Q2 2024 Karat Packaging Inc Earnings Call

Operator: Question in another 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. Thank you.

You would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

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Operator: If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Roger Frandel, Investor Relations. Please go ahead.

Roger Pondel: I would now like to turn the call over to Roger Fondel, Investor Relation. Please go ahead.

Speaker Change: I would now like to turn the call over to God Your friend Investor Relations. Please go ahead.

Roger Pondel: Thank you, operator.

Roger Pondel: Thank you, Operator, and good afternoon, everyone, and welcome to Karat Packaging's 2024 second quarter conference call. I'm Roger Pondel with Pondel Wilkinson, Karat Packaging's Investor Relations. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and his Chief Financial Officer, Jian Guo. Before I turn this 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 Format of 1995, and such forward-looking fitness are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factor section of the company'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.

Gauri: Thank you operator, and good afternoon, everyone and welcome to tier.

Roger Pondel: Good afternoon, everyone, and welcome to Parrot Packaging's 2024 second quarter conference call. I'm Roger Pondel with Pondel Wilkinson, Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and his Chief Financial Officer, Jian Guo.

2024 second quarter conference call, Roger Pinedale with Pinedale Wilkinson packaging.

Gauri: Relationship.

Speaker Change: It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan you as Chief Financial Officer, Jeremy Scott.

Roger Pondel: Before I turn this 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. You can search forward-looking statements or subject to numerous conditions, any of which are beyond the company's control, including those set forth in the risk factor section of the company's most recent forms, NK, 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. Actual results good different materially from this forward-looking statements.

Roger Pondel: However, actual results could differ materially from these forward-looking statements. Karat Packaging undertakes no obligation to update any forward-looking statements, except, excuse me, as required by law. Please also note that during this 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. The 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, I will turn the call over to CEO Alan Yu. Alan

Speaker Change: Before I turn this call over to Alan.

Speaker Change: 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.

Speaker Change: Such forward looking statements are subject to numerous conditions, many of which are beyond the company's control.

Speaker Change: Including those set forth in the risk factors section of the <unk>.

Speaker Change: Company's most recent Form 10-K.

Speaker Change: As filed with Securities and Exchange Commission copies of which are available on the Sec's website.

Speaker Change: Www Dot FCC dot Gov, well with other company's filings made with the SEC.

Speaker Change: Actual results could differ materially from these forward looking statements.

Roger Pondel: The carrot packaging undertakes no obligation to update any forward-looking statements, except, excuse me, as required by law.

Speaker Change: Packaging undertakes no obligation to update any forward looking statements.

Speaker Change: Excuse me as required by law.

Roger Pondel: Please also note that during this 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.

Speaker Change: Please also note that during this 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.

Roger Pondel: 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.

Alan: 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 I will turn the call over to CEO Alan you Alan.

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

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

Alan Yu: Thank you, Roger.

Alan Yu: Net sales for the 2024 second quarter grew 3.5% over the prior year period, and sales volume grew 3.2%. Our business pipeline continues to expand with the acquisition of new national and regional chain accounts. However, initiation of some new orders is taking longer than anticipated during the quarter, mainly due to administrative set-up procedures at the larger chain accounts and software demand in certain categories, which we do not expect to recur in the back end of the year.

Alan: Thank you Roger good afternoon, everyone net sales for 2024.

Alan Yu: Good afternoon, everyone. NIT sale for 2024, second quarter grew 3.5 percent over the prior year period, and sales volume grew 3.2 percent. Our business pipeline continues to expand with defining a new national and regional chain accounts. However, initiation of some new orders is taking longer than it existed during the quarter. Mainly due to administrative setup procedures at the larger chain account and software demand in certain categories, which we do not expect to recur in the back end of the year. We are pleased to see that close margin house study in the second quarter at 38.5 percent, despite pressure from significantly higher ocean freight costs that started in mid-May.

Speaker Change: Quarter grew three 5% over the prior year period and sales volume grew three 2% our business pipeline continues to expand with is finding a new national and regional chain accounts. However, initiation of some new orders is taking longer than extra stated during the quarter mainly due.

Alan: Due to administrative setup procedures at the largest chain accounts and softer demand in certain categories, which we do not expect to recur in the back end of the year.

Alan Yu: We are pleased to see that gross margin held steady in the second quarter at 38.5% despite pressure from significantly higher ocean freight costs that started in mid-May. Ocean freight rates spiked at that time when increased tariffs for certain imports goods were announced initially to take effect August 1, resulting in part to higher demand and lower capacity. Freight rates moderated somewhat in late July, which enabled us to ship more products with CARE contracted ocean freight rates that were locked in earlier this year. We expect freight rates to start to normalize after demand softens subsequent to the tariff effective date.

Alan: We are pleased to see that gross margin held steady in the second quarter at 38, 5% despite pressure from significantly higher ocean freight cost that started in mid may.

Alan Yu: Ocean freight rate spiked at that time when increased tariff for certain imports goes, where announced initially to take effect August 1st. Resulting import to higher demand and lower capacity. Freight rates moderated somewhat in late July, which enabled us to sit more product with Karat contracted ocean freight rates that were locked in earlier this year. We expect freight rates to start to normalize after the men's softens subsequent to the tariff effective dates. With better visibility into ocean freight rates, we do spend the pricing and continue the strength of the U.S. Dollar, we expect to be able to meet our full year goal for growth margin.

Alan: Ocean freight rates spike at that time when increased tariff for certain inputs guys were announced initially to take effect August one.

Alan: LTE in part to higher demand and lower capacity.

Alan: Freight rates moderated somewhat in late July, which enable us to ship more product with <unk>.

Alan: Contracted ocean freight rates that were locked in earlier this year, we expect freight rates to start to normalize after demand softness subsequent to the tariff effective dates.

Alan Yu: With better visibility into ocean freight rates, reduced vendor pricing, and the continued strength of the U.S. dollar, we expect to be able to meet our four-year goal for gross margin. Our strategic initiative from last year to establish warehouses in new geographic markets and enlarge existing warehouses is yielding positive results and is contributing to business growth across most of our sales channels, especially for our online sales. Sales for this category, which typically carries the highest margin and included a positive impact from the inclusion of online platform fees of $2.7 million in the second quarter of 2024, grew 26% in the second quarter. Sales of our eco-friendly products represented approximately 32.3% of total sales in the second quarter. Essentially, the same percentage as last year.

Alan: With better visibility into ocean freight rates reduced vendor pricing and continued strength of the U S. Dollar we expect to be able to meet our full year goal for gross margin.

Alan Yu: Our strategic initiative last year to establish warehouses in new geographic markets and enlarge existing warehouses is yielding positive results and is contributing to business growth across most of our sales channels, especially for our online sales. Sales for this category, which typically carries the highest margin and included a positive impact from the inclusion of online platform fee of 2.7 million in the second quarter of 2024, who 26% in the second quarter. Sales of our eco-friendly products represented approximately 32.3% of total sales in the second quarter. Essentially, the same percentage as last year, eco-friendly product remains a priority for Karat.

Alan: Our strategic initiatives last year to establish warehouses in new geographic markets and a large existing warehouses is yielding positive results and is it contributing to business growth across most of our sales channels, especially for online sales.

Alan: Sales for this category, which typically carries the highest margin included a positive impact from the inclusion of online platform fees of $2 7 million in the second quarter of 2024.

Alan: Grew 26% in the second quarter.

Alan: Sales of our eco friendly products represented approximately 32, 3% of total sales in the second quarter.

Alan Yu: Eco-friendly product remains a priority for Karat. We believe that there will be an increased demand for eco-friendly and composable single-use disposable products, and this should have a positive long-lasting impact on our results. We saw that the growth in eco-friendly products significantly outpaced the overall growth in July. Sales from manufactured products in the second quarter were 11% of total net sales, compared with approximately 20% last year, in keeping with our asset life strategy in the U.S. and emphasis on imported items.

Alan: Essentially the same percentage as last year.

Alan: For any product remains a priority for Karen we believe that there will be an increased demand for eco friendly and compulsory will single use disposable products and this should have a positive long lasting impact on our results. We saw that the growth in eco friendly products significantly outpaced the overall growth in July.

Alan Yu: We believe that there will be an increased demand for eco-friendly and composable single use disposable products, and this should have a positive and long lasting impact on our results. We saw that the growth in eco-friendly products significantly outpaced the overall growth in July. Sales for manufactured products in the second quarter were 11% of totalment sales, compared with approximately 20% last year, in keeping with our asset life strategy in the U.S. At emphasis on imported items. From the inventory pipeline perspective, we are positioned to support an even stronger second half of the year in 2024 compared to 2023.

Speaker Change: Sales for manufactured products in the second quarter were 11% of total net sales compared with approximately 20% last year and keeping with our asset light strategy in the U S emphasis of imported items.

Alan Yu: From the inventory pipeline perspective, we are positioned to support an even stronger second half of the year in 2024 compared to 2023. Our preliminary sales in July were up by more than 10% year-over-year, and we expect the robust year-over-year performance to continue into the end of this year. In addition, we are continuing to explore strategic acquisition opportunities to further penetrate the market.

Speaker Change: From the inventory pipeline perspective, we are positioned to support an even stronger second half of the year in 2024 compared to 2023.

Alan Yu: Our free living sales in July were up by more than 10% year over year, and we expect the robust year over year performers to continue into the end of this year. Further, we are continuing to explore strategic acquisition opportunities to further penetrate the marketplace.

Speaker Change: Preliminary sales in July were up by more than 10% year over year, and we expect a robust year over year performance to continue into the end of this year.

Speaker Change: Further we are continuing to exploring strategic acquisition opportunities to further penetrate the marketplace.

Alan Yu: Lastly, on August 6, our border directors offer a regular quarterly cash dividend payment of 35 cents per share and a special dividend of 15 cents per share.

Alan Yu: Lastly, on August 6th, our Board of Directors authorized a regular quarterly cash dividend payment of $0.35 per share and a special dividend of $0.15 per share. I will now turn this call over to Jian Guo, our Chief Financial Officer, to discuss the company's financial results in greater detail.

Speaker Change: Lastly on August six our board of directors authorized a regular quarterly cash dividend payment of 35 per share and a special dividend of <unk> 15 per share.

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

Jian Guo: Net sales for the 2024 second quarter were $112.6 million, up 3.5% from $108.7 million for the same quarter last year. As Alan mentioned earlier, our sales volume grew 3.2%.

Jan <unk>: I will now turn this call over to Jan <unk>, Our Chief financial Officer to discuss the company's financial results in greater detail Jan.

Jian Guo: Thank you, Alan. Next sales for the 2024 second quarter were $112.6 million, up 3.5% from $108.7 million for the same quarter last year. As Alan mentioned earlier, our sales volume grew 3.2% compared to the 2023 second quarter. Net sales also included the favorable impact of the inclusion of online platform fees of $2.7 million and the unfavorable year-over-year pricing compared.

Jan: Thank you Alan net sales for the 2024 second quarter, well $112 6 million up three 5%.

Speaker Change: $108 7 million for the same quarter last year.

Speaker Change: As Adam mentioned earlier, our sales volume grew three 2% compared to the 2023 second quarter. Net sales also included the favorable impact of the inclusion of online platform fees of $2 $7 million and the answer.

Jian Guo: Compared to the 2023 second quarter, net sales also included the favorable impact of the inclusion of online platform fees of $2.7 million and the unfavorable year-over-year pricing comparison. By channel, compared with a year ago, online sales for the 2024 second quarter were up 26.2%, benefiting in part from the inclusion of online platform fees discussed earlier. Sales to national and regional chains were up about 0.9%, sales to the retail channel increased 1.1%, and sales to distributors were slightly lower.

Speaker Change: Favorable year over year pricing comparison.

Jian Guo: by channel, compared with a year ago, online sales for the 2024 second quarter were up 26.2%, benefiting import from the inclusion of online platform fees discussed earlier. Sales to national and regional chains were up about 0.9%. Sales to the retail channel increased 1.1%, and sales to distributors were slightly lower. The distributor channel remains challenging, with a pricing environment still very competitive.

Speaker Change: By channel compared with a year ago online sales for the 2020 for second quarter.

Speaker Change: Up 26, 2% benefiting in part from the inclusion of online platform fees discussed earlier.

Speaker Change: Sales to national and regional chains.

Speaker Change: About 9% Dallas to the retail channel increased one 1% and sales to distributors were slightly lower the distributor channel remains challenging with the pricing environment is still very competitive.

Jian Guo: The distributor channel remains challenging, with the pricing environment still very competitive. Cost of goods sold for the 2024 second quarter was $69.2 million compared with $66.9 million in the prior year quarter. This was primarily due to increased freight and duty costs and inventory reserve adjustments, and the inclusion of certain production costs in cost of goods sold. These increases were partially offset, as the prior year quarter included write-offs of certain expired products and raw materials related to the disposal of certain machinery and equipment in executing the plan to scale back production in certain locations.

Jian Guo: Cost of goods sold for the 2024 second quarter was $69.2 million compared with $66.9 million in the prior year quarter. The increase was primarily due to increased freight and beauty costs, and inventory reserve adjustment, and inclusion of certain production costs in cost of goods sold. These increases were partially offset as the prior year quarter included write-offs of certain expired products and raw materials related to the disposal of certain machinery and equipment in executing the plan to scale back production in certain locations. Gross profit for the 2024 second quarter was $43.4 million versus $41.9 million in last year.

Speaker Change: Cost of goods sold for the 2024 second quarter was $69 2 million compared with $66 $9 million in the prior year quarter. The increase was primarily due to increased freight and duty cost.

Speaker Change: And inventory reserve adjustment.

Speaker Change: And the inclusion of certain production costs in cost of goods sold.

Speaker Change: These increases were partially offset.

Speaker Change: As the prior year quarter included write offs of certain expired products and raw materials related to the disposal of certain machinery and equipment.

Speaker Change: Executing the plan to scale back production in certain locations.

Jian Guo: Gross profit for the 2024 second quarter was $43.4 million versus $41.9 million in last year. Gross margin was 38.5%, same as the prior year quarter. Gross margin for the 2024 second quarter was impacted by higher inventory reserve adjustment and an increase in freight and duty costs, which as a percentage of net sales increased to 8.6% from 6.2% in the prior year quarter. At the same time, gross margin for the 2024 second quarter benefited from the adjustments to net sales related to online platform fees and cost of goods sold related to production expenses, as discussed earlier, and lower vendor pricing and increased imports as a percentage of total product mix, resulting in a decrease in product cost as a percentage of net sales. Gross margin in the 2023 second quarter included a negative impact of 160 basis points from the write-off of certain raw materials Operating expenses in the current quarter included an online sales platform fee, higher rent and warehouse expense, an increase in marketing expense for online sales, and higher self-based compensation expense.

Speaker Change: Gross profit for the 2024 second quarter was $43 $4 million versus $41 9 million in last year.

Operator: Such increases were partially offset by a decrease in impairment expense and loss on disposal of machinery, as the 2023 second quarter included $2.5 million of impairment expense and loss on disposal of machinery, primarily due to executing the plan to scale back production in certain locations. Net income for the 2024 second quarter was $9.2 million compared with $10.7 million in the prior year quarter. Net income margin was 8.2% in the 2024 second quarter compared with 9.8% in the prior year quarter.

Jian Guo: Gross margin was 38.5%, same as the prior year quarter. Gross margin for the 2024 second quarter was impacted by higher inventory reserve adjustment and increased freight and beauty costs, which, as a percentage of net sales, increased to 8.6% from 6.2% in the prior year quarter. At the same time, gross margin for the 2024 second quarter benefited from the adjustments to net sales related to online platform fees and cost of goods sold related to production expenses, as discussed earlier. A lower vendor pricing and increased import as a percentage of total product mix, resulting in a decrease in product cost as a percentage of net sales.

Operator: Net income attributable to Karat for the 2024 second quarter was $9.1 million or $0.45 per diluted share compared with $10.5 million or $0.53 per diluted share last year. Adjusted EBITDA, a non-debt measure, in the 2024 second quarter was $15.7 million versus $21.1 million in the prior year; adjusted EBITDA margin was 13.9% in the 2024 second quarter versus 19.4% in the prior year quarter; adjusted diluted earnings per common share was 49 cents per share in the 2024 second quarter compared with 69 cents per share a year ago.

Speaker Change: Gross margin was 38, 5% same as the prior year quarter gross margin for the 2024 second quarter was impacted by higher inventory reserve adjustment and an increase in freight and duty costs, which as a percentage of net sales.

Speaker Change: <unk> increased.

Speaker Change: Eight 6% from six 2% in the prior year quarter.

Speaker Change: At the same time gross margin for the 2024 second quarter benefited from the adjustments to net sales related to online platform fees.

Speaker Change: Cost of goods.

Speaker Change: Related production expenses as discussed earlier.

Speaker Change: And lower vendor pricing and increased imports.

Speaker Change: <unk> of total product mix, resulting in a decrease in product cost as a percentage of net sales.

Jian Guo: Gross margin in the 2023 second quarter included a negative impact of 160 basis points from the write-offs of certain raw material as we executed the plan to scale back production in certain locations, which we discussed earlier.

Speaker Change: Gross margin in the 2023 second quarter included a negative impact of 160 basis points from the write off of certain raw material as we executed the plan to scale back production in certain locations, which we discussed earlier.

Jian Guo: Operating expenses in the 2024 second quarter were $32.3 million, or 28.7% of net sales, compared with $28.5 million, or 26.2% of net sales, in the prior year quarter. of creating expenses in the current quarter included online sales, platform fee, higher rent and warehouse expense, an increase in marketing expense for online sales, and higher self-based compensation expenses. Such increases will partially offset by a decrease in impairment expense and loss on disposal of machinery, as the 2020-32nd quarter included $2.5 million of impairment expense and loss on disposal of machinery primarily due to executing the plan to scale back production in certain locations.

Speaker Change: Operating expenses in the 2024 second quarter or $32 3 million or 28, 7% of net sales compared with $28 $5 million or 26, 2% of net sales in the prior year quarter.

Speaker Change: Operating expenses in the current quarter included online sales platform fees.

Speaker Change: Higher rent and warehouse expense and increase in marketing expense for online sales and higher stock based compensation expenses.

Speaker Change: Such increases were partially offset by a decrease in impairment expense and loss on disposal of machinery.

Speaker Change: The 2023 second quarter included $2 $5 million of impairment expense and loss on disposal of machinery, primarily due to executing the plan to scale back production in certain locations.

Jian Guo: Net income for the 2020-24nd quarter was $9.2 million compared with $10.7 million in the prior year quarter. Net income margin was 8.2% in the 2020-24nd quarter compared with 9.8% in the prior year quarter. Net income actually built to Karat for the 2020-24nd quarter was $9.1 million, or 45 cents per diluted share compared with $10.5 million of 53 cents per diluted share last year.

Speaker Change: Net income for the 2024 second quarter with $9 $2 million compared with $10 $7 million.

Speaker Change: In the prior year quarter.

Speaker Change: Net income margin was eight 2% in the 2024 second quarter compared with nine 8% in the prior year quarter.

Operator: Question in another 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.

Speaker Change: Net income attributable to carrot for the 2024 second quarter with $9 $1 million, all 45 per diluted share compared with $10 5 million or 53 per diluted share last year.

Operator: Thank you.

Jian Guo: Adjusted EBITDA, a non-get measure in the 2020-24nd quarter, was $15.7 million versus $21.1 million in the prior year. Adjusted EBITDA margin was 13.9% in the 2020-24nd quarter versus 19.4% in the prior year quarter. Adjusted diluted earnings per common share was 49 cents per share in the 2020-24nd quarter compared with 69 cents per share a year ago.

Speaker Change: Adjusted EBITDA.

Speaker Change: non-GAAP measure in the 2024 second quarter with $15 $7 million versus $21 $1 million in the prior year. Adjusted EBITDA margin was 13, 9% in the 2024 second quarter versus 19, 4%.

Roger Pondel: I would now like to turn the call over to Roger Fondel, investor relation. Please go ahead.

Roger Pondel: Thank you operator. Good afternoon everyone and welcome to Parrot Packaging's 2024 second quarter conference call.

Roger Pondel: I'm Roger Pondel with Pondel Wilkinson, Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's chief executive officer, Alan Yu, and his chief financial officer, Jian Guo. Before I turn this 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 Security's litigation format of 1995. You can search forward-looking statements or subject to numerous conditions, any of which are beyond the company's control, including those set forth in the risk factor section of the company's most recent forms, NK, as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.suc.gov, along with other company filings made with the SEC from time to time.

Speaker Change: <unk> in the prior year quarter.

Speaker Change: Adjusted diluted earnings per common share was 49 per share in the 2024 second quarter compared with 69 per share a year ago.

Jian Guo: The second quarter ended with $114.2 million in working capital compared with $110.5 million at the end of 2023. As of June 30th, 2024, we have financial liquidity of $55.5 million with another $32.7 million in short term investments.

Operator: The second quarter ended with $114.2 million in working capital, compared with $110.5 million at the end of 2023. As of June 30, 2024, we have financial liquidity of $55.5 million, and with another $32.7 million in short-term investment, we expect net sales for the 2024 third quarter to increase by mid to high single digits over the prior year quarter. Our gross margin goal for the 2024 third quarter is approximately 38 to 39 percent.

Speaker Change: The second quarter ended with $114 $2 million in working capital compared with $110 $5 million at the end of 2023.

Speaker Change: June 32024, we have financial liquidity of $55 $5 million with another $32 7 million in short term investments.

Roger Pondel: Actual results good different materially from this forward-looking statements. The carrot packaging undertakes no obligation to update any forward-looking statements, except excuse me, as required by law. Please also note that this during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, and adjusted diluted earnings per share, which are non-gap financial measures, as defined by SEC regulation G.

Jian Guo: We expect net sales for the 2020-24th third quarter to increase by net to high single digits over the prior year quarter. Our close margin goal for the 2020-24th third quarter is approximately 38 to 39%. For the 4 2020-24 year, we expect net sales to grow mid-single digits and close margin to be in a range of 38 to 40%.

Speaker Change: We expect net sales for the 2024 third quarter to increase by mid to high single digits over the prior year quarter. Our gross margin goal for the 2020 for third quarter is approximately 38, 39% for the for 2024.

Speaker Change: We expect net sales to grow mid single digits and gross margin to be in the range of 38% to 40%.

Operator: For the fall 2024 year, we expect net sales to grow by mid single digits and gross margin to be in a range of 38 to 40 percent. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

Jian Guo: Allen and I will now be happy to answer your questions, and I'll turn a call back to the operator. Thank you.

Roger Pondel: 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.

Speaker Change: Alan and I will now be happy to answer your questions and I will 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, simply press star 1 again. If you are called upon to ask your question and are listening via a loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Ryan Merkel with William Blair. Please go ahead. Great, thanks for taking the question.

Speaker Change: Thank you you can now begin the question and answer session.

Operator: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press TAR 1 on your telephone key. By choice, your hand and join the queue. If you would like to withdraw your question, please press TAR 1 again.

Alan Yu: And with that, I will turn the call over to CEO Alan New. Alan? Thank you, Roger. Good afternoon, everyone. NIT Sale for 2024, second quarter grew 3.5 percent over the prior year period, and sales volume grew 3.2 percent. Our business pipeline continues to expand with defining a new national and regional chain accounts. However, initiation of some new orders is taking longer than it existed during the quarter. Mainly due to administrative setup procedures at the larger chain account and software demand in certain categories, which we do not expect to recur in the back end of the year.

Speaker Change: If you have dialed in and would like to ask a question. Please press star one on your telephone keypad, Judy and join the queue. Thank.

Speaker Change: She would like to withdraw your question simply press Star one again.

Operator: If you are called upon to ask your question in a reasoning via loudspeaker on your device, please pick up your handset and ensure that your phone is not on midland. Asking your question.

Speaker Change: If you are called upon to ask quick question and I'll be sending by a lot okay.

Speaker Change: Goodbye.

Speaker Change: Yup your handset and ensure that your phone is not on mute when asking your question.

Ryan Merkel: The first question comes from the line of Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel: Great, thanks for taking the questions. First off, Alan, why was the change in sales growth lower for 24? Is the big issue the new business taking longer? Or are there also macro pressures with maybe restaurant traffic also weighing on the change?

Speaker Change: First question comes from the line of.

Speaker Change: Ryan Merkel with William Blair. Please go ahead.

Ryan Merkel: Great, thanks for taking the questions. First off, Alan, why did change in sales growth lower for 24? Is the big issue the new business taking longer, or are there also macro pressures with maybe restaurant traffic also weighing on the change?

Alan Yu: or what are we referring to? Because my understanding is that our sales for 2024 are actually going to be higher than 2023. And we have been considering, continuously reiterating overall growth of 7% to 15% total. That's where we are seeing. And if we were having a merger and acquisition, it would be a 15% higher range of the estimate. Without the acquisition, it would be at the lower range of the estimate. So I don't believe that, Jian, can you? Did we change our sales guidance lower?

Ryan Merkel: Great. Thanks for taking the questions first off Alan why the change in sales growth lower for 'twenty. Four is the big issue the new the new business, taking longer or are there are some macro pressures with maybe restaurant traffic also weighing on.

Alan Yu: We are pleased to see that close margin house study in the second quarter at 38.5 percent, despite pressure from significantly higher ocean freight costs that started in mid-May. Ocean freight rate spiked at that time when increased tariff for certain imports goes, where announced initially to take effect August 1st. Resulting import to higher demand and lower capacity. Freight Rates moderated somewhat in late July, which enabled us to sit more product with Karat contracted ocean freight rates that were locked in earlier this year.

Speaker Change: The change there.

Alan Yu: Or what are we referring to because to what my understanding is that our sales for 2024 is actually going to be higher than 2023 and we have been considered a continuation that we iterating overall growth of 7 to 15% total. That's that's where we're seeing. And if we were having a merger in acquisition, it would be 15% the pocketing higher range of the estimate. Without the acquisition, it will be the lower range of the estimate.

Speaker Change: Or what are we referring to because.

Speaker Change: My understanding is that our sales for 2024 is actually going to be higher than 2023, and we have been considering continuous re underwriting overall growth of 7% to 15% total.

Speaker Change: That's where we're seeing and if we were having a merger and acquisition it would be 15% of the partnering higher range I E.

Alan Yu: We expect freight rates to start to normalize after the men's softens subsequent to the tariff effective dates. With better visibility into ocean freight rates, we do spend the pricing and continue the strength of the U.S, dollar, we expect to be able to meet our full year goal for growth margin. Our strategic initiative last year to establish warehouses in new geographic markets and enlarge existing warehouses is yielding positive results and is contributing to business growth across most of our sales channels, especially for our online sales.

Speaker Change: The estimate without the acquisition it will be at the lower range of the estimate so I don't believe that.

Alan Yu: So, I don't believe that, Jian. Can you, do we change ourselves guidance lower? So, the sales guidance for the four year of 2024, for right now, we are expecting mid to high single digit for the third quarter for 2024. On the four year basis, we're expecting mid single digit from the prior year. Okay. Yeah.

Speaker Change: <unk> do we change our sales guidance malware.

Speaker Change: So.

Jian Guo: So, um... The sales guidance for the full year of 2024, for right now, we are expecting mid to high single digits for the third quarter of 2024. On a four-year basis, we're expecting mid-single digits from the prior year.

Speaker Change: The sales guidance for the full year of 2024 foot right now we are expecting mid to high single digit.

Alan Yu: Sales for this category, which typically carries the highest margin and included a positive impact from the inclusion of online platform fee of 2.7 million in the second quarter of 2024, who 26% in the second quarter, sales of our eco-friendly products represented approximately 32.3% of total sales in the second quarter. Essentially, the same percentage at last year, eco-friendly product remains a priority for Karat. We believe that there will be an increased demand for eco-friendly and composable single use disposable products and this should have a positive and long lasting impact on our results.

Speaker Change: Yes.

Speaker Change: For the third quarter for 2024 on a full year basis, we're expecting mid single digits from the prior year.

Alan Yu: Okay. Yeah. And Alan, you cut out when you started answering the question.

Speaker Change: Okay. Okay.

Alan Yu: And Alan, you cut out when you started answering the question. I thought the prior guide, correct me if I'm wrong, I thought it was up 8 to 15%. I think that included M&A. So, you're going from 8 to 15 for the four year, 24 to now mid single digits. That's kind of a big change. Yeah. Correct. Well, I believe that, like Jen mentioned earlier, we were expecting somebody's chain account to hit it earlier versus later. So, right now, we're still pushing for the chain to move faster in terms of converting into our product. But right now, at this time, I believe Jen is being very conservative in terms of making sure that we can meet our guidance on that court.

Speaker Change: And Alan you cut out when you started answering the question I thought the prior guide and correct me if I'm wrong I thought it was up 8% to 15% I think that included M&A.

Ryan Merkel: I thought the prior guide, correct me if I'm wrong, I thought it was up 8 to 15%. I think that included M&A. So you're going from 8 to 15 for the full year 24 to now up mid-single digit. That's where I'm making a big change.

Speaker Change: 8% to 15 for the full year 'twenty, four and now mid single digits.

Speaker Change: That's a big change.

Alan Yu: Correct. Well, I believe that, like Jian mentioned earlier, we were expecting some of the chain accounts to hit it earlier versus later. So right now, we're still pushing for the chain to move faster in terms of converting into our product. But right now, at this time, I believe Jian is being very conservative in terms of making sure that we can meet our guidance on that part.

Speaker Change: Correct.

Speaker Change: I believe that John mentioned earlier, we weren't expecting somebody chain account to hit it earlier.

Alan Yu: We saw that the growth in eco-friendly product significantly outpaced the overall growth in July. Sales for manufactured products in the second quarter were 11% of totalment sales, compared with approximately 20% last year, in keeping with our asset life strategy in the U.S, at emphasis on imported items. From the inventory pipeline perspective, we are positioned to support an even stronger second half of the year in 2024 compared to 2023. Our free living sales in July were up by more than 10% year over year, and we expect the robust year over year performers to continue into the end of this year. Further, we are continuing to exploring strategic acquisition opportunities to further penetrate the marketplace.

Speaker Change: Versus later, so right now we're still pushing for the change to move faster in terms of converting.

Speaker Change: Into our <unk>.

Speaker Change: But right now at this time.

Speaker Change: <unk> churn as well.

Speaker Change: Conservative in terms of making sure that we can meet our guidance on that part.

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

Alan Yu: Got it. Okay.

Speaker Change: Got it okay.

Alan Yu: And then Alan, you mentioned July was stronger. And I think you mentioned you thought that would continue. Can you just reiterate those comments?

Alan: And then Alan you mentioned July was stronger than I think you mentioned you thought that would continue could you just reiterate those comments was that a total business comment or is that specific to online or eco friendly I'm, sorry, I just missed it.

Alan Yu: Was that a total business comment, or is that specific to online or eco friendly? I'm sorry, I just missed it. Yes, July, I believe we're seeing double-digit growth and revenue-wise. So you'll be a comparison cop and it's not basically all sex, all segment that we're seeing chain accounts are hitting a later ladder part of July. Our bubble tea supplies is growing online is actually going very strong. And online is basically we're seeing a, I believe Jen, we've mentioned about this quarter was 17% year-over-year growth online. And last quarter, I mentioned that our goal for this year was $70 million on revenue. Right now, I'm actually pushing for $80 million revenue.

Alan Yu: Yes, July, I believe we're seeing double-digit growth in revenue-wise, so over your comparison comp, and it's not – basically, it's all segments that we're seeing. Chain accounts are hitting a later – latter part of July.

Alan: Yes July I believe we're seeing double digit growth in revenue wise, so year over year comparison comp and it's not basically all sectors. All segment that were seeing chain accounts.

Speaker Change: Our hitting later latter part of July our bubble tea supply is growing our online is actually growing very strong and all line is basically we're seeing.

Alan Yu: Lastly, on August 6, our border directors offer a regular quarterly cash dividend payment of 35 cents per share and a special dividend of 15 cents per share.

Alan Yu: Our bubble tea supply is growing. Online is actually growing very strong, and online is basically – we're seeing a – I believe, Jen, we mentioned this quarter was 17 percent year-over-year growth online, and last quarter, I mentioned that our goal for this year was $70 million in revenue. Right now, I'm actually pushing for an $80 million revenue goal. So, our second part of 2024, we're seeing a strong push into online, and how we're about to do that is we added additional staffing to put more items into Amazon FBA and also added – added a new feature on our Shopify, our lollipopstore.com, that customers can buy volume and get volume discounts on that part.

Gen: Believe Gen we mentioned about.

Jian Guo: I will now turn this call over to Jan Guau, our chief financial officer, to discuss the company financial result in greater detail. Jan? Thank you, Alan. Next sales for the 2024 second quarter were $112.6 million, up 3.5% from $108.7 million for the same quarter last year. As Alan mentioned earlier, our sales volume grew 3.2%, compared to the 2023 second quarter, net sales also included the favorable impact of the inclusion of online platform fees of $2.7 million and the unfavorable year-over-year pricing compared, by channel, compared with a year ago, online sales for the 2024 second quarter were up 26.2% benefiting import from the inclusion of online platform fees discussed earlier.

Gen: This quarter was 17% year over year growth online and.

Speaker Change: Last quarter I mentioned that our goal for this year was $70 million all of that revenue right now actually pushing for $80 million revenue calls. So our second part of the 2024, we're seeing a strong push into online and how are we about to do that as we add additional staffing into putting.

Alan Yu: So our second part of the 2024 we're seeing a strong push into online and how we're about to do that is we added additional staffing into putting more items into Amazon FBA and and also putting changing adding a new feature on our Shopify are allowing a lot of sort of calm that customer can buy volume and give volume discount on that part. So, we foresee that basically our online sell very likely to be over 20% year over year growth. So, up up from $70 million, initially we projected to almost $80 million. That is our goal for online sale by the end of this year.

Gen: More items into Amazon FBA, and and also putting the change you're adding a new feature on large shopify like.

Gen: Lollipops for Dot com that customer can buy volume volume discount on that part so we foresee that basically our lifestyle.

Alan Yu: So we foresee that basically our online sale is very likely to be over 20 percent year-over-year growth. So up from $70 million initially, we projected to almost $80 million. That is our goal for online sales by the end of this year.

Gen: Very likely to be over 20% year over year growth. So.

Ryan Merkel: Got it. Okay.

Gen: Up from $70 million initially we projected to almost $80 million that is our goal for <unk> by the end of this year.

Alan Yu: here. Got it. Okay. That's very encouraging. Thank you.

Ryan Merkel: That's very encouraging. Thank you. I'll pass it on.

Speaker Change: Got it okay. That's very encouraging thank you I'll pass it on.

Ryan Merkel: I'll pass it on. Okay. Thank you, really.

Alan Yu: Okay. Thank you, everyone.

Randy: Okay. Thank you Randy.

Operator: And your next question comes from the line of Jake Bartlett with Schuster.

Jake Bartlett: And your next question comes from the line of Jake Bartlett, which is: please go ahead. Great.

Scott Wine: Thank you. Our next question comes from the line of Scott wine.

Speaker Change: Please go ahead.

Jian Guo: Sales to national and regional chains were up about 0.9%. Sales to the retail channel increased 1.1%, and sales to distributors were slightly lower. The distributor channel remains challenging with a pricing environment still very competitive. Cost of goods sold for the 2024 second quarter was $69.2 million compared with $66.9 million in the prior year quarter. The increase was primarily due to increased freight and beauty costs and inventory reserve adjustment and inclusion of certain production costs in cost of goods sold.

Jake Bartlett: Great, thanks for taking the questions. You know, my first question was just a follow up on the last comment, Alan. You mentioned July being up 10%. But, you know, the guidance for the quarter is mid to high single digits, so implying a deceleration. Is that just being conservative? Or is there something coming down the pike in the next two months that you think would be decreasing the sales growth from the July level?

Scott Wine: Great. Thanks for taking my questions. My first is just a follow up on the last comment Alan you mentioned July being up 10%, but the <unk>.

Jake Bartlett: Thanks for taking the questions. You know, my first was just a follow-up on the last, you know, comment. Alan, you mentioned July being up 10%, but you know the guidance for the quarter is mid to high single digits.

Speaker Change: <unk> for the quarter is mid to high single digits. So.

Alan Yu: So, implying a desaleration, is that just being conservative or is there something coming down the pike in the next two months that you think would be decreasing the sales growth from the July level? We're trying to be conservative, basically. But, like I said, the business overall is very encouraging. We see the business growing. And we want to make sure that we're able to hit that number; that's one, everything. Okay.

Speaker Change: Paying a deceleration is that just being conservative or is there something coming down the pike in the next two months.

Speaker Change: That you think would be decreasing the sales growth from the July levels.

Alan Yu: We're trying to be conservative, basically, but like I said, the business overall is very encouraging. We see the business growing, and we want to make sure that we're able to hit that number. That's one of our goals.

Speaker Change: What we're trying to be conservative basically.

Speaker Change: Like I said the business is overall is very encouraging we see the business growing and.

Speaker Change: We want to make sure that we're able to hit that number that's one other thing.

Jake Bartlett: Okay. And, you know, in the second quarter, you missed your guidance. You know, you mentioned kind of onboarding these new accounts, you know, taking a little longer than expected, but to what extent does the weak pricing or just the pricing environment that was mentioned in the press release, I think in your prepared remarks as well, but how confident are you in the pricing? Will the pricing sustain, or is there a risk that, you know, the prices will continue to decline given the competitive environment?

Speaker Change: Okay and.

Alan Yu: And you know, in the second quarter, you missed your guidance. You know, you mentioned kind of onboarding these new accounts, you know, taking a little longer than expected. But to what extent does the weak pricing or just the pricing environment that was mentioned in the press release, I think, on their prepared remarks as well? But, you know, how confident are you in the pricing? The pricing will sustain, or is there risk that the prices will continue to decline given the competitive environment? Well, we see the pricing stable, I think. And also, we have a very competitive internship, ensuring that we're continuing to move forward in the market, taking market shares, and ensuring that we don't lose any clients.

Speaker Change: In the second quarter, you missed your guidance.

Speaker Change: You mentioned kind of Onboarding these new accounts.

Speaker Change: Taking a little longer than expected, but to what extent is the weak pricing or just the pricing environment that was mentioned in.

Jian Guo: These increases were partially offset as the prior year quarter included write-offs of certain expired products and raw materials related to the disposal of certain machinery and equipment in executing the plan to scale back production in certain locations. Gross profit for the 2024 second quarter was $43.4 million versus $41.9 million in last year. Gross margin was 38.5%, same as the prior year quarter. Gross margin for the 2024 second quarter was impacted by higher inventory reserve adjustment and increased freight and beauty costs, which as a percentage of net sales increased to 8.6% from 6.2% in the prior year quarter.

Speaker Change: In the press release I think on your prepared remarks, as well, but how confident are you in the pricing the pricing will sustain or is there a risk that that.

Speaker Change: The prices will continue to decline given the competitive environment.

Alan Yu: Well, we see the pricing stabilizing, and we've also been very competitive in terms of ensuring that we're continuing to move forward in the market, taking market shares and ensuring that we don't lose any clients. All of our clients are looking for savings regardless of new clients, old clients, and existing clients. So that's what we've been doing in terms of doing that.

Speaker Change: While we see the pricing stabilizing and also we have been very competitive in terms of ensuring that we're continue ship before taking.

Speaker Change: Taking market shares and ensuring that we don't lose any clients.

Alan Yu: All of our clients are looking for savings, regardless of new clients, old clients, existing clients. So, that's what we've been doing in terms of doing that. And how we'll be able to pass on savings to our client is basically, several items is one of the strong dollar; it's helping that, as well as we're happy negotiating with our vendors to also get more support from them to lower the cost. But of course, the ocean fray in the second quarter really increased quite a bit in terms of the situation with the ocean. The shortage of containers, that's actually raising the prices.

Speaker Change: All of our clients are looking for savings.

Speaker Change: All of those with new clients or clients existing clients. So that's what we've been doing in terms of doing that and how we'd be able to pass on savings to our client is basically.

Alan Yu: And how we'll be able to pass on savings to our clients is basically several things. One of the strong dollars is helping that, as well as we have been negotiating with our vendors to also get more support from them to lower the cost. Of course, ocean freight in the second quarter really increased quite a bit in terms of the situation with ocean freight, the shortage of containers, that's actually raising prices. But even with that, we're still able to meet our gross margin goal with that high increase in ocean freight.

Speaker Change: Item is one of the strong dollar is helping that as well is that we have been negotiating with our vendors to also get more support from them to lower their cost.

Speaker Change: Of course, the ocean freight in the second quarter really increased quite a bit in terms of the.

Jian Guo: At the same time, gross margin for the 2024 second quarter benefited from the adjustments to net sales related to online platform fees and cost of goods sold related to production expenses as discussed earlier. A lower vendor pricing and increased import as a percentage of total product mix resulting in a decrease in product cost as a percentage of net sales. Gross margin in the 2023 second quarter included a negative impact of 160 basis points from the write-offs of certain raw material as we executed the plan to scale back production in certain locations which we discussed earlier.

Speaker Change: The.

Speaker Change: The situation with the ocean freight the shortage of containers.

Speaker Change: Are you raising their prices, but even with that we're still able to meet our gross margin goal without high increase in ocean freight.

Alan Yu: But even with that, we're still able to meet our growth margins, go with that high increase in ocean fray.

Jake Bartlett: Alan, for those of us who aren't as close to how the ocean freight rates work and all the dynamics there, on the last call, you mentioned that you had rates locked through April of 2025. So I guess I'm, you know, I'm struggling to understand how the current rate environment, the freight rate environment, impacts you if you're contracted through April of 25. Just help us understand the dynamics there and, you know, what makes you go on and off contract. And, you know, in the context, then, you know, how confident are you in the freight rates for the remainder of the year?

Alan Yu: And Alan, could you just, you know, this is, for those of us who aren't as close to, you know, how the ocean fray rates work and all the dynamics there? You know, on the last call, you mentioned that you had contracted, you had rates locked through April of 2025. So, I guess I'm struggling to understand how, you know, the current rate environment, rate environment impacts you if you're contracted through April of 25. Just help us understand the dynamics there and, you know, what makes you go on and off contract. And, you know, in the contracts, you know, then, you know, how confident are you, you know, in the fray rates, you know, for the remainder of the year.

Speaker Change: Got it.

Speaker Change: This is for those of us who aren't as close to.

Speaker Change: How the ocean freight rates work and all the dynamics there.

Alan Yu: Well, we signed, just like most companies did, back in the end of April, a contracted rate, a certain contracted rate. And because of the situation with the shortage, Ocean Freightliner added a peak season surcharge. And that's a rate that can add $500 to $800, and they elected to add $1,000 to each container that we ship. At the same time, because of the Ocean Freightliner, they knew that there was a higher demand for containers, and they reduced their shipping costs shipped to the US, so they were able to raise the rate in the spot rate in the market.

Speaker Change: On the last call you mentioned that you had contracted you had rates locked through April of 2025.

Speaker Change: I guess.

Speaker Change: I'm struggling to understand how the current rate environment freight rate environment impacts you if you're if you're contracted through April 25, just help us understand the dynamics there and what makes you go on and off contract.

Jian Guo: Operating expenses in the 2024 second quarter were $32.3 million or $28.7% of net sales compared with $28.5 million or $26.2% of net sales in the prior year quarter, of creating expenses in the current quarter included online sales, platform fee, higher rent and warehouse expense, an increase in marketing expense for online sales, and higher self-based compensation expenses. Such increases will partially offset by a decrease in impairment expense and loss on disposal of machinery as the 2020-32nd quarter included $2.5 million of impairment expense and loss on disposal of machinery primarily due to executing the plan to scale back production in certain locations.

Speaker Change: And in the context then.

Speaker Change: How confident are you in.

Speaker Change: In the freight rates.

Speaker Change: Remainder of the year.

Alan Yu: What they've done is, even though we have a contracted rate, they're not giving us exactly the number of containers that we need to ship our product. So if we wanted to get an additional container, we have to go out of our contracted rate with freight forwarder, like other people, if they didn't sign the contract. And that rate skyrocketed to $8,000 containers and $10,000 containers to New York, which is almost triple the amount of, quadrupled the amount of money that we had originally signed the contract with.

Alan Yu: Well, we saw, just like most companies did in the back, being the end of April, our contract rate, a certain contract rate. And because of the situation with the shortage, the ocean fray liner added a peak season surcharge. And that's a rate that can add $500 to $800, and they elected to add $1,000 each container that we should. At the same time, because the ocean fray liner, they knew that there's a higher demand in the containers and they reduced their shipping ship to the US. So, they were able to raise the rate in the more spot rate in the market.

Speaker Change: Well we.

Speaker Change: Like most companies did in the.

Speaker Change: <unk> and <unk>.

Speaker Change: April.

Speaker Change: Our contracted rates as certain contract right.

Speaker Change: And because of the situation, where the shortage the ocean freight liner peak seats at peak season surcharge.

Speaker Change: That's a rate that can add $500 to $800 and but they elected to at $1000. Each container that we ship at the same time, because the ocean Freightliner they knew that there's a higher demand in the containers and they reduced our shipping ship to the U S. So they were able.

Speaker Change: <unk> raised the rates in the more spot rate in the market.

Alan Yu: What they've done is, even though we have a contract rate, they're not giving us exactly the containers numbers that we needed to ship a product. So, if we wanted to get an additional container, we have to go out of our rate contract, the rate with fray for order, like other people if they didn't sign the contract. And that raised skyrocketed to $8,000 containers, and $10,000 container to New York, which is almost triple the amount of, like, quadriple the amount of money that we have the ocean signed the contract with.

Speaker Change: What they've done is even though we have a contract the rate they are not giving us exactly the containers numbers that we needed to ship a product. So we wanted to get additional containment. We have to go out of our rates contracted rates with straightforward or like other people if they didn't sign the contract and that raised skywalker that your $8 containers.

Jian Guo: Net income for the 2020-24nd quarter was $9.2 million compared with $10.7 million in the prior year quarter. Net income margin was 8.2% in the 2020-24nd quarter compared with 9.8% in the prior year quarter. Net income actually built to Karat for the 2020-24nd quarter was $9.1 million, or 45 cents per diluted share compared with $10.5 million of 53 cents per diluted share last year. Adjusted EBITDA, a non-get measure in the 2020-24nd quarter was $15.7 million versus $21.1 million in the prior year.

Speaker Change: And $10000 container to New York.

Speaker Change: It's almost triple the amount of those.

Speaker Change: Quad Triple the amount of money that we have the signing originally signed the contract with <unk>.

Alan Yu: Unfortunately, we were able to, we only needed to use a 10% of our containers with out of the contract rate versus some of our competitors or other smaller importers that didn't sign the contract rate, or have to ship more product. They have to go out and find containers at the rate of anywhere from $6,500 to $10,000, almost needed a price that they were paying during the pandemic.

Alan Yu: Unfortunately, we were able to use only 10% of our containers out of the contract rate, versus some of our competitors or other smaller importers that didn't sign, elect to sign that contract rate, would have to ship more product, they would have to go out and find containers at the rate of anywhere from $6,500 to $10,000 a container, almost near the price that they were paying during the pandemic.

Speaker Change: Fortunately, we were able to win.

Speaker Change: We only needed to use a 10% of our containers with our out of the contract rate versus some of our competitors or other smaller importers that didn't sign you'd like to sign that contract rates would have to ship more product. They have to go out and find containers at the rate of.

Speaker Change: Anywhere from 6500 $8 to $10000 of Makena, almost near the price that they were paying during the pandemic.

Jian Guo: Adjusted EBITDA margin was 13.9% in the 2020-24nd quarter versus 19.4% in the prior year quarter. Adjusted diluted earnings per common share was 49 cents per share in the 2020-24nd quarter compared with 69 cents per share a year ago. The second quarter ended with $114.2 million in working capital compared with $110.5 million at the end of 2023. As of June 30th, 2024 we have financial liquidity of $55.5 million with another $32.7 million in short term investments.

Alan Yu: And last question, Alan, in an environment or in the eventuality of the possibility that whatever happens with this presidential election, there's a possibility of a broad kind of tariff being implemented. Can you just speak to that risk for Karat? What mitigating factors there might be and what kind of maybe contingency measures you're taking for that potentiality? Sure. We've noticed that US has been implementing tariffs on different items and not just a regular tariff, but additional tariffs, anti-dumping tariffs on different categories, starting July, August, and October and December. So what we've done is we've been finding different vendors like we have before, moving from our purchase from China into Malaysia, Vietnam, and other parts of the Asia world.

Alan: Okay and last question to Alan.

Jake Bartlett: And last question, Alan, you know, in an environment or, you know, in the eventuality, the possibility that, you know, whatever happens with this presidential election, there's the possibility of a broad kind of tariff being implemented. Can you just speak to that risk for Karat? What you know, what mitigating factors there might be? And, you know, what kind of possible contingency, you know, measures you're taking for that potentiality?

Alan: And environment.

Speaker Change: In the eventuality of the possibility that.

Speaker Change: Whatever happens with this presidential election.

Alan: So it puts a possibility of a broad kind of tariffs being implemented can you just speak to that risk for care at what you what mitigating factors there might be and what kind of maybe contingency.

Speaker Change: Measures youre, taking for that potentiality.

Alan: Sure.

Alan Yu: We've noticed that the U.S. has been implementing tariffs on different items, and not just a regular tariff, but an additional tariff, an anti-dumping tariff, on different categories, starting July, August, October, and December. So what we did is we've been finding different vendors, like we had before, moving from our purchase from China into Malaysia, Vietnam, and other parts of the Asian world. And that's something that we've been doing for the past years.

Speaker Change: Noticed that.

Alan: U S has been implementing tariff on different items and not just a regular tariff but.

Alan: Additional terrorists.

Speaker Change: Anti dumping tariff.

Speaker Change: Categories.

Speaker Change: Starting July August and October and December.

Speaker Change: So what we've done is we've been finding different vendors like we have before moving from our purchase from China into Malaysia, Vietnam and other part of the Asia World.

Jian Guo: We expect net sales for the 2020-24th third quarter to increase by net to high single digits over the prior year quarter. Our close margin goal for the 2020-24th third quarter is approximately 38 to 39%. For the 4 2020-24 year, we expect net sales to grow mid-single digits and close margin to be in a range of 38 to 40%.

Alan Yu: And that's something that we've been doing in the past years. So our purchase reliant on shipment from China has reduced even more. And with the additional tariff on aluminum, that's not going to be just us, it's going to be everyone in the US, even the manufacturer, not only the imported manufacturer, neither raw material. Getting from China are going to get hit with a really high tariff, as much as 55 to 100 percent increase in tariff. So everyone has to look for alternatives, and just definitely not everyone can bring the factory immediately back to US for production, but even domestic manufacturers should have announced increasing prices.

Speaker Change: And that's something that we've been we've been doing in the past years. So our purchase reliance shipment from China has reduced even more.

Alan Yu: So our purchase reliance on shipment from China has reduced even more. And with the additional tariff on aluminum, that's not going to be just us. It's going to be everyone in the U.S., even the manufacturer, and not only the importer. Manufacturers that need the raw materials are getting from China are going to get hit with a really high tariff, as much as 55% to 100% increase in tariff. So everyone has to look for alternatives, and definitely not everyone can bring the factory immediately back to the U.S. for production.

Speaker Change: And with the additional tariff on aluminum.

Speaker Change: Im going to be just us its beat every one in the U S. Even manufacturer and not only the imported manufactured about neither raw material are getting from China are going to get hit with a really high tariff as much as 55% to 100% increase in Paris. So everyone has to look alternatives.

Jian Guo: Allen and I will now be happy to answer your questions and I'll turn a call back to the operator. Thank you.

Operator: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press TAR 1 on your telephone key by choice your hand and join the queue. If you would like to withdraw your question, please press TAR 1 again.

Speaker Change: It's definitely not everyone can bring their factory in Italy back to your Westwood production, but even domestic manufacturers have announced increase in prices.

Alan Yu: And even domestic manufacturers have announced increasing prices. So we're also working on that and looking for additional new vendors. We've done so. We're working on testing the quality and everything to ensure that they will have the same match of the item skew that we have right now.

Alan Yu: So we're also working on that and looking for an additional new vendors. We've done so. We're working on testing on the quality and everything to ensure that they will have the same match, the item skewed that we have right now. So that's what we've done right now to mitigate. In the case that a new president comes in and all of a sudden started raising tariffs on every country in Asia, and also Europe and Mexico, partner country, I think that's going to be an issue that everyone has to deal with. It'll be a broad price increase among the categories that basically being increased on the tariff.

Speaker Change: We're also looking at adopting and looking for additional new vendors.

Speaker Change: So we're working on testing on the quality and everything to ensure that they will have the same match the item SKU that we have right now so that's what we've done right now to mitigate.

Operator: If you are called upon to ask your question in a reasoning via loudspeaker on your device, please pick up your handset and ensure that your phone is not on midland asking your question.

Jake Bartlett: So that's what we've done right now to mitigate that. In the case that a new president comes in and all of a sudden starts raising tariffs on every country in Asia and also Europe and Mexico, our partner country, I think that's going to be an issue that everyone has to deal with. It will be a broad price increase among the categories that are basically being increased on tariffs. So it wouldn't just be us. It would be just like everybody else. And with that said, everyone has to raise their price at that time.

Speaker Change: In the case that a new president comes it all of a sudden started raising tariffs every country in Asia and also Europe, and Mexico part of the country I think that's going to be.

Ryan Merkel: The first question comes from the line of Ryan Merkel with William Blair. Please go ahead. Great, thanks for taking the questions.

Speaker Change: Sure that everyone has to deal with it will be a.

Speaker Change: A broad price increase among.

Alan Yu: First off, Alan, why did change in sales growth lower for 24? Is the big issue the new business taking longer or are there also macro pressures with maybe restaurant traffic also weighing on the change? Or what are we referring to because to what my understanding is that our sales for 2024 is actually going to be higher than 2023 and we have been considered a continuation that we iterating overall growth of 7 to 15% total.

Speaker Change: Among the categories that basically been increase on the tariffs. So it wasn't just us it will be just like everybody.

Alan Yu: So it wouldn't just be us; it would be just like everybody. And that would that set everyone has to raise the price at that time. Okay. Thank you so much. I appreciate it. No problem.

Speaker Change: That would assets everyone has the ratio price at that time.

Speaker Change: Okay. Thank you so much I appreciate it.

Operator: Thank you so much. I appreciate it.

Speaker Change: No problem.

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

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

Speaker Change: Your next question comes from the line of Ryan <unk> with <unk>.

Ryan Merkel: Key capital market.

Speaker Change: Go ahead.

Ryan Meyers: Hey guys, thanks for taking my question.

Alan Yu: Hey guys, thanks for taking my question. First one for me, Alan, I was wondering if you could just comment on maybe what you're seeing across some of your food service customers. Are you seeing any softness there? Are there any kind of issues in overall traffic levels? Just so we get a good understanding of the overall kind of demand in the food service environment and what that looks like.

Ryan Merkel: Hey, guys. Thanks for taking my questions.

Alan Yu: Sure. We're getting increasing orders from chain accounts, definitely, especially on chain accounts that are doing well. Very fortunate for us, and that many of the chain accounts are actually doing well, and some chains are not doing as well. Fortunately, most of our customers are the better part of it. On the distribution side, we're seeing softness on the distribution side, especially in California. The California restaurant environment is really not doing well, especially mom-and-pop shops. They're closing. If not, they're about to close. But the national chain accounts, especially fast casual chains, surprisingly, they're doing better than the fast food chain.

Alan Yu: First one for me, Alan. I wonder if you could just comment on maybe what you're seeing across some of your food service customers. You know, you're seeing any softness there; is there any kind of issues in overall traffic levels, just so we get a good understanding of the overall kind of demand at food service environment and what that looks like. Sure. We're getting increasing orders from chain accounts. Definitely, especially a chain account that is doing well. Very fortunately, that was. And that many of the chain accounts are actually doing well, and some chains are not doing as well.

Ryan Merkel: First one for me is Alan and I was wondering if you could just comment on maybe what you're seeing across some of your foodservice customers and are you seeing any softness there is there any kind of issues and overall traffic levels. Just so we get a good understand of the AR.

Speaker Change: Overall kind of demand at foodservice environment, and what that looks like.

Alan Yu: That's that's where we're seeing. And if we were having a merger in acquisition, it would be 15% the pocketing higher range of the estimate. Without the acquisition, it will be the lower range of the estimate. So, I don't believe that, Jian, can you, do we change ourselves guidance lower? So, the sales guidance for the four year of 2024, for right now, we are expecting mid to high single digit for the third quarter for 2024. On the four year basis, we're expecting mid single digit from the prior year.

Speaker Change: Sure, we're getting increasing orders from China accounts.

Speaker Change: Definitely a special chain account that is doing well very fortunately for us and that.

Speaker Change: They never chain accounts are actually doing well and some change are not doing as well.

Alan Yu: Fortunately, we have not where are most of our customers are the better part of it in distribution side. We're seeing softness and distribution side, especially in California, California restaurant environment. It's really not doing well, especially Mom and pop shots. They're closing. They're not. They're about to close. But the national chain account, especially fast casual chains, surprisingly, they're doing better than the fast food chain, right? That's what we're saying.

Speaker Change: <unk> would have not where our most of our customers the better part of it.

Speaker Change: And distribution side, we're seeing softness in distribution side.

Speaker Change: Especially in California, California out of the restaurant environment is really not doing well, especially mom and pop shops, they're closing have not they are about to close.

Speaker Change: The national channel, especially fast casual chains surprisingly, they're doing better.

Speaker Change: Fast food chain right Thats what were seeing.

Alan Yu: And then, you know, it sounds like the original guidance range that you guys have given, the 8 to 15% at the high end there, accounts for an acquisition. So maybe can you just kind of comment on how we should maybe be thinking about that for the rest of this year and maybe what you're seeing in the M&A environment. Well, we're still in discussion with different partners and see what we can do in terms of merger and acquisition. And even as we speak right now, we have some potential partners that we're working with right now at that part.

Ryan Meyers: And then, you know, it sounds like the original guidance range that you guys had given, the 8 to 15 percent, at the high end there, accounts for acquisitions, so maybe can you just kind of comment on how we should maybe be thinking about that for the rest of this year and maybe what you're seeing in the M&A environment?

Speaker Change: And then it sounds like the original guidance range that you guys had given the 8% to 15% at the high end their accounts for an acquisition.

Alan Yu: Okay. Yeah. And Alan, you cut out when you started answering the question. I thought the prior guide, correct me if I'm wrong, I thought it was up 8 to 15%. I think that included M&A. So, you're going from 8 to 15 for the four year 24 to now mid single digits. That's kind of a big change. Yeah. Correct. Well, I believe that, like Jen mentioned earlier, we were expecting somebody chain account to hit it earlier versus later.

Speaker Change: So maybe can you just kind of comment on how we should maybe be thinking about that for the rest of this year and maybe what youre seeing in the M&A environment.

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

Speaker Change: Well, we haven't we're still in discussion with different partners and see what we can do in terms of merger and acquisition.

Speaker Change: And.

Speaker Change: Even though.

Speaker Change: As we speak right now we have some potential partners that we're working with right now on that part.

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

Alan Yu: Even potentially partnering, bringing additional manufacturing into Texas because of like a previous question that brought up about the tariff. There's certain item categories that we're seeing a high tariff. And actually, I'm looking to discuss with some of the opposite partners to bring their manufacturing capability into U.S., domestic U.S., so that we can do a joint venture in terms of producing items that basically it's being hit with the tariff. So basically, we can increase sales and also revenue by bringing the manufacturing back to U.S. That's one thing that we're doing right now on the revenue side.

Speaker Change: Even the potentially partnering bring additional manufacturing.

Speaker Change: Into Texas because of like the.

Speaker Change: The previous question that brought up about the tariff.

Speaker Change: Certain item categories that are we're seeing high tariff or actually I am looking to discuss what some of the overseas partners to bring the manufacturing capability to U S. Domestic U S. So that we can do have a joint venture in terms of producing items that basically it's being hit with the tariffs.

Alan Yu: Got it. Okay. And then Alan, you mentioned July was stronger. And I think you mentioned you thought that would continue. Can you just reiterate those comments? Was that a total business comment or is that specific to online or eco friendly? I'm sorry, I just missed it. Yes, July, I believe we're seeing double digit growth and revenue wise. So you'll be a comparison cop and it's not basically all sex, all segment that we're seeing chain accounts are hitting a later ladder part of July, our bubble tea supplies is growing online is actually going very strong.

Speaker Change: So basically we can increase.

Speaker Change: Increased sales and also revenue by bringing manufacturing back to the U S.

Alan Yu: So basically, we can increase sales and also revenue by bringing the manufacturing back to the US. That's one thing that we're doing right now. On the revenue side, I mean, we're also discussing partnering with companies or buying shares of companies that would enable us to tap into the supermarket industry, different segments, adding SKUs. Our goal is basically to increase our revenue by adding additional SKUs, as well as increasing our wallet share.

Speaker Change: That's one thing that we're doing right now on the revenue side I mean, we're also discussing with.

Alan Yu: I mean, we're also discussing partnering with a company or buying shares of a company that would enable us to tap into the supermarket industry, different segments of adding SKUs. Our goal is basically to increase our revenue by adding additional SKUs as well as increasing our wallet share customers.

Speaker Change: Partnering with company or buying of shares a company that would enable us to tap into a supermarket industry different segments, adding skus, although as basically increased our revenue by adding additional SKU as well as increasing our wallet share in customers.

Alan Yu: And online is basically we're seeing a, I believe Jen, we've mentioned about this quarter was 17% year over year growth online. And last quarter, I mentioned that our goal for this year was $70 million on revenue right now, I'm actually pushing for $80 million revenue. So our second part of the 2024 we're seeing a strong push into online and how we're about to do that is we added additional staffing into putting more items into Amazon FBA and and also putting changing adding a new feature on our Shopify are allowing a lot of sort of calm that customer can buy volume and give volume discount on that part.

Ryan Meyers: Okay, I got it. That's helpful.

Ryan Meyers: Okay, that's helpful. Thanks for taking my questions. Thank you.

Speaker Change: Okay got it that's helpful. Thanks for taking my questions.

Speaker Change: Thank you.

Brian Butler: Your next question comes from the line of Brian Butler Switch. Please go ahead.

Operator: Your next question comes from the line of Brian Butler, Rich DeVelle. Please go ahead.

Speaker Change: Your next question comes from the line of Brian Butler Switch CFO. Please go ahead.

Brian Butler: Afternoon. Thank you for taking the time to answer the question. Just, I guess, back on kind of the inferred guidance for the back half of 24, when you think of the mid-single-digit growth for the full year and mid- to high-single-digit growth for the third quarter, so does that, that, that, that suggest fourth quarter's going to be, or you're expecting fourth quarter to be very strong, almost, you know, mid-teens for growth. Am I thinking about We're thinking of double

Brian Butler: Afternoon. Thank you for taking the question. Just I guess back on kind of the infert guiding for the back half of 24 when you think of the mid single digit growth for the full year and mid to high single digits for third quarter.

Brian Butler: Afternoon. Thank you for taking the question.

Speaker Change: Just I guess back on kind of the inferred guidance for the back half of 2004. When you think of the mid single digit growth for the full year and mid to high single digit for third quarter.

Brian Butler: So does that that that that's the just fourth quarter is going to be you're expecting fourth quarter to be very strong, you know, mid teams for growth. Am I thinking about that progression from quarter to quarter correctly for the back half? We're thinking of double-digit growth for the fourth quarter. That is correct. Okay. And then again, in the past we have been seeing our company double digit growth. I think we're happy that we're seeing that we're back to the trajectory that starting the third quarter, we're having a strong quarter in the third quarter and even stronger quarter in the fourth quarter.

Speaker Change: Does that.

Speaker Change: Just fourth quarter is going to be youre expecting fourth quarter to be very strong almost mid teens for growth.

Alan Yu: So we, we foresee that basically our online sell very likely to be over 20% year over year growth. So up up from $70 million initially we projected to almost $80 million. That is our goal for online sale by the end of this year, here. Got it.

Speaker Change: Thinking about that progression from quarter to quarter correctly for the back half.

Alan Yu: We're thinking of double-digit growth for the fourth quarter. That is correct. And then, again, in the past...

Speaker Change: We're thinking of double digit growth for the fourth quarter.

Ryan Merkel: Okay. That's very encouraging. Thank you.

Speaker Change: That is correct.

Speaker Change: Okay.

Speaker Change: And then again in the <unk>.

Speaker Change: We have been.

Speaker Change: Seeing our company double digit growth I think we're happy that we're seeing that we're back to the trajectory that starting third quarter, where we're having a strong quarter in third quarter, and even a stronger quarter in the fourth quarter.

Ryan Merkel: I'll pass it on. Okay. Thank you, really.

Jake Bartlett: And your next question comes from the line of Jake Bartlett, which is please go ahead. Great. Thanks for taking the questions. You know, my first was just a follow-up on the last, you know, comment. Alan, you mentioned July being up 10%, but, you know, the guidance for the quarter is mid to high single digits. So, implying a desaleration, is that just being conservative or is there something coming down the pike in the next two months that you think would be decreasing the sales growth from the July level? We're trying to be conservative, basically. But like I said, the business overall is very encouraging. We see the business growing. And we want to make sure that we're able to hit that number, that's one everything.

Alan Yu: And is that benefit from the national account signing finally kind of getting through the administrative process, and how does that roll into how should we think about that rolling into 25. Yes, that is actually true. On some of the large chain accounts that we were expecting for third quarter, is actually going to roll into the end of third quarter into fourth quarter. And that's where we see a segment that we're seeing that growth is adding additional national chain account. And some of the chain account actually switching a different type of product from cyrofilming to plastic into papers and other things composable items. And that's some of the things that we're seeing that right now.

Brian Butler: And is that benefiting from larger clients, the national account signing, finally kind of getting through the administrative process? And how does that roll into, how should we think about that rolling into 25?

Speaker Change: And does that benefit.

Speaker Change: From larger clients.

Speaker Change: National account signings finally kind of getting through the administrative process and how does that roll into how should we think about that rolling into 'twenty five.

Alan Yu: Yes, that is actually true. The large chain account that we were expecting for the third quarter is actually going to roll into the end of the third quarter and into the fourth quarter. And that's where we see the growth. It's adding additional national chain accounts. And some of these chain accounts are actually switching a different type of product from styrofoam into plastic, into papers, and other things, composable items.

Speaker Change: Yes, that's actually true.

Speaker Change: The large chain account that we were expecting for third quarter is actually going to roll into the end of third quarter into fourth quarter, and that's where we see.

Speaker Change: Segment that we're seeing the growth.

Speaker Change: Adding additional national chain account and some of these fintech I was actually switching.

Speaker Change: One type of product from styrofoam into plastic into papers and the other thing proposal the items and Thats. Some of the things that we're seeing that right now and how are we going to see a stronger 2025.

Alan Yu: And that's some of the things that we're seeing right now. And are we going to see a stronger 2025? Definitely. We're going to see a stronger 2025 with an increase in online sales, additional increase in online sales that's already starting in the third quarter and moving to the fourth quarter of 2025.

Alan Yu: And are we going to see a stronger 2025? Definitely we're going to see a stronger 2025 way to increase in online sales additional increase online sales that's already starting in third quarter and moving the fourth quarter in 2025. Okay.

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

Speaker Change: Definitely we're going to see a stronger at 195 were to increase it all ourselves additional increase all ICL thats already starting in third quarter and move into fourth quarter of 2025.

Brian Butler: Okay, and then thinking about EBITDA and the kind of margin compression that we saw in the second quarter, I mean, we were down about 550 basis points. Do you have a bridge between last year and this year between the kind of the puts and takes that's behind that 550, you know, basis point compression?

Speaker Change: Okay, and then thinking about the EBITDA and the kind of the margin compression that we saw in the second quarter. I mean, we were down about 550 basis points do you have a bridge between between last year and this year behind the kind of the puts and takes what's behind that 550 basis point compression.

Jian Guo: And then thinking about the EBITDA and the kind of the margin compression that we saw in the second quarter, I mean, we were down about 550 basis points. Do you have a bridge between last year and this year, become the kind of the puts and takes what's behind that 550 basis point compression? That will have a chance to answer that question. Yeah, so if you look at Brian, if you're looking at the bridge between last year's adjusted EBITDA margin to this year's adjusted EBITDA margin, the biggest gap there is the operating expense, as we talked about earlier. Our growth margin remained consistent between the quarters.

Jian Guo: That I will ask Jian. Can you answer that question?

Speaker Change: That I will ask Jan Kees will answer that question.

Alan Yu: Well, we see the pricing stable, I think. And also, we have a very competitive internship ensuring that we're continuing to move forward in the market, taking market shares, and ensuring that we don't lose any clients. All of our clients are looking for savings, regardless of new clients, old client existing clients. So, that's what we've been doing in terms of doing that. And how we'll be able to pass on savings to our client is basically, several items is one of the strong dollar it's helping that as well as we're happy negotiating with our vendors to also get more support from them to lower the cost.

Jian Guo: Yeah, so if you're looking at the bridge between last year's adjusted EBITDA margin and this year's adjusted EBITDA margin, the biggest gap there is the operating expense. As we talked about earlier, our growth margin remained consistent between the quarters.

Jan Kees: Yeah. So if you look at if you're looking at the approach between last years adjusted EBITDA margin to this years adjusted EBITDA margin.

Jan Kees: The biggest.

Speaker Change: GAAP there is the operating expense as we talked about earlier.

Jian Guo: So really, the biggest gap is the operating expense section, some of the items that we talked about in the prepared remarks in terms of the fixed operating expenses. And then there are also certain categories, certain investments that we're making, for example, marketing expenses to support our online sales growth. Those are just some of the examples of the increases in operating expenses that would account for the majority of the variance year over year.

Jan Kees: Our gross margin remained consistent between the quarters. So really the biggest gap is the operating expense section some of the items that we talked about in our prepared remarks in terms of the fixed operating expenses and then there are also certain categories certain investments that we're making.

Jian Guo: So really, the biggest gap is the operating expense section; some of the items that we talked about in the prepared remarks in terms of the fixed operating expenses. And then there are also certain categories, certain investments that were making, for example, the marketing expenses to support our online sales growth. Those are the examples, some of the examples of the increases in operating expense that would account for the majority of the variance year over year.

Brian Butler: And is that showing up in the selling expense? Because selling expense was up like 56% year-over-year in the second quarter. Is that those things? Is that what you're talking about?

Alan Yu: But of course, the ocean fray in the second quarter really increased quite a bit in terms of the situation with the ocean the shortage of containers, that's actually raising the prices. But even with that, we're still able to meet our growth margins go with that high increase in ocean fray. And Alan, could you just, you know, this is, for those of us who aren't as close to, you know, how the ocean fray rates work and all the dynamics there, you know, on the last call, you mentioned that you had contracted, you had rates locked through April of 2025.

Speaker Change: For example, with a marketing expenses to support our online sales growth. Those are the examples some of the examples of the increases in operating expense that that would account for the majority of the variance year over year.

Jian Guo: The selling expense, I mean, you are right. That's a great comment.

Jian Guo: And is that showing up in the selling expense because selling expense was up like 56% year over year in the second quarter? Is that those things? Is that what you're talking about? The selling expense, I mean, you are right, that's a great comment, although I do want to highlight, if you are only looking at the selling expense, if you're looking at the selling expense line item, there is a little bit of an approach to orange comparison in a sense that there was an adjustment of the online platform fee, which I mentioned earlier that this year, it's being included in this quarter.

Speaker Change: And is that showing up in the selling expense because selling expense was up like 56% year over year in the second quarter or is that is that those banks are is that what youre talking about.

Jian Guo: Although I do want to highlight, if you are only looking at the selling expense, if you're looking at the selling expense line item, there is a little bit of an apple to orange comparison in the sense that there was an adjustment for the online platform fee, which Alan mentioned earlier, that this year it's been included in this quarter, well, I should say starting Q4 2023, we're including it in selling expense versus previously it was reported as So that's a fairly significant increase in selling expenses. That's sort of from an accounting adjustment that we discussed earlier.

Speaker Change: The selling expense I mean, you are right. That's a great comment although I do want to highlight if you are only looking at the selling expense if youre looking at the selling expense line item.

Alan Yu: So, I guess I'm struggling to understand how, you know, the current rate environment, rate environment impacts you if you're contracted through April of 25. Just help us understand the dynamics there and, you know, what makes you go on and off contract. And, you know, in the contracts, you know, then, you know, how confident are you, you know, in the fray rates, you know, for the remainder of the year. Well, we saw just like most companies did in the back being the end of April, our contract rate, a certain contract rate.

Speaker Change: Let up at all five apples to Orange comparison in a sense that there was an adjustment of the online platform fee, which Alan mentioned earlier that this year. It's being included in this quarter. So well I should say, starting Q4, 2023, we're including in selling expense versus pre.

Jian Guo: Well, I should say, starting Q4 2023, we're including in selling expense versus previously, it was reported as an offset against sales. So that's a fairly significant increase in the selling expense; that's a sort of from an accounting adjustment that we discussed earlier as well.

Speaker Change: It was reported as a offset against south so that's a fairly significant increase in the selling expense that's a startup from accounting adjustment that we discussed earlier as well.

Alan Yu: And because of the situation with the shortage, the ocean fray liner added a peak season surcharge. And that's a rate that can add $500 to $800, and they elected to add $1,000 each container that we should. At the same time, because the ocean fray liner, they knew that there's a higher demand in the containers and they reduced their shipping ship to the US. So, they were able to raise the rate in the more spot rate in the market.

Jian Guo: Okay, and then on the freight cost, so how does that freight cost look in the third quarter and the fourth quarter? Can you provide some, maybe I guess, that trend in the back half as a percent, maybe of revenues? Sure, I mentioned earlier that the second quarter were seeing a significant increase in ocean freight due to peak season search cars, as well as if we were to counter out out of our contract to getting a container from freight quarters 10% of that, that really includes our ocean freight. We have seen the ocean freight prices come down starting July, and all even more in August. The non-contract rate was when the highest $8,000 to California West Coast and $10,000 East Coast.

Speaker Change: Okay and then.

Brian Butler: Okay, and then on freight costs, so how should we, how does that freight cost look in the third quarter, in the fourth quarter? Can you provide some, maybe, I guess, you know, that trend in the back half as a percent maybe of revenue?

Speaker Change: On the freight costs so how.

Speaker Change: How should we how does that freight costs look in the third quarter and the fourth quarter can you provide some maybe I guess.

Speaker Change: That trend in the back half as a percent of revenues.

Alan Yu: Sure. As I mentioned earlier, in the second quarter, we're seeing a significant increase in ocean freight due to the peak season surcharge, as well as if we were to contract out of our contract to get a container from freight forwarders, 10% of that, that really increases our ocean freight. We have seen the ocean freight prices come down starting July and even more in August. The non-contract rate was as high as $8,000 to California's West Coast and $10,000 to the East Coast. Now it's down below $5,000.

Speaker Change: Sure.

Speaker Change: As I mentioned earlier that the second quarter, we're seeing a significant increase in ocean freight.

Alan Yu: What they've done is, even though we have a contract rate, they're not giving us exactly the containers numbers that we needed to ship a product. So, if we wanted to get additional container, we have to go out of our rate contract, the rate with fray for order, like other people if they didn't sign the contract. And that raised skyrocketed to $8,000 containers, and $10,000 container to New York, which is almost triple the amount of, like, quadriple the amount of money that we have the ocean signed the contract with.

Speaker Change: Peak season peak season surcharge as well as if we were to contract out out of our contract to getting a container from fourth quarter, 10% of that.

Speaker Change: That really increase our ocean freight we have seen the ocean freight prices come down starting in July and even more in August.

Speaker Change: Non contract rate was as high as $8000 to California, West Coast and $10000 East Coast now is down below $5000 and unfortunately.

Alan Yu: And fortunately, now we're really not using any containers out of our contract rate starting August. So in July, we were still taking some containers that we needed to without the contract rate so that we don't run out of product for our customers. But in August, we have stopped taking any non-contracted containers. So that's a good thing.

Jian Guo: Now it's down below $5,000. And fortunately, now we're really not using any containers out of our contract rate starting August. So in July, we were still taking somewhat containers that we needed to without the contract rate, so that we don't run out of product on customers. But in August, we have stopped taking any non-contract containers. So that's a good thing, even though we're paying for the peak season search cars, but we're not paying for the extra above the peak season search RG, the $6,000, $7,000 container rates. And this is due to the fact that containers basically has become more available, less people are shipping products because there was a tariff that was hitting the US and Europe in August first.

Speaker Change: Now, where we were really not using any containers out of our contract rates starting in August in July we were still taking some port.

Alan Yu: Unfortunately, we were able to, we only needed to use a 10% of our containers with out of the contract rate versus some of our competitors or other smaller importers that didn't sign the contract rate, or have to ship more product, they have to go out and find containers at the rate of anywhere from $6,500 to $10,000 almost needed a price that they were paying during the pandemic.

Speaker Change: Containers that we needed to without the.

Speaker Change: The contract rate so.

Speaker Change: So that we don't run out of product and our customers but in August.

Speaker Change: Have stopped taking any non contracted containers. So that's a good thing even though we're paying for the peak season surcharge, but without paying for the extra above the peak season surcharge.

Alan Yu: Even though we're paying for the peak season surcharge, we're not paying for the extra above the peak season surcharge, the $6,000, $7,000 container rates. And this is due to the fact that containers basically have become more available. Less people are shipping products because there was a tariff that was hitting the US and Europe on August 1st. And those companies that needed to ship electric vehicles into Europe, basically, they stopped shipping that.

Speaker Change: $6 $7000 container rates and.

Alan Yu: And last question, Alan, in an environment or in the eventuality of the possibility that whatever happens with this presidential election, there's a possibility of a broad kind of tariff being implemented. Can you just speak to that risk for Karat? What mitigating factors there might be and what kind of maybe contingency measures you're taking for that potentiality? Sure. We've noticed that US has been implementing tariff on different items and not just a regular tariff, but additional tariff, anti-dumping tariff on different categories, starting July, August and October and December.

Speaker Change: This is due to the fact that.

Speaker Change: Containers basically has become more available.

Speaker Change: Less people shipping product because there was a tariff that was hitting the U S. In Europe in August one and those company that needed a ship electric vehicles into Europe basically they stop ship at that so basically theres more container available for the U S customers right now and the fourth quarter, we're seeing that.

Jian Guo: And those companies that needed to ship electric vehicles into Europe basically stopped shipping that. So basically, there's more container available for the US customers. and the fourth quarter we're seeing that the ocean freight line should be removing the peak season search cars that we can go back to the original contact array. So the ocean freight will come down even more during the fourth quarter of this year.

Alan Yu: So basically, there are more containers available for US customers. And in the fourth quarter, we're seeing that the ocean freight liners should be removing the peak season surcharge so we can go back to the original contract array. So the ocean freight cost will come down even more during the fourth quarter.

Speaker Change: Ocean freight liner should be removing the peak season surcharge that we can go back to the original contract the ratio of the Ocean freight will come down even more during the fourth quarter of this year.

Jian Guo: Okay, so Brian, just a little more color, just a little more color there, just to get a line on the model. So overall, in terms of net sales, we're expecting ocean freight for the second half of the year to range between 8 to 10 percent of net sales. I, everything, you know, Alan talked about, right, just in terms of the ocean freight, the trend, obviously, I think that's great sort of insight into what we're expecting. Just in terms of modeling out to the second half of the year, I do want to just, as a reminder, we would typically see about roughly two months' lack in terms of the real-time rate and how it's getting recorded on the financials just because of the inventory chart.

Jian Guo: Okay. So, Ryan, just a little more color there to get a better look at the model. So, overall, in terms of net sales, we're expecting ocean freight for the second half of the year to range between 8 to 10 percent of net sales. Everything Alan talked about, right, just in terms of ocean freight, the trend, obviously, I think that's a great sort of insight into what we're expecting just in terms of modeling out to the second half of the year.

Speaker Change: Okay, and then just a little more color just a little more color there just to get a line.

Speaker Change: On the model. So overall in terms of net south we're expecting ocean freight for the second half of the year to range between 8% to 10% of net sales.

Alan Yu: So what we've done is we've been finding different vendors like we have before, moving from our purchase from China into Malaysia, Vietnam and other parts of the Asia world. And that's something that we've been doing in the past years. So our purchase reliant on shipment from China has reduced even more. And with the additional tariff on aluminum, that's not going to be just us, it's going to be everyone in the US, even the manufacturer, not only the imported manufacturer, neither raw material.

Alan: I everything you know Alan talked about right just in terms of the ocean freight.

Speaker Change: That trend, obviously I think that that's that's great that's great color or insight into what we're expecting just in terms of modeling out the second half of the year I do wanted to just start just as a reminder, we typically do see about roughly a two month lag in terms of the real time.

Jian Guo: I do want to, just as a reminder, we typically do see about a two months lag in terms of the real-time rate and how it's getting recorded on the financials just because of the inventory chart. So, that said, the spike in the late part of the second quarter, we will see primarily that impact getting reflected on the financials in the first half of the third quarter. And as we start, obviously, seeing improvements in ocean rates, we'll get that benefit in the second half of the third quarter as well as the fourth quarter.

Alan Yu: Getting from China are going to get hit with a really high tariff, as much as 55 to 100 percent increase in tariff. So everyone has to look for alternatives, and just definitely not everyone can bring the factory immediately back to US for production, but even domestic manufacturers should have announced increasing prices. So we're also working on that and looking for an additional new vendors. We've done so. We're working on testing on the quality and everything to ensure that they will have the same match, the item skewed that we have right now.

Speaker Change: Right and how it's getting recorded on the financials, just because of the inventory tight so that said the spike in the second.

Jian Guo: So that said, the spike in the second, in the late part of the second quarter, we will see primarily that impact getting reflected on the financials in the first half of the third quarter. And as we start obviously seeing improvements in ocean range, we'll get that benefit in the second half of the third quarter, as well as the fourth quarter. Right. And to be clear, that's built into your 38 to 40 percent gross margin kind of forecast for the full year. Correct. Right. And if you think about going down to the EBITDA line, you know, that 38 to 40 percent would suggest some margin improvement year over year on the gross margin.

Speaker Change: The late part of the second quarter, we will see primarily that impact getting reflected on our financials in the first half of the third quarter and then as we start obviously, you're seeing improvement in ocean rates won't get that benefit in the second half of third quarter as well as in the fourth quarter.

Brian Butler: And to be clear, that's built into your 38 to 40% gross margin kind of forecast for the full year. Correct.

Speaker Change: Right and to be clear that that's built into your 38% to 40% gross margin kind of forecast for the full year.

Alan Yu: So that's what we've done right now to mitigate. In the case that a new president comes in and all of a sudden started raising tariff on every country in Asia, and also Europe and Mexico, partner country, I think that's going to be an issue that everyone has to deal with, it'll be a broad price increase among the categories that basically being increased on the tariff. So it wouldn't just be us, it would be just like everybody. And that would that set everyone has to raise the price at that time.

Speaker Change: Correct.

Brian Butler: And, and if you think about going down to the EBITDA line, you know, are you, that 38 to 40% would suggest some margin improvement year over year on the gross margin. But on the EBITDA line, it seems like we're going to probably see some compression because of the higher costs of operating and those fixed costs and selling. Is that a fair way to look at EBITDA and gross, gross profit for, for, the full year?

Speaker Change: Right.

Speaker Change: And if you think about going down to the EBITDA line that.

Speaker Change: That 38% to 40%.

Speaker Change: Suggest some margin improvement year over year on the gross margin, but on the EBITDA line. It seems like we're going to probably see some compression.

Jian Guo: But on the EBITDA line, it seems like we're going to probably see some compression because of the higher cost on operating and those fixed costs and selling. Is that a fair way to look at EBITDA and gross profits for the full year?

Speaker Change: The higher costs on operating and those fixed costs in selling is that a fair way to look at EBITDA and growth gross profit for.

Speaker Change: For the full year.

Alan Yu: Okay. Thank you so much. I appreciate it. No problem.

Speaker Change: Yeah.

Jian Guo: On the four year basis, I think we previously communicated our long term goal for our adjusted the EBITDA margin is to be the highest mid-teen, and I think we're still on track to meet that goal for four year, 2024. Missing. Okay.

Jian Guo: On a four-year basis, I think we previously communicated our long-term goal for our adjusted EBITDA margin to be as mid-teens, and I think we're still on track to meet that goal for the year 2024.

Speaker Change: On a full year basis, I think we previously.

Ryan Mayers: Your next question comes from the line of Ryan Mayors with Lake Street capital markets. Peaceful ahead. Hey guys, thanks for taking my question. First one for me, Alan. I wonder if you could just comment on maybe what you're seeing across some of your food service customers. You know, you're seeing any softness there, is there any kind of issues in overall traffic levels, just so we get a good understanding of the overall kind of demand at food service environment and what that looks like.

Speaker Change: Communicated our long term goal for our adjusted EBITDA margin is to be they.

Speaker Change: A high a mid teens and I think we're still on track to meet that goal for full year 2024.

Speaker Change: Mid teens.

Brian Butler: Okay. And then maybe one last one on maybe an update. You had talked in the past about expanding some of the distribution product lines kind of beyond the packaging pieces. Do you have an update on that and maybe where you stand on that, and if that strategy is continuing to be pushed forward?

Alan Yu: And then one last one on maybe an update. You had talked in the past about expanding some of the distribution product lines, kind of beyond the packaging pieces. Do you have an update on that and maybe where you stand and if that strategy is continuing to be pressed forward? Yes, we're actually looking to the food segment, frozen food segment. So we're adding refrigerated truck. We're adding refrigerated containers. And we're also looking to build a coastal rich containers warehouse in the state of Texas. So that's what 2025 goal in terms of what the items we can sell.

Speaker Change: Okay, and then one last one on maybe an update you talked in the past about expanding some of the distribution product lines kind of beyond.

Speaker Change: The packaging pieces you haven't do you have an update on that and maybe where you stand and if that strategy is continuing to press forward.

Alan Yu: Sure. We're getting increasing orders from chain accounts. Definitely, especially a chain account that is doing well, very fortunately that was. And that many of the chain accounts are actually doing well, and some chains are not doing as well. Fortunately, we have not where are most of our customers are the better part of it in distribution side. We're seeing softness and distribution side, especially in California, California restaurant environment. It's really not doing well, especially mom and pop shots. They're closing. They're not. They're about to close. But the national chain account, especially fast casual chains, surprisingly, they're doing better than the fast food chain, right? That's what we're saying.

Alan Yu: Yes, we're actually looking to enter the food segment, the frozen food segment. So we're adding refrigeration, refrigerated trucks, refrigerated containers, and we're also looking to build a cold storage containers warehouse in the state of Texas. So that's for the 2025 goal. In terms of what items we can sell, there might be frozen food, frozen dumplings, and other things that we might be able to distribute and also possibly manufacture domestically.

Speaker Change: Yes, so we're actually looking to the food segment frozen fruit segment. So we're adding.

Speaker Change: Refrigeration refrigerant truck, we're adding a refrigerated containers and we're also looking to build.

Speaker Change: A cold storage containers.

Speaker Change: Warehouse in the state of Texas.

Speaker Change: That's for 2025 goal.

Speaker Change: In terms of.

Speaker Change: The items, we can sell.

Alan Yu: There's, there's might be frozen food, frozen dumpling and other things that we might be able to distribute, and then also put possibly manufacturing domestically.

Speaker Change: Might be frozen food frozen.

Speaker Change: The other thing that we might be able to distribute it and then also possibly manufacturing domestically.

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

Alan Yu: Do you have an estimate on the capital requirements for that? Right now, we don't know how much capital requirements are going to be. We have not estimated that. Yes.

Speaker Change: Do you have an estimate on the capital requirements for that.

Alan Yu: Right now, we don't know how much the capital requirements are going to be; we have not estimated that yet.

Speaker Change: Okay.

Ryan Mayers: And then, you know, it sounds like the original guidance range that you guys have given the 8 to 15% at the high end there accounts for an acquisition. So maybe can you just kind of comment on how we should maybe be thinking about that for the rest of this year and maybe what you're seeing in the M&A environment. Well, we're still in discussion with different partners and see what we can do in terms of merger and acquisition.

Speaker Change: Right now we don't know how much capital requirements are going to be we have not estimated that yet.

Alan Yu: Okay.

Brian Butler: Okay, that was all my questions. Thank you very much.

Speaker Change: Okay that was all my questions. Thank you very much.

Brian Butler: That was all my questions. Thank you very much. No problem.

Speaker Change: No problem.

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

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

Speaker Change: That concludes our Q&A session I will now turn the conference back over to you for.

Alan Yu: Alan Yu for closing remarks. Thank you, operator, and thank you to all of you for joining us today. We appreciate your continuing support. We remain confident about Keras' future, and we look forward to keeping you up. Apprates of our progress.

Speaker Change: For closing remarks.

Speaker Change: Thanks.

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

Speaker Change: Thank you operator, and thanks to all of you for joining US today. We appreciate your continuing support we remain confident about curious feature and we look forward to keeping you up.

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

Speaker Change: Our progress have a great evening, everyone Goodbye.

Operator: Have a great evening, everyone. Goodbye.

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

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect.

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

Speaker Change: Yeah.

Speaker Change: [music].

Ryan Mayers: So basically, we can increase sales and also revenue by bringing the manufacturing back to U.S. That's one thing that we're doing right now on the revenue side. I mean, we're also discussing with partnering with company or buying shares of company that would enable us to tap into supermarket industry, different segments of adding SKUs. Our goal is basically to increase our revenue by adding additional SKUs as well as increasing our wallet share customers. Okay, that's helpful.

Ryan Mayers: Thanks for taking my questions.

Speaker Change: Yeah.

Speaker Change: Uh huh.

Ryan Mayers: Thank you.

Speaker Change: Yeah.

Brian Butler: Your next question comes from the line of Brian Butler switch.

Brian Butler: Please go ahead. Afternoon. Thank you for taking the question. Just I guess back on kind of the infert guiding for the back half of 24 when you think of the mid single digit growth for the full year and mid to high single digits for third quarter. So does that that that that's the just fourth quarter is going to be you're expecting fourth quarter to be very strong, you know, mid teams for growth.

Brian Butler: Am I thinking about that progression from quarter to quarter correctly for the back half? We're thinking of double digit growth for the fourth quarter. That is correct. Okay. And then again, in the past we we have been seeing our company double digit growth. I think we're happy that we're seeing that we're back to the trajectory that starting the third quarter, we're having a strong quarter and third quarter and even stronger quarter in the fourth quarter.

Brian Butler: And is that benefit from the national account signing finally kind of getting through the administrative process and how does that roll into how should we think about that rolling into 25. Yes, that actually true. On some of the large chain account that we were expecting for third quarter is actually going to roll into the end of third quarter into fourth quarter. And that's where we see a segment that we're seeing that growth is adding additional national chain account.

Brian Butler: And some of the chain account actually switching a different type of product from cyrofilming to plastic into papers and other things composable items. And that's some of the things that we're seeing that right now. And are we going to see a stronger 2025? Definitely we're going to see a stronger 2025 way to increase in online sales additional increase online sales that's already starting in third quarter and moving the fourth quarter in 2025.

Brian Butler: Okay. And then thinking about the EBITDA and the kind of the margin compression that we saw in the second quarter, I mean, we were down about 550 basis points. Do you have a bridge between between last year and this year, become the kind of the puts and takes what's behind that 550 basis point compression? That will have a chance to answer that question. Yeah, so if you look at Brian, if you're looking at the bridge between last year's adjusted EBITDA margin to this year's adjusted EBITDA margin, the biggest gap there is the operating expense as we talked about earlier, our growth margin remained consistent between the quarters.

Brian Butler: So really, the biggest gap is the operating expense section, some of the items that we talked about in the prepared remarks in terms of the fixed operating expenses. And then there are also certain categories, certain investments that were making, for example, the marketing expenses to support our online sales growth. Those are the examples, some of the examples of the increases in operating expense that would account for the majority of the variance year over year.

Brian Butler: And is that showing up in the selling expense because selling expense was up like 56% year over year in the second quarter? Is that those things, is that what you're talking about? The selling expense, I mean, you are right, that's a great comment, although I do want to highlight, if you are only looking at the selling expense, if you're looking at the selling expense line item, there is a little bit of an approach to orange comparison in a sense that there was an adjustment of the online platform fee, which I mentioned earlier that this year, it's being included in this quarter.

Brian Butler: Well, I should say starting Q4 2023, we're including in selling expense versus previously, it was reported as an offset against sales. So that's a fairly significant increase in the selling expense, that's a sort of from a accounting adjustment that we discussed earlier as well. Okay, and then on the freight cost, so how does that freight cost look in the third quarter in the fourth quarter? Can you provide some maybe I guess that trend in the back half as a percent maybe of revenues?

Brian Butler: Sure, I mentioned earlier that the second quarter were seeing a significant increase in ocean freight due to peak season search cars as well as if we were to counter out out of our contract to getting a container from freight quarters 10% of that, that really includes our ocean freight. We have seen the ocean freight prices come down starting July, and all even more in August, the non contract rate was when the highest $8,000 to California West Coast and $10,000 East Coast.

Brian Butler: Now it's down below $5,000. And fortunately, now we're really not using any containers out of our contract rate starting August. So in July, we were still taking some what containers that we needed to without the contract rate, so that we don't run out of product on customers, but in August, we have stopped taking any non contract containers. So that's a good thing, even though we're paying for the peak season search cars, but we're not paying for the extra above the peak season search RG, the $6,000, $7,000 container rates.

Brian Butler: And this is due to the fact that containers basically has become more available, less people are shipping products because there was a tariff that was hitting the US and Europe in August first. And those companies that needed to ship electric vehicles into Europe, basically they stopped shipping that. So basically, there's more container available for the US customers, and the fourth quarter we're seeing that the ocean freight line should be removing the peak season search cars that we can go back to the original contact array.

Brian Butler: So the ocean freight will come down even more during the fourth quarter of this year. Okay, so Brian, just a little more color, just a little more color there just to get a line on the model. So overall, in terms of net sales, we're expecting ocean freight for the second half of the year to range between 8 to 10 percent of net sales. I, everything, you know, Alan talked about, right, just in terms of the ocean freight, the trend, obviously, I think that's great sort of insight into what we're expecting.

Brian Butler: Just in terms of modeling out to the second half of the year, I do want to just as a reminder we would typically do see about roughly two months lack in terms of the real time rate and how it's getting recorded on the financials just because of the inventory chart. So that said, the spike in the second in the late part of the second quarter, we will see primarily that impact getting reflected on the financials in the first half of the third quarter.

Brian Butler: And as we start obviously seeing improvements in ocean range, we'll get that benefit in the second half of the third quarter as well as the fourth quarter. Right. And to be clear, that's built into your 38 to 40 percent gross margin kind of forecast for the full year. Correct. Right. And if you think about going down to the EBITDA line, you know, that 38 to 40 percent would suggest some margin improvement year over year on the gross margin.

Brian Butler: But on the EBITDA line, it seems like we're going to probably see some compression because of the higher cost on operating and those fixed costs and selling. Is that a fair way to look at EBITDA and gross profits for the full year? On the four year basis, I think we previously communicated our long term goal for our adjusted the EBITDA margin is to be the highest mid-teen and I think we're still on track to meet that goal for four year, 20, 24.

Brian Butler: Missing. Okay. And then one last one on maybe an update. You had talked in the past about expanding some of the distribution product lines kind of beyond the packaging pieces. Do you have an update on that and maybe where you stand and if that strategy is continuing to be pressed forward? Yes, we're actually looking to the food segment, frozen food segment. So we're adding refrigerated truck. We're adding refrigerated containers. And we're also looking to build a coastal rich containers warehouse in the state of Texas.

Brian Butler: So that's what 2025 goal in terms of what the items we can sell. There's there's might be frozen food, frozen dumpling and other things that we might be able to distribute and then also put possibly manufacturing domestically. Do you have an estimate on the capital requirements for that? Right now, we don't know how much capital requirements are going to be. We have not estimated that. Yes. Okay. That was all my questions. Thank you very much. No problem.

Operator: That concludes our Q&A session.

Alan Yu: I will now turn the conference back over to you.

Alan Yu: Alan Yu for closing remarks. Thank you, operator, and thank you to all of you for joining us today. We appreciate your continuing support. We remain confident about Keras' future and we look forward to keeping you up. Apprates of our progress. Have a great evening, everyone.

Operator: Goodbye.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.