Q2 2025 Karat Packaging Inc Earnings Call
Speaker #4: Good afternoon, everyone, and welcome to the Karat Packaging Inc. second quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should ou need assistance, please say no at conference specialist by pressing the star key, followed by zero.
Speaker #4: After today's presentation, there will be an opportunity ask questions. To ask a question, you may press star and then one on your touchtone telephones.
Speaker #4: To withdraw your estions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Roger Pondel.
Speaker #4: Sir. Please go head.
Speaker #5: Good afternoon, everyone, and welcome to Karat Packaging's 2025 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.
Speaker #5: Before I turn the call over to Alan, I want 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 #5: Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factors section of Karat'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.
Speaker #5: Actual results could differ materially from these forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements except as required by law.
Speaker #5: Please also note that during today's call, we will be discussing adjusted EBITDA and adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow which are non-GAAP financial measures as defined by SEC regulation G.
Speaker #5: A reconciliation of the most recently 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.
Speaker #5: And with that, I will turn the call over to CEO Alan Yu. Alan.
Speaker #6: Thank you, Roger. Good afternoon, everyone. We achieved a record second quarter performance, marked by a 13% increase in sales volume. 10% growth in net sales and 20% growth in net income.
Speaker #6: Year over year. Despite a significant foreign currency headwind due to a sudden substantial weakening in the US dollar against new Taiwan dollar. Heading into the third quarter, we continue to diversify our global sourcing and expand into new countries and geographies.
Speaker #6: And we see the currency pressure starting to ease. A record quarter performance is a testimony to Karat's nimble business model and resilient global supply chain, which allow us to early success in igating the supply chain disruption and trade uncertainties.
Speaker #6: We are swiftly diversifying our sourcing footprint. Reducing reliance on China to just 10% in the second quarter, while implementing plans to further expand our sourcing across other Asian countries and Latin America to enhance supply chain resilience and flexibilities.
Speaker #6: In addition to the sourcing diversification, Karat's ability to quickly ramp up existing domestic manufacturing operations enables us to respond rapidly to customers' needs together with these actions have further enhanced our agilities and competitiveness.
Speaker #6: And are helping us to secure new business and position the company well for sustained growth in a challenging external environment. Business trend remains strong.
Speaker #6: As we proceed into the third quarters and the remainder of the 2025, and continue double-digit sales growth across of our major markets, including California, further.
Speaker #6: These are new business wins from a number of large national chains are scheduled to begin shipping in the third and fourth quarters. Our new distribution center near our Chino headquarters is now fully operational.
Speaker #6: Significantly strengthening our logistic capabilities and enabling even faster delivery time. This facility also supported inventory buildup during the second quarter. Positioning us well to accommodate our anticipated growth in the second half of the year.
Speaker #6: As previously announced, we implemented price increases for select products on April 1st. Followed by a broader price adjustment across most of our product lines in late May.
Speaker #6: We continue to assess the impact of these changes. Along with potential effects from the new tariffs affecting in August. Karat remains focused on accelerating top-line growth and profitability through product innovation, strategic expansion, and a track record of being a dependable supplier to our ustomers.
Speaker #6: At the same time, we continue to drive operational efficiency through discipline cost management. In the second quarter, we improved our ating cost leverage, saving $1 million in online shipping and marketing.
Speaker #6: By switching provider, even as shipping volume increased. We also shifted our online sales focus from third-party platform fulfillment to our own e-commerce storefronts. Lowering online selling costs and more effectively utilizing online marketing dollars.
Speaker #6: These efforts reflect our ongoing focus on balancing growth with profitability and building long-term operational resilience. We believe Karat, as well-positioned for continued profitable growth, and I will now turn the call over to Jian Guo, our chief financial officer, to discuss the company's financial result in greater detail.
Speaker #6: Jian?
Speaker #7: Thank you, Alan. I'll begin with a summary of our Q2 performance. Followed by an update on our guidance. Net sales for the 2025 second quarter were 124 million dollars, up 10.1% from 112.6 million dollars in the prior year quarter.
Speaker #7: The increase was primarily driven by year-over-year volume growth of 13%, partially offset by 3.3 million dollars in unfavorable pricing as chains and distributors' growth outpaced online and retail channels.
Speaker #7: Sales to chain accounts and distributors were up by 11.4%. Online sales increased 6.8% over the prior year quarter, reflecting our continued focus on expanding this high-margin category.
Speaker #7: Sales to the retail channel turned positive with an increase of 1.9%. Cost of goods sold for the 2025 second quarter was 74.9 million dollars, compared with 69.2 million dollars in the 2024 second quarter.
Speaker #7: The increase primarily reflected 4.0 million dollars of higher product costs, resulting from increased sales volume. This was partially offset by more favorable vendor pricing and product mix.
Speaker #7: Additionally, ocean freight and duty costs rose by 2.1 million dollars due to higher import duty costs. Impacted by the recent tariffs coupled with an increase in import volume of 37.0%, as we increased inventory ahead of expected business expansion during the second half of 2025.
Speaker #7: At the same time, average ocean container rates during the 2025 second quarter decreased 4.0% year over year. Gross profit for the 2025 second quarter increased 13.1% to 49.1 million dollars, from 43.4 million dollars in the prior year quarter.
Speaker #7: Gross margin increased 110 basis points to 39.6% compared with 38.5% in the prior year quarter. Gross margin benefited from lower product costs as a percentage of net sales mainly due to more favorable vendor pricing and product mix.
Speaker #7: And reduction in depreciation expense as a percentage of net sales. These improvements were partially offset by higher ocean freight and duty costs as a percentage of net sales increased to 9.5% during the 2025 second quarter, versus 8.6% during the 2024 second quarter.
Speaker #7: Operating expenses for the 2025 second quarter were 32.6 million dollars, compared with 32.3 million dollars in the prior year quarter. The increase was mainly due to higher shipping and transportation costs for offline orders from increased shipping volume increased the rent and higher salaries and benefits.
Speaker #7: These increases were partially offset by a decrease in shipping costs for online orders despite the increase in online orders shipped. Online platform fees lower marketing expense stock-based compensation and a gain recognized from disposal of machinery and equipment.
Speaker #7: Operating income in the 2025 second quarter increased 48.9% to 16.6 million dollars, from 11.1 million dollars in the prior year quarter. Total other expense net was 2.0 million dollars for the 2025 second quarter, compared with other income net of 1.0 million dollars in the prior year quarter.
Speaker #7: The difference was primarily due a loss on foreign currency transactions of 2.9 million dollars, compared with a gain of 0.3 million dollars during the 2024 second quarter.
Speaker #7: Net income for the 2025 second quarter increased 19.8% to 11.1 million dollars, from 9.2 million dollars for the prior year quarter. Net income margin was 8.9% in the 2025 second quarter, compared with 8.2% a year ago.
Speaker #7: Net income attributable to Karat for the 2025 second quarter was 10.9 million dollars, or 54.00 cents per diluted share, compared with 9.1 million dollars or 45.00 cents per diluted share in the prior year quarter.
Speaker #7: Adjusted EBITDA for the was 17.7 million dollars, compared with 15.7 million dollars for the prior year quarter. Adjusted EBITDA margin was 14.3% of net sales for the 2025 second quarter, compared with 13.9% for the prior year quarter.
Speaker #7: Adjusted diluted earnings per common share was 57.00 cents for the 2025 second quarter, compared with 49.00 cents for the same quarter last 2025 second quarter quarter, and ended the quarter with 116.8 million dollars in working capital.
Speaker #7: Our free cash flow was 9.6 million dollars in the second quarter. As of June 30th, 2025, we had financial liquidity of 44.7 million dollars, with another 26.4 million dollars in short-term investments.
Speaker #7: On August 5th, 2025, our board directors approved the quarterly dividend of 45.00 cents per share, payable August 27th, 2025, to stockholders of record as of August 20th, 2025.
Speaker #7: Looking ahead, we expect net sales for the 2025 third quarter to increase by approximately 9 to 10 percent over the prior year quarter. We expect our gross margin for the 2025 third quarter to be in the low to mid-30s, and adjusted EBITDA margin to be within 10 to 12 percent as our cost of goods sold have begun to reflect inventory brought in with the elevated tariff.
Speaker #7: Currently, we are maintaining our full year 2025 guidance for net sales gross margin and adjusted EBITDA margin pending potential impact related to additional tariff changes.
Speaker #7: Alan and I now will be happy to answer your questions and I'll turn the call back to the operator.
Speaker #8: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, please press star and one using a touchtone telephone.
Speaker #8: To withdraw your questions, ou may press star and two. If you are using a speakerphone, we do ask that you please ick up the handset prior to pressing the keys to ensure the best sound quality.
Speaker #8: Once in, that is star and then one, to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Michael Francis from William Blair.
Speaker #8: Please go ahead with your question.
Speaker #9: Hi, guys. this is Mike on for Ryan. nice quarter. wanted to, to unpack some, some stuff in the guide, but first want to start with, with prices.
Speaker #9: we're surprised to see price was negative on the quarter, especially with some of the tariff price increases. So I guess two parts. why was price negative on the quarter?
Speaker #9: And then what should we be expecting from the, the impact of price in second half?
Speaker #10: We are currently holding on to the pricing. with some minor increases in certain categories, that's it. because we're seeing that the, there's more visibility in terms of, every country that we import now on the pricing.
Speaker #10: And also one of the things is that, we mitigated, we will be starting to mitigate, our costs by moving some of the product that we've sourced from, the certain countries from Taiwan into other Asian and Latin American countries, with, lower tariff, as well as the, our costs of goods purchase, has been reducing.
Speaker #10: So we have some, new vendors and vendors that we work with, looking to reduce our costs. And that's going to help us in terms of, mitigating any, potential tariff increases.
Speaker #10: Impact.
Speaker #9: Okay. Okay. So if I, I think about that, right, with, with your second half guide, that, that you referred to, should I be thinking sort of a similar volume growth and, and price impact that we saw in this quarter and in the third quarter?
Speaker #10: Jian, would ou be able to answer that question?
Speaker #7: Yeah. So, to answer your estion, Michael, going forward, second half of the year, we do expect pricing to be close to break even. Compared about a negative three in this quarter.
Speaker #9: Okay. Understood. And then, with that, I noticed that there's, an embedded in the guide, there's a sequential decline in, in gross margin. so I wanted to know what the puts and takes of that is.
Speaker #9: Is it tariffs ing through the, the P&L? Is it, just forward profitability, sourcing from other, other countries, just would love to unpack that.
Speaker #10: Well, the currently, I would say that, the impact, the positive impact, of the, new sourcing will be hitting, will be actually receiving that impact in the fourth quarter.
Speaker #10: So we're right now, third quarter, we are still seeing that, some of the tariffs that we brought in, in the second quarter, in the second quarters, we're seeing that, with a higher tariff cost.
Speaker #10: And, that should be mitigated in the fourth quarters. So right now, we're, we're trying to see where the, how much impact it will be.
Speaker #10: That's why we mentioned in the second, first quarter, during our first quarter earnings conference call, we, we mentioned that, the product brought in in the second quarter will be sold in the third quarters.
Speaker #10: So, second quarter will have higher gross margin and third quarter will have a lower gross margin. and also the bigger impact was because, many of the products we source from Taiwan had a currency, FX loss in terms of, devaluation into US dollars that's causing the increase in some of the, cost of goods sold, decrease our gross margin as well.
Speaker #9: Okay. so if I, if I'm understanding you right, it should be down in, in the third quarter but then gross margin should recover some in the, in the fourth quarter?
Speaker #10: Yes, that is my understanding.
Speaker #9: Okay. and then the last one for me, I just wanted to know what you're seeing on, on July trends and, have you seen any sort of free buy from, from your customers ahead of the, the August tariffs?
Speaker #10: We are seeing, especially from, some of our national chain account, there's, there's sales in July has been very strong. And we have due to the tariff, we've seen a, several, many of our, smaller importer competitors, gone, reduced their inventory.
Speaker #10: And, our volume has increased, in terms of a certain category that, people were sourcing from overseas. So, we're eing strong demand in terms , July, especially in California, we're seeing, more than double-digit sales, increase in California market.
Speaker #10: it started in June and July was basically a follow the trend. So we're pretty, we, we believe that the, the revenue volume double-digit is, very, it's something that we're, you know, that we're, we know that we can, definitely beat it.
Speaker #9: Okay. I'll pass it on. Thanks, guys.
Speaker #8: Once again, if you would ike to ask a question, please press star and then one. To withdraw your questions, you may press star and two.
Speaker #8: Again, that is star and then one to join the question queue. And our next question comes from Josh Axel from UBS. Please go ahead with your estion.
Speaker #11: Hi, guys. Hope all's well today.
Speaker #10: Hi, Josh.
Speaker #11: Question, hi. question for you on, the online sales? Can you, give a little, guidance on what you're thinking for the second half of the year as far as online sales?
Speaker #11: So kind of growth you're, you're geting and what you're seeing in that area? And then I have one, one more question for you.
Speaker #10: Sure. No problem. we believe online sales will continue to grow, especially we just added new platform called Cisco Marketplace. That seemed to be, doing quite well for us.
Speaker #10: And it's basically fulfilled by our own logistic warehouse. we move away from Amazon FBA, fulfillment by a third party. because the cost was, it's just too high.
Speaker #10: And, there was a lot of issues in terms of inventory, inventory reconciliation. And by moving away from Amazon FBA, our margin revenue, our revenue dropped a little bit, but our margin has, significantly gained a in terms of margin-wise.
Speaker #10: And, we have better controls of the inventory as well. So we do see, our online sales to grow, continuously, just like we have been in the past month, years.
Speaker #11: Do you, do you, do you think you can get back to a double-digit? online growth in the second half of the year? Or with, with losing Amazon?
Speaker #11: Is that going to be a little more icult?
Speaker #10: I would think that in the fourth quarter, because we're the, the Cisco place, marketplace, we started at just about, three months ago. And it has built a lot of momentum.
Speaker #10: And we're adding, we weren't, we probably had about 500 SKU in the Cisco marketplace. And we, and we're looking to add another, 750 SKU, this month.
Speaker #10: So these, definitely will turn into a revenue. So we believe that in the fourth quarter, online revenue should be able to go back to double-digit growth.
Speaker #10: Yes.
Speaker #11: Okay, great. And then the last question: can you just discuss the M&A landscape? If you're looking at anything, what is it? Or do the prices just not seem attractive, or is it just a matter of where you are?
Speaker #11: Thanks.
Speaker #10: yes. We have, I, we, we are still looking at M&A and also we analyze the current, the previous past, six months. There has been some, a couple of M&A, mergers and acquisitions in our packaging space.
Speaker #10: And it seems like, the sellers were not getting, as much as they were hoping
Speaker #10: for. but the, the price is comment, Alan, on what you're seeing in still, I believe, it's not to where we believe it should be.
Speaker #10: and also, most of our competitors who bought these, acquired the acquiree were just to gain mar, not a gain the product line, and market shares, which we can basically increase our, bring in new SKUs and that we can do it urselves.
Speaker #10: Our goal with M&A is, basically, strategically. It has to be a location, or a client base, or an item that we do not currently carry.
Speaker #10: So we are still looking at that, on that segment. And also, of course, you know, adding new product lines, that's what 've been doing, we, in the past, month, we've, looking to partnership with other people's, discussion has been going on for over, several months in the past with different kind of vendors that we have.
Speaker #10: to see if there's any potential that we can work together in terms, just like we had in the past with the Bugas manufacturer joint ventures.
Speaker #10: So these are the things that we're looking at. So we're not just saying that we're just playing one segment. We're oking at in different areas.
Speaker #11: Great. Thank you very much, guys.
Speaker #10: Thank you, Josh.
Speaker #8: And with that, ladies and gentlemen, we'll be concluding today's question and answer session. I'd like to turn the conference call back over to Alan Yu for any closing comments.
Speaker #4: Thank ou, everyone, for joining our Karat Packaging second quarter earnings conference call. And I would like to say, thank you all and have a nice day.
Speaker #4: Bye-bye.
Speaker #8: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining.