mentioned earlier as we entered into an agreement to sublease this warehouse in California.

Jian Guo: Gross margin was 39, 3% in the 2024 first quarter compared with 39, 8% for the prior year quarter.

Jian Guo: Operating expenses in the 2020 for first quarter were $29 million or 39% of net sales compared with $25 $4 million or 26, 5% of Michelle <unk>.

Jian Guo: In the prior year quarter.

Jian Guo: Operating expenses in the current quarter included a noncash impairment of $2.0 million after operating right of use asset for the city of industry release that Alan mentioned earlier as we entered into an agreement to sublease This warehouse in California.

Jian Guo: The increase was also driven by the inclusion of online sales platform fees, higher rent from additional leased warehouses, and higher labor costs due to workforce extension. Such increases in operating expenses were partially offset by a decrease in shipping and transportation costs and the inclusion of certain production costs in the cost of goods sold.

Jian Guo: The increase was also driven by the inclusion of online sales platform fees.

Jian Guo: Higher rent from additional lease warehouses and higher labor costs due to walk for expansion.

Jian Guo: Such increases in operating expenses, partially offset by a decrease in shipping and transportation costs and the inclusion of certain protection cost in cost of goods sold.

Jian Guo: Net income for the 2024 first quarter was $6.5 million compared with $9.2 million in the prior year quarter. Net income margin was 6.8% in the 2024 first quarter compared with 9.6% in the prior year quarter. Net Income Attributable to Karat for the 2024 first quarter was $6.2 million, or $0.31 per diluted share, compared with $9.0 million or $0.45 per diluted share last year. Adjusted EBITDA, a non-GAAP measure, in the 2024 first quarter was $13.5 million versus $15.3 million in the prior year quarter.

Jian Guo: Net income for the 2020 for first quarter was $6 $5 million compared with $9 2 million in the prior year quarter.

Jian Guo: Net income margin was six 8% in the 2024 first quarter compared with nine 6% in the prior year quarter.

Jian Guo: Net income attributable to carrot.

Jian Guo: For the 2020 for first quarter was $6 $2 million.

Jian Guo: 31 cents per diluted share compared with $9.0 million, all 45 cents per diluted share last year.

Jian Guo: Adjusted EBITDA.

Jian Guo: non-GAAP measure in the 2020 for first quarter was 13 $5 million versus $15 $3 million in the prior year quarter.

Jian Guo: Adjusted EBITDA margin was 14, 2%.

Jian Guo: In the 2024 first quarter versus 15, 9% in the prior year quarter.

Jian Guo: Adjusted diluted earnings per common share.

Jian Guo: <unk> 40 cents per share in the 2024 first quarter compared with 46 cents per share a year ago.

Jian Guo: Adjusted EBITDA margin was 14.2% in the 2024 first quarter versus 15.9% in the prior year quarter. Adjusted Diluted Earnings per Common Share was $0.40 per share in the 2020 first quarter compared with $0.46 per share a year ago. The first quarter ended with $112.3 million in working capital, compared with $110.5 million at the end of 2023. As of March 31, 2024, we had financial liquidity of $49.3 million, with another $33.5 million in short-term investments.

Jian Guo: The first quarter ended with $112 $3 million in walking pretzel, compared with $110 $5 million at the end of 2023.

Jian Guo: As of March 31, 2024, we had financial liquidity of 49 $3 million with another $33 $5 million in short term investments.

Jian Guo: During the first quarter, we made significant investments to stock up on our inventory ahead of our summer peak season. With a positive outlook for new business, we expect net sales for the 2024 second quarter to increase by a net single digit over the prior year's quarter. Our gross margin goal for the 2024 second quarter is approximately 38 to 40 percent. For the full 2024 year, we expect net sales to grow 8% to 15% and gross margin to be in a range of 37% to 40%. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

Jian Guo: During the first quarter, we made significant investment to stock up our inventory ahead of all the summer peak season.

Jian Guo: Yeah.

Jian Guo: With a positive outlook for new business, we expect net sales for the 2024 second quarter to increase by mid single digit over the prior year quarter.

Jian Guo: Our gross margin goal for the 2024 second quarter is approximately 38% to 40%.

Jian Guo: For the for 2024 year.

Jian Guo: <unk> net sales to grow 8% to 15% and gross margin to be in the range of 37% to 40%.

Speaker Change: Alan and I will now be happy to answer your questions and I'll turn the call back to the operator.

Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 again. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not in mute when asking your question. Again, press star 1 to join the queue. And your first question comes from the line of Michael Hoffman with Stifel. Your line is...

Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question Press Star one again.

Operator: We are called upon to ask the question and are listening via loud speaker in your device. Please pickup your handset and ensure that your phone is sort of need when asking your question again crestar one to join the queue and your first question comes from the line of Michael Hoffman with Stifel. Your line is open.

Michael Edward Hoffman: Hi Alan, Jian, thank you for taking the question. Sorry about my voice. I'm not sure where it's disappeared to.

Michael Edward Hoffman: Hi, Alan and Jim. Thank you for taking the question sorry about my voice, so I'm not sure where it's disappeared too.

Michael Edward Hoffman:

Michael Edward Hoffman: Can you bridge for us? Maybe by the line items, whether it's national distribution on site or online, or retail, versus your own plan, right? So if I think about the guide you gave us, we were gonna land somewhere around $100 million. A round number. We're about four and a half short. Of those four buckets, where's the shortage, and what gives you confidence in this next 90-day view? in light of that, where it fell.

Michael Edward Hoffman: Can you bridge for us.

Michael Edward Hoffman: Maybe by the line items, whether its national distribution on site or online I mean or retail.

Michael Edward Hoffman: Versus your own plan right. So if I think about the guide you gave US we were going to land somewhere around $100 million round numbers.

Michael Edward Hoffman: We're about four and a half short.

Michael Edward Hoffman: Of those four buckets, whereas the shortage and what gives you confidence in this next 90 day view.

Michael Edward Hoffman: In light of that where it fell short.

Michael Edward Hoffman: Michael, let me just understand the question. Are you refusing the $4 million shortfall for the first quarter, or are you refusing the second quarter? You gave us a forward view of the up-mid-signal digits, which if we did the math, would land you at about $100 million, right? And you did 95 and a half, I'm rounding, so we're $4.5 million short. And if I think of the four segments... Well, where does that shortfall come relative to your own plan, and what gives you comfort in the next forward plan that... We've got a better handle on that. Sure.

Michael Edward Hoffman: Michael Let me get the gist.

Michael Edward Hoffman: I understand the question are you, referring to $4 million Schwartz for the first quarter or are you referring.

Michael Edward Hoffman: So just wondering you gave us a forward view of up mid single digits, which if we did our math there was land you're at about $100 million right and you did gotcha 95, and a half I'm rounding so were $4 5 million short and I, probably think of the four segments.

Michael Edward Hoffman: Well, where where does that shortfall come relative to your own plan and what gives you comfort in the next forward plan that.

Michael Edward Hoffman: We've got a better handle on that sure.

Alan Yu: Well, we, I believe Jim mentioned earlier in the call that there was a change in accounting practice, recognition, and revenue recognition. We actually had to deduct $2 million. And normally, for the past 12, 15 years, 20 years, we have been recognizing revenues as we ship the product. But our auditor has decided that we need to adopt a new method of recognizing revenues that we need to account for when the customers, even if we ship at the last date of every month, they need to understand how long it takes for them to receive the product.

Michael Edward Hoffman: Well we.

Michael Edward Hoffman: <unk> mentioned earlier in the call that.

Alan Yu: The change in accounting practice, a recognition revenue recognition.

Alan Yu: We actually had to deduct 2 million spend normally in the past.

Alan Yu: At 12, 15 years 20 years, we have been recognizing revenues as we ship the product.

Alan Yu: But our auditor has decided that we need to adapt a new method of recognizing revenues that we need to account for when the customers. Even if we ship. It. The last date of every month they need to understand how long did it does it take for them to receive the product and they were saying they are asking us to recognize revenue.

Alan Yu: Upon the data receiver so we had to.

Alan Yu: And they're asking us to recognize revenue on the day they receive it, so we had to reduce $2 million from the current quarter, over $2 million basically. And that's something that we have never done in the past 24 years of our accounting history. So this is the first quarter they want us to start moving forward to change this practice. That's over $2 million that we couldn't account for in recognition.

Alan Yu: Reduced $2 million.

Alan Yu: The current quarter over $2 million, basically and Thats something that we have never done so in the past 24 years of our upcoming history. So this is the first quarter. They want us to start moving forward to changes practice, that's over $2 million or we couldn't count forward recognition.

Alan Yu: The other $2 million I, we were actually I mean, Jan we were actually looking at the guide in terms of 90, approximately $98 million versus.

Alan Yu: Versus the $100 million.

Alan Yu: I believe that we actually would have met the lower end of our projection.

Alan Yu: I said at the first quarter. If we had we were able to account for the $2 million that we had to change.

Alan Yu: Revenue revenue recognition practice.

Michael Edward Hoffman: It sounds like you ought to get another auditor. How are you supposed to track when a delivery arrives unless you're controlling the last mile? That seems like an unreasonable reach.

Speaker Change: Sounds like you already got another auditor, how do how are you supposed to track with the delivery of rise unless you're controlling the last mile but that seems like an unreasonable reach.

Alan Yu: Agent is the one that dealt with the auditor. Maybe, Jian, you could perhaps kind of explain it to us. We were fighting for that, and we thought it was really hard to understand, to account for, because it's taking a lot of our time to just try and define the bill of lending. And when the customer receives it, we have to track down all the tracking. Some of our deliveries are delivered by third parties and UPS. So we had to set up a program just to accommodate this new request on that part.

Michael Edward Hoffman: Jan is the ones that dealt with the auditor, maybe John you could perhaps kind of explained to you because I always thought we were fighting for that we thought that was really hard to understand to account for it because it's taking a lot of our time to just trying to find the bill Lennie in when the customer receive it we have to track down all the tracking using.

Alan Yu: Some of our.

Alan Yu: Delivery are delivered by third party and UBS. So we had to set up a program just to accommodate this new requests on that part.

Jian Guo: Hi Michael, this is Jian. Let me chime in on this one.

Alan Yu: Hi, Michael This is Jan let me chime in on this one so I think you make a fair point.

Jian Guo: So I think you make a fair point about tracking. It is a challenge, and we are reviewing our internal process to make sure that we have reliable, accurate data to be able to account for it, and account for revenue appropriately. I will say, as I mentioned in my prepared remarks, that historically, this is something that we've been tracking internally for a fairly long time, as Alan mentioned. It's the same accounting practice since 15-20 years ago.

Jian Guo: About tracking it is a challenge and we are now.

Jian Guo: Reviewing our internal process to make sure that we have reliable accurate data.

Jian Guo: To be able to account for it.

Jian Guo:

Jian Guo: A council revenue appropriate today.

Jian Guo: I'll say as I mentioned in my prepared remarks that historically this is something that we've been tracking internally for a fairly long time as much as Alan mentioned.

Jian Guo: It's it's it's the same accounting practice since 15 20 years ago, we have there.

Jian Guo: We have evaluated, as I mentioned earlier, the kind of lag between shipping and delivery and concluded, and our auditors concurred in the past, that the impact was immaterial. Basically, the lag was immaterial, even though we don't necessarily track every single shipment and know exactly when it's delivered to the customer. We have a pretty good idea, and we have a... sort of the estimate method to help us get to a pretty close number.

Jian Guo: Evaluated as I mentioned earlier.

Jian Guo: Previously kind of the lag between shipping and delivery and concluded.

Jian Guo: And our auditors concurred in the past that the impact was immaterial basically the lack with immaterial, even even though we don't necessarily track every single.

Jian Guo: Shipment know exactly when it's delivered to the customer we have a pretty good idea and we have a.

Jian Guo: Sort of.

Jian Guo: The.

Jian Guo: The estimate met there to help us get to a pretty close number so that said fast forward to March 2024.

Jian Guo: So that said, fast forward to March 2024, and I will just add a little color here on Q1 activities, the pickup activities towards the end of the quarter. And that's also one of the reasons why if you look at the last few days in a quarter, the activity that we saw, the amount of the shipment that went out actually increased quite a bit compared to what we typically see towards the end of the quarter. As I mentioned earlier, the amount of revenue that we deferred from March to April is $1.9 million.

Jian Guo: I would just add that I'll call out here is in Q1, we are seeing increased act.

Jian Guo: So basically, roughly the $2 million that Alan was talking about earlier, compared to, typically, on a quarterly basis, we see towards the quarter end, that number is roughly 700, 800,000. So there was a little bit of an increased activity in the shipments, in the products that we shipped but have not yet delivered to the customer. So that also accounted for a little bit of a year-over-year comparison. I just wanted to point out part of the reason why you are seeing the 1.9, Alan talked about this, sort of the two million, is also the increased activity, the increased momentum that we're seeing towards the quarter end.

Jian Guo: Activities to pick up in activity towards the end of the quarter and.

Jian Guo: And that's also one of the reasons why if you look at the last few days in a quarter that I. The activity that we we saw the amount of the shipment that went out actually increased quite a bit compared to what we typically see.

Jian Guo: Towards quarter end as I mentioned earlier the amount of the revenue that we deferred from March to April it's $1 9 billion. So basically roughly the 2 million that Adam was talking about earlier.

Jian Guo: <unk> typically on the quarterly basis, we see towards the quarter end that number it's roughly 700 800000. So so there was a little bit of increased activity.

Jian Guo: In the in the shipments that are in the products that we shipped but have not yet delivered to the customer. So that also accounted for a little bit of a year over year comparison I just wanted to point out part of the reason why.

Jian Guo: You have seen a $1 nine Adam talked about this at the 2 million is also the increased activity the increase momentum that we've seen toward the quarter end.

Michael Edward Hoffman: Okay, so I just want to tease out a couple things on this. Did you, if you, look at March 23 and do the same treatment of... Accounted Sales, as you shipped it, now you had to count it on delivery and sort of adjust that number, and then the reality of the like-to-like is you hit your load amid single-digit growth rates because you reset the prior number to look the same way.

Jian Guo: So it's well it could tease out a couple of things on this.

Michael Edward Hoffman: Did you if you.

Michael Edward Hoffman: Did you look at March of 'twenty, three in and do the same treatment of discounted sales as we shifted now you had the town. It is on the delivery and sort of adjust that number and then the reality of the like to like as you hit your low to mid single digit growth rate.

Michael Edward Hoffman: Because you've reset the prior number to look the same way.

Michael Edward Hoffman: No, actually, Mike, Michael, like I said, this is the first time. Yeah, I get that. I was just wondering if you did it.

Speaker Change: No actually Mike Michael.

Speaker Change: Like I said this is the first time, yeah I get that I was just wondering if you did the work in.

Michael Edward Hoffman: I get that. I was just wondering if you did the work and put the prior year on a like basis. What I'm trying to get to, and I'm not doing a very good job of it, is, I think I'm hearing you said almost 4% volume growth, so I'm going, okay, underlying structural demand's good, maybe I'm still repricing some inventory from the above-average inflation in the inventory, but volume's good, so SKUs are good. I've got this oddball accounting thing, you still think you ought to fire your auditor, and, If I had a like-to-like comparison, you really did land somewhere between low to mid-single-digit growth.

Michael Edward Hoffman: And put the prior year on a light.

Michael Edward Hoffman: Basis.

Michael Edward Hoffman: What I'm trying to get to and I'm not doing a very good job of it.

Michael Edward Hoffman: I think I'm hearing you said almost 4% volume growth. So I'm going okay underlying structural demand is good maybe I am still repricing some inventory from the above average inflation in the inventory, but volumes. Good. So skus are good.

Michael Edward Hoffman: This oddball accounting thing is still think youre at a fire auditor.

Michael Edward Hoffman: If I had I'd like to like comparison that you read.

Michael Edward Hoffman: Did land somewhere between low to mid single digit growth.

Michael Edward Hoffman: And so none of us should freak out. The market shouldn't freak out. The stock should be fine tomorrow, blah, blah, blah. There was a question in there somewhere, but I'm not sure what it was.

Michael Edward Hoffman: And so none of us should freak out the market shouldn't freak out stock should be filing tomorrow blah blah blah.

Michael Edward Hoffman: There was a question in there somewhere but I'm not sure what it was.

Michael Edward Hoffman: Where I'm going [laughter], yeah, again, like I said I I.

Alan Yu: Yeah, again, like I said, basically, it is what it is. I get that, but underlying business, all this noise aside, underlying business demand is good. It is very good. I would say the underlying business, personally, I think this is the best quarter for 12 months, basically, for the fourth quarter, because we've seen volume decline and pricing decline for the past three quarters, and this is the first quarter we've seen a solid year-over-year growth in volume, in revenue, and also in revenue if we were to use the old accounting method. Revenue was higher, the volume was higher, and the pipeline that we have is stronger than ever, so I would say that this was the best quarter in a year.

Alan Yu: I basically.

Alan Yu: This is it is what it is I mean I.

Alan Yu: I get that but yeah underlying business if all this noise aside underlying business demand is good as well.

Alan Yu: It is a very good I would say the underlying business I personally I think this is the best quarter since the since <unk>.

Alan Yu: 12 months basically for the fourth quarter, because we've seen volume declines pricing declining for the past three quarters and this is the first quarter. It was a solid year over year growth in volume and revenue almost almost also in revenue if we had if.

Alan Yu: To use the old accounting method revenue.

Alan Yu: Revenue was higher the volume was higher and the pipeline that we have is stronger than ever.

Alan Yu: So I would say that this is the best quarters in a year.

Michael Edward Hoffman: Okay, that's, I hope, you know, who knows what the market does tomorrow because it hates misses, but... I think the big message here is you've got a good underlying fundamental business model still chugging along.

Speaker Change: Okay, but that's oh.

Michael Edward Hoffman: Who knows what the market does tomorrow because it.

Michael Edward Hoffman: Mrs but.

Michael Edward Hoffman: I think the big message here is you've got good underlying fundamental business model is still chugging, along you've made business decisions to assure the growth rate by moving the distribution centers and we've got this oddball accounting issue.

Michael Edward Hoffman: You've made business decisions to assure the gross rate by moving the distribution centers, and we've got this oddball accounting issue. Have we repriced all the inventory for the above-average pricing? Is that out? We're not looking at repricing issues anymore at this point? Yes.

Michael Edward Hoffman:

Michael Edward Hoffman: We repriced all the inventory for the above average pricing as that out.

Michael Edward Hoffman: We're not looking at repricing issues anymore at this point yeah. So actually we're looking we're not looking at any repricing issue and also wondering if one of the major.

Alan Yu: Actually, we're not looking at any repricing issue. And also, one of the major question marks that we mentioned last quarter was ocean freight. We were not sure, uncertain how the ocean freight was going to play out, but it actually played out pretty well. The ocean freight did not increase significantly for the next year's contract. So that's why we're more confident in terms of raising our full-year gross margin guidance. Originally, I believed with 35 to 38 or 35 to 37, now we're up to 37 to 40% because we feel confident that we have now signed the contract with ocean freight, which was the wild card, and that's why we feel very strong that we're going to see a very strong year with the support of ocean freight as well as the strong dollar. Thank you very much. Thank you, Michael.

Alan Yu: The question Mark that we mentioned that last quarter was the ocean freight.

Alan Yu: We're not sure uncertain, how the ocean freight is going to play out, but it actually it will actually play out pretty well that ocean freight did not increase significantly.

Alan Yu: Next year contract. So that's why we're more confident in terms of raising our full year gross margin guidance.

Alan Yu: Originally I believe was 35% to $38 35 to 37 hour upping to 37% to 40% because we feel confident that we signed now that we have signed a contract with ocean freight which was the wildcard and that's why we feel very strong that we're going to see a very strong year with.

Alan Yu: With the support of Ocean freight as well as strong dollar.

Alan Yu: Okay.

Speaker Change: I'll leave it at that.

Speaker Change: Very much thank you Michael.

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

Alan Yu: Your next question comes from the line of Ryan Meyers with Lake Street Capital markets. Your line is open.

Ryan Robert Meyers: Hey guys, thank you for taking my questions. Just kind of as a follow-up to the last question, I just want to make sure I understand it clearly. So it sounds like you priced through the low, or sorry, you went through the lower priced inventory this quarter. So pricing shouldn't be a headwind for the remainder of the year. Okay. I got it. That's helpful. And then, you know, if we think about the eco-friendly business, it came in at 6% growth for the quarter.

Ryan Robert Meyers: Hey, guys. Thank you for taking my questions just kind of as a follow up is the last question I just wanted to make sure I understand it clearly so it sounds like your price through the law sorry, you went to the lower price inventory this quarter, so pricing shouldnt be a headwind for the remainder of the year.

Speaker Change: That is correct.

Speaker Change: Okay got it that's helpful.

Ryan Robert Meyers: And then if we think about the eco friendly business came in at 6% growth for the quarter I know that business has kind of been trading in the double digit growth rate there.

Ryan Robert Meyers: I know that business has kind of been treading in double-digit growth right there. You know, is there anything to call out about what you guys saw in the quarter for eco-friendly, or is that just kind of related to the pricing as well?

Ryan Robert Meyers: Is there anything to call out about what you guys saw in the quarter for eco friendly or is that just kind of related to the pricing as well.

Alan Yu: Well, we did see a demand pick up for eco-friendly products. We saw more and more cities actually enforcing compostable products and making them even stricter. The state of Washington is imposing that to be able to not confuse the consumer. Starting in July, they want every composable plastic item to have some type of green on it, or like the lids, so that they can see it specifically; it's different than the regular PET non-composable lids.

Speaker Change: Well, we did see demand picking up equal for any product.

Alan Yu: We saw more and more.

Alan Yu: City actually.

Alan Yu: Enforcing.

Alan Yu: Can postal product and making it even stricter.

Alan Yu: I'd like to state of Washington is imposing that.

Alan Yu: To be able to not confuse the consumer date, starting July they want every compulsive all plastic items to have some type of green item on it or it like the list chips. So that they can see it specifically it's different than the regular P. T <unk> and we're seeing that there's a there's new law.

Alan Yu: And we're seeing that there are new laws on the paper shopping bag, that basically U.S. commerce is increasing tariffs on all the imports from overseas, which definitely will raise the price for U.S. domestic users starting, I would say, as early as August or September. Once everyone depletes their inventory, the price can go up as much as 30, 40 percent on the paper shopping bag. So there are these new laws in different states and cities; it's actually creating a higher demand in terms of compostable products.

Alan Yu: On the paperback shopping back that basically that U S. Commerce is it's inc. Increasing tariffs on all the imports from overseas, which definitely will raise the price for U S domestic user.

Alan Yu: Starting I would say as early as August September once to everyone deplete their inventory the price can go up as much as 30%, 40% on the paper shopping back. So there's just these new laws in different states and cities is actually creating a higher demand in terms of couples or product.

Alan Yu: And we're seeing more people moving away from just regular plastic into composable, regular styrofoam and also other items. I would say that those manufacturers that continue to sell styrofoam are really seeing a drop in volume.

Alan Yu: We're seeing more people moving away from just regular plastic into composed of all regular styrofoam into plastic and also other items. So I will say that those manufacturer that's continued to sell styrofoam, it's really seeing.

Alan Yu: Really are dropping volume wise.

Ryan Robert Meyers: Okay, got it. That makes sense. And if we think about the eight to 15% top line guidance for the year, just kind of want to get a good understanding of, you know, what needs to happen or what needs to come into the model for you guys to hit the higher end of that.

Speaker Change: Okay got it that makes sense and then if we think about the 8% to 15% topline guidance for the year, just kind of wanted to get a good understanding of what needs to happen or what needs to come into the model for you guys to hit the higher end of that range.

Alan Yu: Well, if we were to just do organic growth, we're looking at the 8% range. The reason we're saying that is because last year, our third and fourth quarter, we were not as strong as we have today. We didn't have as much pipeline that we have today. And all the pipeline that we have is currently with the national chain account with the supermarkets, those are actually turning into revenues, and we're seeing them in the third and fourth quarters.

Ryan Robert Meyers: Well, if we were to just do organic growth. We're looking at the 8% range are the reason, we're saying that because last year, our third and fourth quarter. We were not as strong as we had that we didn't have as much pipeline that we have today and all the pipeline that we have is currently what the national chain account with supermarket those are.

Alan Yu: Turning into revenues and we're seeing them into third and fourth quarters that will help us to the 8%, 10% gross margin and also we are aggressively.

Alan Yu: That will help us to achieve the eighth and 10% growth margin. And also, we are aggressively in conversation with several different companies potential partners or acquisitions that we're hopeful that by the end of this year, the third quarter, we should be able to have some results in terms of what acquisition or what partnership that we may have by the third quarter of this year, and that will help us to reach the double digit mark by the end of this year. As I mentioned earlier, Okay.

Alan Yu: Actually in conversation with several different companies potentials that you partner or acquisition.

Alan Yu: That we're hopeful that by the end of this year what quarter, we should be able to have some results in terms of.

Alan Yu: Acquisition or partnership that we may have by third quarter of this year and that would help us Judy to the double digit mark by the end of this year as.

Alan Yu: As I mentioned earlier, Okay got it.

Ryan Robert Meyers: Okay, sure. Well, that's helpful. Thank you for taking the time to answer my questions.

Speaker Change: Okay. That's helpful. Thank you for taking my questions no problem. Thank you Ryan.

Operator: No problem. Thank you, Ryan.

Michael Edward Hoffman: And your next question comes from the line of Ryan Merkel with William Blair. Your line is open. Thank you.

Operator: And your next question comes from the line of Ryan Merkel with William Blair. Your line is open.

Michael Edward Hoffman: Hey guys, this is Mike Francis on for Ryan. Thanks for taking my questions, and first, a little follow-up on the last question regarding the M&A. Was that 8 to 15 percent at the end of 4Q that you gave, was that also inclusive of the M&A?

Michael Edward Hoffman: Hey, guys. This is Mike <unk> on for Brian. Thanks for taking my questions first a little follow up on the last question with regarding the M&A.

Speaker Change: Was that <unk> or <unk>.

Michael Edward Hoffman: 15% at the end of <unk> that you gave was that also inclusive of the M&A.

Alan Yu: If we do not include any M&A, that would be in the range of 8 to 10%. If we include the M&A, that would be in the range of 10 to 15%.

Michael Edward Hoffman: If we do not include any M&A that would be the range of 8% to 10%. If we exclude or include the M&A that would be in the range of 10% to 50% yes.

Michael Edward Hoffman: Okay, perfect. Thank you. And then next for me, you talked about the distribution of this area being a little weaker. Can you give a little more color around that? Is it just sort of market softness, or is there anything I'm happy with any of the players there?

Speaker Change: Okay perfect. Thank you.

Michael Edward Hoffman: And then next from me you talked about the distribution.

Michael Edward Hoffman: <unk> being a little weaker can you give a little more color around that.

Michael Edward Hoffman: Is it just sort of market softness or is there anything happening with any of the players there.

Michael Edward Hoffman: Well.

Alan Yu: We have been seeing the California, West Coast market drop. The overall environment in California, especially for the mom and pop, smaller restaurant chains, we're seeing declining sales. Not only that, but we're seeing closures. One of my favorite restaurants that I've been going to for the past 25 years, they announced that they were shutting down on April 30th. And we're seeing more and more restaurants shutting down in California because of an increase in the minimum wage. And it's hard to find laborers in California, especially hard to find people that want to work in the kitchen.

Michael Edward Hoffman: We have been seeing Cal.

Alan Yu: California West coast market, dropping the overall environment in California, especially for the mom and Pops smaller.

Alan Yu: Restaurant chains are there, we're seeing declining sales not only that we're seeing closures.

Alan Yu: One of my favorite restaurant.

Alan Yu: I've been going for the past 25 years, they should they announced shutting shutting down April 30th and we're seeing more and more restaurant shutting down in California because of the increase in minimum wage in and it's hard to find labors in California, especially hard to find people that want to work in the kitchen.

Alan Yu: We're still seeing that, but we see a little bit now that the drop was only a single digit versus double digits in the past quarters for California. So that's where we're seeing a softness. And also, we're seeing – this is across the board from all of our competitors and distributors, that they're saying the same thing as well. But we're seeing strong growth in online as well as potentially stronger growth for the national chain account. And also in the Midwest and East Coast; that's where we're focusing on that part for that.

Alan Yu: We're still seeing that we see a little bit.

Alan Yu: Better now that.

Alan Yu: The drop was only a single digit versus double digit in the past quarters for California.

Alan Yu: So that's where we're seeing a softness and also we're seeing a this is across the board from all of the all of our competitors in distribution that they're saying the same thing as well, although we're seeing a strong growth in online as well as potentially a stronger growth for the national chain account.

Alan Yu: That's what we're and also in Midwest and East Coast, That's why we're focusing on that part.

Alan Yu: For that.

Michael Edward Hoffman: Is there any sort of target capital allocation we should think about longer term, maybe like a percent of operating cash flow or anything like that?

Alan Yu: Okay.

Speaker Change: Last one for me you guys.

Michael Edward Hoffman: The dividend again is there any sort of target capital allocation, we should think about longer term, maybe like a percent of operating cash flow or anything like that.

Michael Edward Hoffman: Currently where we have we're sitting on some cash that we actually put out.

Michael Edward Hoffman: Deposit for income would actually generate income and of course, we're increasing.

Michael Edward Hoffman: Increasing our dividend because we were our cash flow continued to increase because our operations pretty strong and we're not we don't have any debt on that and that's why we're looking at merchant acquisition.

Alan Yu: If we were to successfully complete two acquisitions by the end of this year, that should deplete our cash, pretty much take out some of our cash. I wouldn't say deplete all of our cash because we're still generating more cash every quarter. I would say that we're still in a healthy cash flow position on that part. We are looking at acquisition targets definitely not to exceed what we have in cash on hand.

Michael Edward Hoffman: If we were to successfully complete a to.

Alan Yu: Two acquisition by the end of this year that should deplete our cash pretty much take some of our cash I would say to play are all of our cash because we were still generating more cash every quarters.

Alan Yu: I would say that were still open there is healthy capture position that par. We we are looking at acquisition targets definitely not to exceed what we have on hand and cash on hand.

Michael Edward Hoffman: Okay. I hope you can find a new replacement restroom. It's too bad. I'll pass it on.

Alan Yu: Okay.

Alan Yu: I hope you can find a new replacement restaurants too bad.

Speaker Change: I'll pass it on alright, Thank you Ryan.

Michael Edward Hoffman: That concludes our Q&A session I will now turn the conference back over to Alan <unk> for closing remarks.

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

Speaker Change: Thank you everyone for joining our first quarter 2020 for earning conference call and I wasn't again says thank you very much and we'll talk to you next time bye bye.

Alan Yu: Thank you, everyone, for joining us on the Karat First Quarter 2024 Earnings Conference Call. And I want to again say thank you very much, and we'll talk to you next time. Bye-bye. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Alan Yu: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.

Operator: Thanks for watching!

Alan Yu: [music].

Operator: Okay.

Operator: [music].