Q1 2025 Karat Packaging Inc Earnings Call
Good afternoon, and welcome to care packaging as 2025 first quarter conference call.
Operator: Good afternoon, and welcome to Karat Packaging's 2025 first quarter conference All participants will be in a listen-only mode for the duration of the call. And should you need any assistance today, please signal a conference specialist by pressing the star key followed by zero on your telephone keypad.
All participants will be in a listen only mode for the duration of the call.
Should you need any assistance today. Please signal conference specialist by pressing the star key followed by zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions.
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Please also note that this event is being recorded today.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please also note that this event is being recorded today.
Roger Pondel: I would now like to turn the conference over to Roger Pondel with Pondel-Wilkinson. Please go ahead, sir. Thank you, operator.
I would now like to turn the conference over to Roger Pond-apple Pando Wilkinson. Please go ahead, Sir Thank you operator, and good afternoon, everyone and welcome to care packaging 2025 first quarter conference call I'm, Roger upon Dell with Pinedale Wilkinson.
Roger Pondel: Good afternoon, everyone, and welcome to Karat Packaging's 2025 first quarter conference call.
Roger Pondel: I'm Roger Pondel with Pondel-Wilkinson, Karat Packaging's investor relations firm, and it'll be my pleasure momentarily to introduce the company's chief executive officer, Alan Yu, and his chief officer, Jian Guo. Before I turn the call over to Alan, I want to remind all listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factors section of the company's most recent Form 10-K, as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website.
Speaker Change: Kurt packaging <unk> Investor relations firm and it'll be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan you as Chief Financial Officer, Jan go before I turn the call over to Alan I want to remind all listeners that today's call may include forward looking statements within the meaning of the private.
Speaker Change: 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, including those set forth in the risk factors 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.
Speaker Change: At Www SEC Gov, along with other company filings made with the S. E C from time to time.
Operator: at www.sec.gov, along with other company filings made with the SEC from time to time.
Roger Pondel: Actual results could differ materially from those forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements, except as required by law.
Roger Pondel: Please also note that during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow, which are non-GAAP financial measures as defined by SEC Regulation G. 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.
as well.
Speaker Change: A Reconciliation of the Most Directly Comparable GAAP measures to the non-GAAP financial Measures is included in today's press release, which is now posted on the company's website. And with that, I will turn the call over to CEO Alan Yu.
Alan Yu: And with that, I will turn the call over to CEO Alan Yu. Alan? Thank you, Roger. Good afternoon, everyone. We achieved another strong quarterly performance marked by the nearly 11% increase in sales volume and 8.4% growth in the net sales year over year. Our global strategy sourcing capabilities enable us to take early action securing inventory from sources outside of China. to countries with significantly lower tariffs and more favorable trade conditions. At the end of 2024, our sourcing from China was approximately 20%, and it was down to 15% in March of this year, we're on track to further reduce imports from China to be under 10% by the end of second quarter.
Alan Yu: Thank you, Roger. Good afternoon, everyone. We achieve another strong quarterly performance marked by the nearly 11% increase in sales volume and 8.4% growth in the net sales year-over-year.
Alan Yu: Our global strategy sourcing capabilities enable us to take early action securing inventory from sources outside of China, to countries with significantly lower tariffs and more favorable tree conditions.
Alan Yu: At the end of 2024, our sourcing from China was approximately 20%, and it was down to 15% in March of this year, where on track to further reduce imports from China to be under 10% by the end of 2nd quarter.
Alan Yu: And due to the recent imposed extreme tariffs, we have temporarily suspended imports from most vendors in China starting mid-April. In addition to leveraging our diverse international supplier network, our ability to quickly scale up existing domestic manufacturing operation without significant incremental CapEx is allowing us to respond promptly and effectively to the evolving market dynamics. At the end of first quarter, we had approximately $80 million in inventory, and we are strategically managing sales to customers ahead of the anticipated supply chain disruption to ensure long-term reliability in meeting customers' needs. We believe Karat is well positioned to address ongoing supply chain challenges and navigate an uncertain trade environment.
Alan Yu: And due to the recent imposed extreme tariffs, we have temporarily suspended imports from most vendors in China starting mid-Aprone.
Alan Yu: In addition to leveraging our diverse international supplier networks, our ability to quickly scale up existing domestic manufacturing operation without significant incremental CAP-X is allowing us to respond promptly and effectively to the evolving market dynamic.
Alan Yu: At the end of first quarter, we had approximately $80 million in inventory and we are strategically managing sales to customers ahead of the anticipated supply chain destruction to ensure long-term reliability in meeting customer's need.
Alan Yu: We believe Karat is well positioned to address ongoing supply chain challenges and navigate an uncertain, trade environment.
Alan Yu: As previously announced, we implemented price increases for certain products on April 1 with higher costs of goods anticipated for more recent global tariff developments. We expect to implement additional price increases to most of our products in mid-May. Geographically, our strongest growth for the quarter came from Texas and the Midwest. Sales in California, our largest market, also continue to improve, particularly in the retail and distribution and chain sectors. We remain focused on expanding wallet and market share, as well as growing our online business. which experienced a nearly 20% sales increase during the first quarter. We continue to strengthen our pipeline and anticipate that several large chain accounts will begin shipping in late June.
Alan Yu: As previously announced, we implemented price increases for certain products on April 1st, with higher costs of goods anticipated for more reason, global tariff development.
Alan Yu: We expect to implement additional price increases to most of our product in mid-main.
Alan Yu: We remain focused on the expanding wallet and market share as well as growing our online businesses, which experience a nearly 20% sales increase during the first quarter.
Alan Yu: We continue to strengthen our pipeline and anticipate that several large chain accounts will begin shipping in late June .
Alan Yu: Our new 187,000 square feet distribution center near our headquarters in Chino, which we expect to be fully operational this month, provides much more needed additional capacity to support anticipated growth, allowing us to add 500 new SKUs of products and additional inventory. The timing also coming at a pivotal moment with regards to the supply chain interruptions and general economic uncertainties. As mentioned on our last call, we continue to focus on lowering operating costs while growing our top line, including enhancing distribution efficiency, lowering third-party domestic shipping costs starting March, and reducing online selling expenses. Karat has consistently proven to be a reliable supplier to our customers, not only during the height of the COVID-19 period, but also post-pandemic, when there was widespread product shortages.
Alan Yu: Our new 187,000 square feet distribution center near our headquarters in Chino, which we expect to be fully operational this month, provides much more needed additional capacity to support
Alan Yu: allowing us to add 500 new SK user products and additional inventory. The timing also coming at a pivotal moment with regards to the supply chain interruptions and general economic uncertainties.
Alan Yu: As mentioned on our last call, we continue to focus on lowering operating costs while growing our top line, including enhancing distribution efficiency, lowering third-party domestic shipping costs, starting March and reducing online selling expenses.
Alan Yu: Karat has consistently proven to be a reliable supplier to our customers, not only during the height of the COVID-19 period but also post-pandemic, when there were widespread product shortages. Our ability to maintain steady inventory has reinforced our reputation and resilience.
Alan Yu: Our ability to maintain steady inventory has reinforced our reputation and resilience. We continue to generate strong operating cash flow, as well as liquidity. Our board member remains committed to a balanced capital allocation strategy between shareholder returns and long-term growth investment.
Alan Yu: We continue to generate strong operating cash flow as well as liquidity. Our board member remains committed to a balanced capital allocation strategy between shareholder returns and loan term growth investments.
Jian Guo: I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company financial results in greater detail. Thank you, Alan. I will first provide an overview of our Q1 performance and then close with a guidance update. Net sales for the 2025 first quarter were $103.6 million, up 8.4% from $95.6 million in the prior year quarter. As Alan mentioned, volume grew 10.9% year over year. Pricing was unfavorable by $3.9 million year over year. In terms of sales by category, over the past couple of quarters, we have observed an increasing shift in some ordering pattern from our chain accounts, from direct delivery by carrier through third-party carriers to fulfillment through distribution partners.
Alan Yu: I will now turn the call over to Jian Guo, our chief financial officer, to discuss the company financial results in greater detail. Jian?
Jan Guo: Thank you, Alan. I will first provide an overview of our Q1 performance and then close with the guidance update.
Jan Guo: Net sales for the 2025 first quarter were $103.6 million, up 8.4% from $95.6 million in the prior year quarter.
Speaker Change: As Alan mentioned, volume grew 10.9% year over year. Pricing was unfavorable by $3.9 million year over year.
Speaker Change: In terms of sales by category, over the past couple of quarters, we have observed an increasing shift in some ordering pattern from our chain accounts, from direct delivery by Karat through third party carriers to fulfillment through distribution partners.
Jian Guo: This change has increasingly blurred the distinction between cells to chains and distributors.
Speaker Change: This change has increasingly blurred the distinction between cells to change and distributors.
Jian Guo: Accordingly, starting this quarter, we're combining net sales to chain accounts and distributors into a single category and have recast the comparative period as well. sales to our chain accounts and distributors were up by 7.1%. online sales increased 19.6% over the prior year quarter, reflecting our continual focus on expanding this high margin category. sales to the retail channel decreased 3.2%. Cost of goods sold for the 2025 first quarter was $62.9 million compared with $58.0 million in the 2024 first quarter. The increase was primarily driven by a $3.0 million of higher product cost as a result of the increase in sales volume, partially offset by more favorable vendor pricing, as well as higher ocean freight and duty cost of $2.0 million, reflecting a 15.5% increase in import volume and a 4.3% increase in Ocean Freight Container Rig.
Speaker Change: Cells to our chain accounts and distributors will opt by 7.1%.
Speaker Change: Online sales increased 19.6% over the prior year quarter, reflecting our continual focus on expanding this high margin category, sales to the retail channel decreased 3.2%.
Speaker Change: Because of good sold for the 2025 first quarter was $62.9 million compared with $58.0 million in the 2024 first quarter.
The increase was primarily driven by a $3.0 million.
of Higher Product Cost.
Speaker Change: as a result of the increase in sales volume, partially offset by more favorable vendor pricing as well as higher ocean freight and duty cut of $2.0 million, reflecting a 15.5% increase in import volume.
and a 4.3% increase.
in Ocean Freight Container Rates.
Jian Guo: Gross profit for the 2025 first quarter increased 8.4% to $40.8 million from $37.6 million in the prior year quarter. Gross margin remained consistent at 39.3% for the first quarter of both 2025 and 2024. Gross margin benefited from lower product costs as a percentage of net sales, mainly due to a more favorable vendor pricing, increased imports as a percentage of total product mix, and foreign currency gain partially offset by a higher trade and duty cost as a percentage of net sales. Operating expenses for the 2025 first quarter increased 11.6% to $32.9 million from $29.5 million in the prior year quarter.
Gross Profit for the 2025 first quarter increased 8.4%.
Speaker Change: to $40.8 million from $37.6 million in the prior year quarter. Gross margin remained consistent at 39.3% for the first quarter of both 2025 and 2024.
Speaker Change: close Martin, benefited from lower product cuts as a percentage of net sales, mainly due to a more favorable vendor pricing.
Speaker Change: Increased imports as a percentage of total product mix, and foreign currency gain, partially offset by a higher freight and duty cost as a percentage of net sales.
Speaker Change: Operating expenses for the 2025 first quarter increased 11.6% to 32.9 million dollars from 29.5 million dollars in the prior year quarter.
Jian Guo: The increase was primarily due to a $3.4 million increase in shipping and transportation costs from higher sales volume and an increase in online sales packages as a percentage of total shipments, as well as a $0.9 million increase in rent expense due to the opening of our new distribution center and lease extension in China. Additionally, marketing expense and professional service expense also increased $0.4 million and $0.3 million compared with the prior year quarter, respectively.
Speaker Change: The increase was primarily due to a $3.4 million increase in shipping and transportation from higher sales volume and an increase in online sales packages as a percentage of total shipments.
Speaker Change: as well as a $0.9 million increase in rent expense due to the opening of our new distribution center and lease accession in Chino.
Speaker Change: Additionally, marketing expense and professional service expense also increased $4 million and $3 million compared with the prior year quarter respectively. The increases were partially offset by $2.0 million.
Jian Guo: The increases were partially offset by a $2.0 million non-cash impairment of a right-of-use asset during the prior year quarter, resulting from the sublease of a warehouse in the City of Industry, California. Operating income for the 2025 first quarter was $7.8 million versus $8.1 million in the prior year quarter. Net income for the 2025 first quarter increased 5.2 percent to $6.8 million from $6.5 million in the prior year quarter. Net income margin was 6.6 percent in the 2025 first quarter compared with 6.8 percent in the prior year quarter. Net income attributable to Karat for the 2025 first quarter was $6.4 million or $0.32 per diluted share compared with $6.2 million in the prior year quarter or $0.31 per diluted share.
Speaker Change: Non-Cash impairment of a right-of-use asset during a prior year quarter, resulting from the sub-lease of a warehouse in the City of Industry, California.
Speaker Change: Operating Income for the 2025 first quarter was $7.8 million versus $8.1 million in the prior year quarter.
Speaker Change: Net income for the 2025 first quarter increased 5.2% to $6.8 million from $6.5 million in the prior year quarter.
Speaker Change: Net income margin was 6.6% in the 2025 first quarter, compared with 6.8% in the prior year quarter.
Speaker Change: Net income attributable to Karat for the 2025 first quarter was $6.4 million or 32 cents per diluted share compared with $6.2 million in the prior year quarter or 31 cents per diluted share.
Jian Guo: Adjusted EBITDA for the 2025 first quarter was $11.9 million compared with $13.5 million for the prior year quarter. adjusted EBITDA margin was 11.5% of net sales for the 2025 first quarter compared with 14.2%. for the prior year quarter. adjusted diluted earnings per common share was $0.33 for the 2025 first quarter compared with $0.40. for the same quarter last year. We generated operating cash flow of $7.7 million in the first quarter and ended the quarter with $111.9 million in working capital. our free cash flow was $6.6 million in the first quarter. As of March 31, 2025, we have financial liquidity of $46.7 million with another $23.8 million in short-term investment.
Speaker Change: Adjusted EBITDA for the 2025 first quarter was $11.9 million compared with $13.5 million for the prior year quarter.
Speaker Change: Adjusted EBITDA margin was 11.5% of net sales for the 2025 first quarter compared with 14.2%.
Speaker Change: for the prior year quarter. Adjusted diluted earnings per common share was 33 cents for the 2025 first quarter compared with 40 cents for the same quarter last year.
Speaker Change: We generated operating cash flow of $7.7 million in the first quarter and ended a quarter with $111.9 million in walking capital.
Speaker Change: Our free cash flow was $6.6 million in the first quarter. As of March 31st, 2025, we have financial liquidity of $46.7 million with another $23.8 million in short-term investments.
Jian Guo: On May 6, 2025, our Board of Directors approved the quarterly dividend of 45 cents per share payable May 23, 2025, to stockholders of record as of May 16, 2025. Looking ahead, we expect net sales for the 2025 second quarter to increase by high single digits to low double digits over the prior year quarter. We expect our growth margin for the 2025 second quarter to be in line with the first quarter and adjusted EBITDA margin to be in the mid-team.
Speaker Change: On May 6th, 2025, our Board of Directors approved the quarterly dividend of 45 cents per share, payable May 23rd, 2025 to stockholders of record as of May 16th, 2025.
Speaker Change: Looking ahead, we expect net sales for the 2025 second quarter to increase by high single digits to low double digits over the prior year quarter. We expect our growth margins for the 2025 second quarter to be in line with the first quarter and adjusted EBITDA margin to be in the mid-teens.
Jian Guo: Currently, we are reiterating our 2025 four-year guidance on net sales, gross margin, and adjusted EBITDA margin.
Speaker Change: Currently, we are reiterating our 2025 four-year guidance on net sales, gross margin, and adjusted EBITDA margin.
Operator: Alan and I. Now we'll be happy to answer your questions, and I'll turn the call back to the operator. We will now begin the question and answer session. To ask a question, you may press star and one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then.
Alan and I.
[inaudible]
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star the moon on your telephone keypad.
Speaker Change: If you're using a speaker phone, please pick up your handset before pressing the keys. And if at any time your question has been addressed and you would like to withdraw your question, please press star then two.
Operator: At this time, we will pause just momentarily to assemble our roster.
Speaker Change: At this time, we will pounce it momentarily to assemble our roster.
[inaudible]
Jake Bartlett: And our first question here will come from Jake Bartlett with Trur Securities. Please go ahead. Hi, guys.
Speaker Change: And our first question here will come from Jake Bartlett with true securities. Please go ahead.
Larson: This is Larson on for Jake. Congrats on a strong quarter. Just had a few here if we could get through the first one. I just want to touch on, I know you mentioned that you're, you know, working towards getting that China exposure down to 10%. I was wondering if you could just give any sort of color on that as far as, you know, some of the countries that you might be looking through. I know for competitive reasons might be a little bit muted, but anything you can add there, that'd be great. You know, just wondering if it's sort of a near-term thing where, you know, you might see an impact longer term or, you know, anything you can add for context there.
Speaker Change: Hi guys, this is Larsen on for Jake. You're at on a strong quarter. I just had a few here as we could get through the first one. I just want to touch on.
Speaker Change: I know you mentioned that you're working towards getting that China exposure down to 10%, I was wondering if you could just give any sort of color on that as far as some of the countries that you might be either looking through. I know it's for competitive reasons might be.
Speaker Change: A little bit muted, but anything you can add there, that'd be great. You know, just wondering if it's sort of a near-term thing where, you know, you might see an impact longer term or, you know, anything you can add for context there.
Alan Yu: Sure, Lawson. Let me answer that question. As Jen mentioned earlier, we were at about 10% as of first quarter. Our goal is actually we're expected to be at no more than 1% or maybe 1% or a little bit more than that by August of this year, shipment out of China. And where we move to, we're moving them majorly into Malaysia, Indonesia, Vietnam, and we're adding more product into Thailand. That's where we're moving the majority of the product. Great, thanks. Appreciate that color there. And then on the price, I want to add one more thing. I'm sorry.
Sure, Lawson. Let me answer that question then.
Asmet Jen Mission earlier, we are, we were at about
Speaker Change: 10% as a first quarter. Our goal is, actually, we're expected to be at no more than 1% or maybe 1% a little bit more than that by August of this year.
Speaker Change: Chipman out of China. And where we move to, we're moving them majority into Malaysia, Indonesia, Vietnam, and we're adding more product into Thailand. That's where we're moving the majority of the product to.
Speaker Change: Great. Thanks. Appreciate the color there. And then, I'm sorry, I do want to add one more thing. I'm sorry, I lost. Sure. I do want to add one more thing. We're actually looking into getting product from the Middle East as well. So basically, it will be we want to diversify out of not just 100% out of Asia. Yeah.
Alan Yu: I do want to add one more. We're actually looking into getting product from Middle East as well. So basically, it will be will be we want to diversify out of not just 100% out of Asia and moving to other part of the continent. That's that's part of our goal. Great, thanks.
that's part of our goal for this year, too.
Alan Yu: On the pricing, you know, how do you view the balance between are you guys expecting to pass the full impact of the tariffs on to customers? Are you going to absorb some of that in margins? Or how are you sort of thinking about that? Well, we have implemented a price increase April 1st on certain items, and we've already announced an across-the-board increase. May 19, that's on every iPhone. It's ranging from 5% to somewhere like 15, 20%, depending on the product itself. So that's what we're looking to do. In terms of are we absorbing all of the costs, it's not 100%, but one thing for sure is our product, basically, it's in high demand.
Speaker Change: Thanks. On the pricing, how do you view the balance between are you guys expecting to pass the full impact of the tariffs on to customers or even absorb some of that margins or how are you sort of thinking about that?
Speaker Change: Well, we have implemented a price increase in April 1st on certain items.
Speaker Change: and we've already announced a cross-the-board increase, May 19th. That's on every item.
Speaker Change: It's ranging from 5% to somewhere 15%, 20% different depending on the product itself.
Speaker Change: So that's what we're looking to do. In terms of are we absorbing all of the costs? It's not 100%
Speaker Change: But one thing for sure is our product, basically, it's in high demand right now. We're seeing a lot of our competitors or importers.
Alan Yu: We're seeing a lot of our competitors or importers stop. 100%, and they're coming to us for everything. And there has been already a major shortage of product already in certain categories.
Stop Importing [inaudible]
Speaker Change: 100% and they're coming to us for everything and there is there has been already
a major shortage of product already and certain category.
Jian Guo: And I just wanted to add on to that just real quick. So in terms of the pricing, obviously, we have been and we remain to be very competitive on the pricing side. To add a little color to Alan's point, we did announce we are expecting to implement some price increases, but we're also looking internally aggressively at areas where we can gain more efficiency to save cost to be able to absorb, to your point, some of the price increases as well. Great, appreciate that.
Speaker Change: and I just wanted to add on to that just real quick.
Alan Yu: To add a little color to Alice Point, we did announce we are expecting to implement some price increases, but we are also looking internally, aggressively at areas where we can gain more efficiency to save cost.
Alan Yu: to be able to absorb to your point some of the increase in crisis as well.
Alan Yu: And then on how do you guys think about reciprocal tariffs? You know, is that factored into guidance? Or what do you think that means for the business? Right now, currently, we're just doing business as we go. Everyone knows that the situation changes not by the month or by the quarter situation are being changed. The it's not just us. Basically, it's really hard to find. Yeah, fair point.
Alan Yu: Great, appreciate that. How do you guys think about reciprocal tariffs? Is that factored into guidance or what do you think that means for the business?
Alan Yu: Right, well, currently we're just doing business as we go because everyone knows that the situation changes not by the month or by the quarter, the situation are being changed by the days.
Alan Yu: So it's hard for anybody to prepare anything, to think of any reciprocal terror because we don't really know that's going to happen. And if it happens, we don't know what's going to happen. So it's not just us. It's basically it's really hard to plan anything like this at this point.
Alan Yu: And then just a few more here. You know, so would you say you think it's fair to say that you are in a position where the tariffs are almost a net benefit because you guys are actually have been, you know, let's say, quicker to the ball on getting the sourcing outside of China compared to competitors where you might be able to take share now? Yes, I think that we have improved. It's just that it came early. Yeah, fair enough.
Speaker Change: Yeah, fair point. And then just a few more here. You know, so would you say, you think it's fair to say but
Speaker Change: You are in a position where the tariffs are almost a net benefit because you guys are actually have been, you know, I'd let's say quicker to the ball on getting the sourcing outside of China compared to competitors, we might be able to take Sharon out.
Speaker Change: Yes, I think that we have been prepared. It's just that it came earlier than we planned it. That's all.
Alan Yu: And the last one here, just, you know, how much, did you say that the freight cost that you're seeing in the quarter were actually higher this past quarter or was that lower? Again, everything changes. Last quarter, the first quarter, the freight was lower than the fourth. upcoming quarter, second quarter, the fray is looking higher than the first quarter, but this is only We don't know if something's going to change because all the shipments are delayed. Well, actually, they stopped shipping and it's going to get very competitive, so price may come down. Week So, everything is so fluctuating.
Speaker Change: Yeah, fair enough. And the last one here, just, you know, how much, so did you say that the freight cost that you're seeing in the quarter were actually higher than this past quarter, or was that, was that lower?
Speaker Change: Again, everything changes. Last quarter, the first quarter, the free was lower than the fourth quarter.
Speaker Change: Upcoming quarter, second quarter, the phrase is looking higher than the first quarter, but this is only this month.
Speaker Change: We don't know if something is going to change because all the shipments are delayed or actually they stop shipping and it's going to get very competitive so...
next week.
So, everything is so fluctuating right now.
Alan Yu: Yeah, yeah, fair point.
Larson: And then just to wrap up here, you mentioned before that there's some cost saving initiatives that you're looking at internally. Is there anything you could share as an example, something like that, that would be good to contextualize?
Yeah.
Speaker Change: Yeah, yeah, fair point. And then I'm just to wrap up here. You mentioned before that there's some cost saving initiatives that you're looking at internally. Is there anything you could share as an example of something like that that would be good to contextualize?
Jian Guo: Yes, I think Jian can go over it on the cost. Yeah, sure.
Speaker Change: Yes, I think Jan can go over it on the car saving initiative that we have.
Jian Guo: So, one good example is when we look at our controllable variable cost, one big component is shipping and transportation cost. So, basically, the cost that we incur, that we spend with our third-party carrier, the partners, to distribute products to our customers. So, this is one area that we have been looking very aggressively in terms of negotiating with our vendors. We recently launched a project where we are getting some savings, we are seeing some initial savings starting the month of March by switching out some of our third-party carriers. So, we've seen encouraging results from the month of March already and we'll be prepared to provide another update in our next quarter.
[inaudible]
Speaker Change: Yeah, sure, so one good example is when we look at our controllable, wearable cost, one big component is shipping and transportation.
Speaker Change: Cost, so basically the cost that we incur that we spend with our third party carrier, the partners.
Speaker Change: to distribute products to our customers. So, this is one area that we have been looking very aggressively in terms of negotiating with our vendors. We recently launched a project where we are.
Speaker Change: We are getting some savings. We are seeing some initial savings starting the month of March.
Speaker Change: by switching now some of our third-party carriers. So we've seen encouraging results from the month of March already and will be prepared to provide another update in our next quarter's call.
Larson: Wonderful. Thanks, guys. Appreciate it.
Wonderful. Thanks guys. Appreciate it.
Operator: And again, if you have a question or a follow-up, you may press star, the one to join the queue.
Speaker Change: And again, if you have a question or a follow-up, you may press star of the one to join the queue.
Ryan Meyers: Our next question will come from Ryan Meyers with Lake Street. Please go ahead. Hey guys, thanks for taking my questions. First one for me, I just want to make sure I get a good understanding of the gross margins for the year. So you commented that you expect the second quarter gross margins to be largely flat with the first quarter. But if we look at the second half, that obviously implies sort of a step down in gross margins just to get to the range of the guidance that you gave. Just any dynamics that you want to call out there as far as what you can potentially see in the second half of the year on the gross margin side?
Speaker Change: Our next question will come from Ryan Meyers for the Lake Street. Please go ahead.
Ryan Myers: Hey guys, thanks for taking my questions. First one for me, I just want to make sure I get a good understanding of the gross margins for the years. So you commented that you expect the second quarter to gross margins to be largely flat with the first quarter, but if we look at the second half that obviously implies sort of a step down in gross margins just to get to the range of the guidance that you gave, just any dynamics that you want to call out there as far as what you can potentially see in the second half of the year on the gross margin side.
Jian Guo: Yeah. I can. Yeah, I can take that.
Jian Guo: Hi, Ryan. Thanks. Thanks for the question. So you are absolutely right. So At this point, we do expect our second quarter growth margin to be consistent with the first quarter. We are saying that because we have good visibility into our growth margin, even with – I know obviously we've been talking about the tariff and the freight cost, and obviously we're sitting in early part of May. I say we have good visibility because our inventory turns roughly about – it takes we have a good idea just based on all the freight cost, what we have paid over the past couple of months.
Julianne Keeley
Speaker Change: I can take that. Hi, Ryan. Thanks for the question. So you are absolutely right. So
Speaker Change: At this point, we do expect our second quarter close margin to be consistent with the first quarter.
Speaker Change: I say we have good visibility because our inventory turns roughly about, it takes about roughly 60 days to turn. That's the reason why we have a good idea, just based on all the...
Jian Guo: I mean, that gives us a good idea of what the second quarter growth margin looks like. So that's on the second quarter. In terms of the full year, yes, you are right. At this point, obviously tariff is a little up in the air, but we did build some cushion, and some – we have some scenario analysis in terms of kind of how margin is going to be compressed a little bit in the second half of the year because of the duties, the tariffs that we would expect to pay, and depending obviously how the negotiations go, so you're absolutely right, we do have a, we're building some conservatism in the second half of, in the model for the gross margin in the second half.
Speaker Change: Craig Coste, what we have paid over the past couple of months, I mean that gives us a good idea of what the second quarter growth margin looks like. So that's on the second quarter. In terms of the four year, yes, you are right. We at this point, obviously tariff is a.
Speaker Change: Open, right? It's a little up in the air, but we did build some cushion, some we have some scenario analysis in terms of kind of how.
Speaker Change: margin is going to be compressed a little bit in the second half of the year because of
Speaker Change: The duties, the tariffs that we would expect to pay, and depending on obviously how the negotiations go, so you're absolutely right, we do have a, we're building some conservative them in the second half of, in a model for the growth margin in the second half.
Ryan Meyers: Got it. That makes sense.
Alan Yu: And then my next question, you know, I was curious to see that you guys ramped up domestic manufacturing, you know, can you maybe give us what the mix of the revenue during the quarter came from domestic manufacturing, and then maybe how you expect that to play out through the year? The first quarter, we didn't actually ramp But in starting recently, we've seen that. Overwhelming. on their products, so we're turning on machines that we didn't have them on before and also we're asking our employees to come and work overtime. to do some more product. We are, as I mentioned earlier, there has been shortages in the market already and basically a product...
Speaker Change: at that makes sense. And then my next question, you know, I was serious to see that you guys ramped up domestic manufacturing. You know, can you maybe give us what the mix of the, you know, revenue during the quarter came from domestic manufacturing. And then maybe how you expect that to play out through the air.
Speaker Change: In the first quarter, we didn't actually ramp up much of a domestic manufacturer, it was pretty much a stable, but in starting recently, we've seen that there's a shortage in the household increase in demand.
Speaker Change: Overwhelmingly increasing demand on the product. So we're turning on machines that we didn't have the mom before and also we're asking our employees to come into work over time to produce more product.
Alan Yu: We're actually telling customers not to stock up inventory. We're not allowing people to buy 4, so this will not disrupt our inventory level. do need to build additional inventory PR because we are more and more customer giving us a forecast that they will be taking inventory from us by stopping importing from where they've been done. So that's where we're at. Transcripts provided by Transcription Outsourcing, LLC. Got it. That makes sense.
Speaker Change: We're actually telling customers not to stock up inventories and we're not allowing people to buy four.
Speaker Change: But we do need to build additional inventory because we are seeing
Speaker Change: More and more customer, giving us a forecast that they will be taking inventory from us by stopping importing from what they've done they've been doing so that's that's what we're at right now but in terms of percentage wise we actually don't have that yet.
Alan Yu: And then the last question for me, you know, this is more of a bigger picture industry type question. When you think about the volume that you guys have continued to drive over the last couple of quarters, I would assume that you've continued to take a significant amount of market share. So Alan, you know, what would you attribute that to? Is that just really your guys' ability to get your customers the inventory they want? Or is there anything else that's worth noting there? Well, one thing is credibility. We build a great relationship in doing the COVID.
Speaker Change: Got it, that makes sense. And then the last question for me knows is more of a bigger picture industry type question. When you think about the volume that you guys have continued to drive over the last couple of quarters, I would assume that you've continued to take the significant amount of market share. So, Alan, what would you attribute that to? Is that just really your guys' ability to get your customers the inventory they want or is there anything else that's worth noting there? Yeah.
Well, one thing is credibility.
We built a great relationship.
in doing the COVID period.
that were a stable company and reliable.
Alan Yu: at the area and Marshall M suggested that the independents beheim room and Marshal UN and I told him that that's correct. So whether he believes this or not, the People's Republic of China has signed a manufacturing cushion just for the upcoming summer, and that's when our new President Trump announced Tariff in April, early April. Everybody started to scramble, but that's too late. But we started to gear up back in March. didn't expect it's going to be this much, the tariff, didn't much. volume increase in our sales part is going to be that. But the good thing is we're ready, and our customer's happy that we're...
Speaker Change: We will make sure that we're prepared for anything happens. And the good thing is that because of our additional event at Warehouse in Chino that we sign up in March, we were able to build additional inventory.
cushion.
just for the upcoming summer.
Speaker Change: and that's when our new president, President Trump announced the tariff in April , early April
Speaker Change: Everybody starts to scramble, but that's too late. But we started to gear up back in March.
didn't expect it's going to be this much, the tariff.
Speaker Change: The volume increase in our sales part is going to be that much but the good thing is we're ready and our customers are happy that we're ready and because of we build an existing relationship with a lot of these clients
Ryan Meyers: And because of we build an existing relationship with a lot of... Now they're in need, and they've come to... Basically, we're doing our best. Got it. Thank you for taking my questions. And this concludes our question and answer session.
Speaker Change: Now they're in need and they've come to us and basically we're doing our best to help whatever we can. Yeah.
Got it, thank you for taking my questions.
Alan Yu: I'd like to turn the conference back over to Alan Yu for any closing remarks. Well, thank you, everybody, for joining our earning conference calls in the first quarter of 2025.
Speaker Change: In this concludes our question and answer session. I'd like to turn the conference back over to Alan Yu for any collision remarks.
Alan Yu: Well, thank you everybody for joining our earning conference calls in first quarter 2025. We look forward to seeing all of you on the next quarterly meeting. Thank you very much. Have a nice day. Bye bye.
Alan Yu: We look forward to seeing all of you on the next. Thank you very much. Have a nice day.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line.
Alan Yu: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.