Q2 2026 Karat Packaging Inc Earnings Call
Speaker #1: Good day, and welcome to the Karat Packaging second quarter 2026 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker #1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touchtone phone.
Speaker #1: To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Roger Pondel, please go ahead.
Speaker #2: Good afternoon, everyone, and welcome to Karat Packaging's 2026 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 #2: Before I turn the 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.
Speaker #2: 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 and 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 #2: 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 #2: 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.
Speaker #2: 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.
Speaker #2: And with that, I will turn the call over to CEO Alan Yu. Alan?
Speaker #3: Thank you, Roger. Good afternoon, everyone. We deliver record quarterly net sales of more than 136 million dollars. Reflecting the strength of our customers' demand and accelerated momentum in our online business growth, during the quarter, our sales pipeline expanded, adding four new chain accounts which further broadened our market reach and created additional opportunities for future revenue growth.
Speaker #3: We continue to experience encouraging momentum across our business, highlighted by the strong performance of our online channel. We're net sales increased 23.6% year over year.
Speaker #3: Our eco-friendly product portfolio also continued to gain traction, benefiting from the continued expansion of SKUs and growth in the paper bag categories. As a result, eco-friendly products represented 33.8% of total sales during the quarter, compared with 31.8% in the prior-year period.
Speaker #3: Our results also benefited from IEPA tariff refunds, which refers higher tariff costs absorbed in the prior periods. And further contributed to the strong reported profitabilities.
Speaker #3: While we were pleased to capture this benefit in the quarter, our focus remains on the fundamental drivers of the business and sustaining strong long-term financial performances.
Speaker #3: To support our long-term growth strategy, we are currently finalizing a lease for a 47,000 square foot warehouse for a new distribution center in Orlando, Florida.
Speaker #3: Which we expect to be operational by the third quarter of this year. The new facility is expected to enhance Karat's ability to better service customers throughout the Southeast, improve fulfillment capability for a growing e-commerce business, reduce delivery time, and provide additional infrastructure to support future growth.
Speaker #3: At the same time, we remain focused on driving operational excellence. We are continuing to execute initiatives designed to enhance efficiency across the organizations. While carefully managing costs, aiming to support sustainable profitabilities, and position the company for continued success.
Speaker #3: During this quarter, we achieved gross margin of 56.6%, including the benefit from the IEPA tariff refund of 1,890 basis points. Despite our higher product costs and ocean freight rates, the performance underscores the strength of our sourcing capabilities.
Speaker #3: Our sourcing diversification initiatives continue to deliver tangible benefits, strengthening Karat's competitive advantage through reliable product availability and cost competitiveness. In the second quarter, domestic purchase increased to nearly 20% of total sourcing, while importing from Taiwan represented 46%, China represented 11%, and sourcing from Indonesia, Singapore, and South America represented an aggregate of 12%.
Speaker #3: Overall, we are pleased with the progress we are making. With the expanding sales pipeline, new customer wins, strong e-commerce growth, and the continued focus on operational discipline.
Speaker #3: We believe Karat is well positioned to advance profitability and long-term growth. I will now turn the call over to Jian Guo, our chief financial officer, to discuss the company financial results in greater detail.
Speaker #3: Jian?
Speaker #4: Thank you, Alan. All begin with a summary of our second quarter performance. Followed by an update on our guidance. Net sales for the 2026 second quarter increased to 136.3 million dollars, up 9.9% from 124.0 million dollars in the prior year quarter.
Speaker #4: The increase primarily reflected 13.1 million dollars in volume growth and product mix, and a 0.4 million dollars favorable impact from pricing, partially offset by a decrease of 1.1 million dollars in shipping and logistics revenue.
Speaker #4: Sales to chain accounts and distributors our biggest sales channel were up by 9.0% in the 2026 second quarter. Online sales as Alan discussed earlier rose 23.6% over the prior year quarter, and sales to the retail channel declined 23.4% from the 2025 second quarter primarily from the decrease in shipping and logistics revenue.
Speaker #4: Cost of goods sold for the 2026 second quarter including the benefit of 25.8 million dollars from IEPA tariff refunds decreased 21.0% to 59.1 million dollars from 74.9 million dollars in the prior year quarter.
Speaker #4: This benefit was partially offset by higher product costs of 6.9 million dollars and increased import costs of 3.5 million dollars. Including an 8.9% increase in average container rates and a 4.3% increase in the number of containers imported versus the quarter.
Speaker #4: Gross profit for the 2026 second quarter increased to 77.2 million dollars from 49.1 million dollars in the prior year quarter. Gross margin increased to 56.6% in the second quarter of 2026 from 39.6% a year ago.
Speaker #4: Reflecting that 1,890 basis point contribution from IEPA tariff refunds. Product costs represented 49.2% of net sales up from 48.5% in the prior year quarter while import costs increased to 11.1% of net sales from 9.5% primarily freight and import-related expenses.
Speaker #4: Operating expenses in the 2026 second quarter increased to 39.6 million dollars from 32.6 million dollars last year. The increase was primarily driven by higher shipping and transportation costs of 3.1 million dollars along with increases in online profitability of 0.6 million dollars and marketing expenses of 0.5 million dollars.
Speaker #4: We also incurred higher costs of 1.1 million dollars in salaries and benefits while bad debt expense and warehouse expenses increased by 0.6 million dollars and 0.4 million dollars respectively.
Speaker #4: Additionally, the second quarter included a 0.1 million dollars loss on the disposal of machinery compared with a 0.3 million dollars gain recognized in the prior year quarter from routine asset disposals.
Speaker #4: Operating income in the 2026 second quarter increased 127.2% to 37.6 million dollars from 16.6 million dollars in the prior year quarter. Other income net for the 2026 second quarter was 1.4 million dollars compared to other expenses net of 2.0 million dollars in the prior year quarter.
Speaker #4: The year-over-year improvement was primarily driven by significantly lower foreign currency transaction losses, which were $0.1 million in the current quarter compared with $2.9 million in the same period last year.
Speaker #4: In addition, interest income increased by 0.5 million dollars reflecting 0.9 million dollars of interest income associated with IEPA tariff refunds partially offset by a 0.4 million dollars decline in interest income earned on investments in certificates of deposit.
Speaker #4: Net income for the 2026 second quarter increased 168.3% to 29.6 million dollars from 11.1 million dollars for the prior year quarter. Net income margin was 21.8% in the 2026 second quarter reflecting the benefit from IEPA tariff refunds of 1,480 basis points versus 8.9% last year.
Speaker #4: Net income attributable to carrot for the 2026 second quarter was 29.3 million dollars or $1.46 per diluted share reflecting the benefit from IEPA tariff refunds of $1 per diluted share compared with 10.9 million dollars or 54 cents per diluted share in the prior year quarter.
Speaker #4: Adjusted EBITDA for the 2026 second quarter rose to 41.6 million dollars reflecting the benefit from IEPA tariff refunds of 25.8 million dollars from 17.7 million dollars for the prior year quarter.
Speaker #4: Adjusted EBITDA margin was 30.5% reflecting the benefit from IEPA tariff refunds of 1,890 basis points compared with 14.3% for the 2025 second quarter. Adjusted diluted earnings per common share increased to $1.48 for the 2026 second quarter.
Speaker #4: Reflecting the benefit from IEPA tariff refunds of $1 per diluted share from 57 cents per share in the comparable prior year period. As of June 30, 2026, we had working capital of 110.8 million dollars and 42 million dollars in financial liquidity.
Speaker #4: With another 15.7 million dollars in short-term investments. During the second quarter, we generated operating cash flow of 33.2 million dollars and free cash flow of 31.8 million dollars both of which reflected the benefit from IEPA tariff refunds received of 25.2 million dollars during the second quarter of 2026.
Speaker #4: We paid out a regular quarterly dividend of 45 cents per share to shareholders on May 28, 2026. During the second quarter, we repurchased 73,510 shares of our common stock for a total of $2 million under our share repurchase program.
Speaker #4: As of June 30, approximately $10 million remained available under the program. On August 4, 2026, our board of directors approved an increase of regular quarterly dividend to 47 cents per share payable on August 28, 2026 to stockholders of record as of August 21, 2026.
Speaker #4: Now, let me provide an update to our guidance. For the 2026 third quarter, we expect net sales to grow in the low double-digit range from the prior year quarter.
Speaker #4: We expect gross margin for the 2026 third quarter to be within 35 to 37 percent and adjusted EBITDA margin to be within 9 to 11 percent both including insignificant IEPA tariff refunds anticipated during the quarter.
Speaker #4: For full year 2026, we expect net sales to grow in the low double-digit range over the prior year. With more clarity, y, around the IEPA tariff refunds process, we now expect gross margin for the full year 2026 to be in the low 40 percent and adjusted EBITDA margin to approx to be approximately mid-teens both including IEPA tariff refunds recorded during the first half of 2026.
Speaker #4: As Alan mentioned earlier, we are experiencing what we believe is accelerated growth in our sales pipeline, reflecting Karat's strong market position and ongoing initiatives to gain market share.
Speaker #4: Looking ahead, we expect to continue driving top-line growth sustaining healthy gross margins throughout diverse stocking strategy and reduced tariffs. We're also confident that the actions we're taking to manage operating costs will further improve operating leverage and drive sustainable profitability.
Speaker #4: Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.
Speaker #1: We will now begin the question and answer session. To ask a question, you may press star, then one, on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker #1: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
Speaker #1: The first question today comes from Michael Francis, Wolf William Blair. Please go ahead.
Speaker #2: Hi, Alan Jan. Good quarter. This is Mike on for Ryan here. I want to start on the SG&A. That seemed to be the big surprise for us in the quarter to the downside.
Speaker #2: You mentioned you have some actions that you're taking to improve that. Can you talk a bit more about, A, what surprised you there and then B, what you're doing to offset some of the higher costs?
Speaker #4: Yeah, sure. Let me start, and then Alan, please feel free to add some additional color there. So, in terms of the SG&A, I know you mentioned some surprises.
Speaker #4: I think really the way that we think about it is just in the consistent with the trend that we are observing just with the micro environment, right?
Speaker #4: Just the biggest item that we are focusing on for the third quarter as far as the cost management is really the shipping cost. So shipping costs a lot of the orders that we ship out to the customers, we utilize the third-party carriers.
Speaker #4: We partner with our third-party carriers so that's an area that we're focusing on in the third quarter to try to manage the cost. Just to give you a high-level idea, so the second quarter in terms of the offline shipping cost in total, we incurred about 6.1 million dollars on the year-over-year basis.
Speaker #4: That's $1.4 million—I'm sorry, sequential—that's a $1.4 million increase right there. So that's one area that, in the third quarter, we're really focusing on: utilizing our internal fleet to try to minimize, to get more efficiency out of the offline shipping cost to the customers by, as I mentioned, utilizing the internal fleet.
Speaker #4: We're delivering orders local orders to our local customers with our own employees and we're also performing the inter warehouse inventory transfers with some of our internal fleet as well.
Speaker #4: So that's the biggest area. Another area is we're continuing to try to get savings on the online order as well. Online order delivery cost, the shipping cost is one area that we talked about previously on the call is we have a service agreement with one of the carriers.
Speaker #4: So that's one area that we're continuing to focus on in terms of realizing cost savings there. So that's the biggest kind of, in terms of the offline and online shipping costs, really.
Speaker #4: I think it's probably fairly consistent with some of the other companies just as we approach as we're thinking about the overall higher oil the gas price there.
Speaker #4: One other area that we're focusing on in the third quarter is our salary and benefit expenses. That's really to utilize our labor force more efficiently.
Speaker #4: So those are the two biggest areas I would call out.
Speaker #2: Okay.
Speaker #3: I want to ask I want to add a little bit of colors to that. What Jan just mentioned. Give me an example. Second quarter, was the highest fuel cost that we ever seen in the past year due to the crisis in the Middle East.
Speaker #3: And in the third quarter, we saw we are actually seeing the cost coming down in the third quarter already. Like for instance, we were paying $5.40 for these per gallon diesel gas.
Speaker #3: In the third quarter, we're looking at around four something 25% discount on the diesel gas alone. On the carrier fuel surcharge also we're seeing a declining rate from second quarter to third quarters.
Speaker #3: So this is where we're seeing that more of a decline in not only on the ocean freight declines and also as well as the shipping.
Speaker #3: All because of oil prices. Everyone knows that the second quarter oil price was the highest ever. But it started to drop in July. So we're seeing if it's continue to drop or even at this point it is still lower than the second quarter.
Speaker #2: Okay, yeah, and that's not surprising. I figured that was the case. And then, to the point of your online sales — those are continuing to trend quite well.
Speaker #2: What drove the strength there and then across the category should we expect the similar growth trajectory to the in the second half that we saw in the first?
Speaker #3: Well, let me add to this online growth. Doing our last quarter earning call, I mentioned that we are our target for this year's online revenue it's $100 million.
Speaker #3: As we see July's numbers, we were looking at the second quarter. We're looking at 24%, 25%—I think—the online growth year over year.
Speaker #3: Just in July, we're seeing Amazon growth around 49% year over year growth. Just in Amazon. Our overall online sales growth in July, in the month of July, we just finished the number.
Speaker #3: We're at 37% plus. Just the online sales growth. So right now I can confidently say that $100 million is on track for this year's revenue goal just for online.
Speaker #3: Definitely it'll be higher, but I'm not sure how much higher. So we're still pushing even more online sales right now. That's where we are.
Speaker #2: Okay. That's good to hear. One last one for me. Florida DC coming online. You continue to sort of add capacity there. Do you still think you have any sort of gaps in your current coverage where you could add more DCs and sellers?
Speaker #2: And if so, where?
Speaker #3: Well, Orlando, Florida it's on the basically we're finalizing the agreement and that's going to help because that is our fourth largest online customer base.
Speaker #3: And we have been shipping from South Carolina and Houston into Orlando. Once we have the Orlando DC ready, our customer can receive their product next day if not the following day.
Speaker #3: Instead of waiting three to five days, so that will definitely improve our sales numbers online in just the Southeast area, which is our fourth largest.
Speaker #3: Now the other area that we're seeing that we might need some support definitely it would be in the Colorado area. Which can support the Utah area.
Speaker #3: But we're still looking at that because Colorado is the shipping anything shipping to Colorado is actually more into Texas. That's where we see so currently we're shipping to Colorado from Texas into Colorado which is two to three days for online.
Speaker #3: And of course, we're definitely looking we have been looking to the North America area the Vancouver, Toronto. These are the area we have been trying to figure how we can get the logistic part of the issues resolved because we do see a very wide open market in that part of the segment.
Speaker #3: Which is North America.
Speaker #2: Okay. That's all understood. I'll pass it on.
Speaker #3: Thank you.
Speaker #1: The next question comes from Ryan Myers with Lake Street. Please go ahead.
Speaker #5: Hey guys, thanks for taking my questions. If we exclude the tariff refund during the quarter, I'm just curious—how would you characterize the underlying gross margin and performance of the business?
Speaker #5: Was it relatively as you expected?
Speaker #4: Let me start and then Alan, please feel free to add colors on there as well. Hi Ryan. That's a great question. So as we reported our gross margin is 56.6% for the quarter if you do the math if you exclude the contribution our gross margin without the refund the tariff refund would have been 37.7% which I think is still really strong.
Speaker #4: We're talking about high close to 40% gross margin and I think we talked about the underlying drivers, right? Our sourcing diversification, our sourcing capabilities and I think we do expect to continue to navigate this environment really well with the pricing dynamics with the sourcing the changing kind of the trade landscape we did provide the guidance for the third quarter gross margin to be to continue to be in the high 30s.
Speaker #4: So 35 to 37%. Does that answer your question?
Speaker #5: Yeah. No.
Speaker #3: Yeah. Ryan, I want to ask something to this. During the second quarter, we did see our Jan mentioned the 37.7%. And in the third quarter, we're seeing a stronger US dollar versus other currency in the Asia especially against Taiwan dollars.
Speaker #3: Last year, if you saw, we had—in the second quarter—a $2.9 million currency loss due to the devaluation of the U.S. dollar against the Taiwan dollar.
Speaker #3: And now we're seeing a strong tailwind which is the currency gain we're seeing at the one of the highest gain in the third quarter that we're looking at as we stay at the same current level right now.
Speaker #3: So there's going to be some pretty positive things in the third quarters. Like the ocean freight. There might be some reduction in ocean freight because we're about to ending the peak season it might be not be a lot but it's definitely going to help I think everything helps in terms of helping that gross margin and also we're looking at not only on that part we're looking at into the in terms of savings in terms of operating expense as well.
Speaker #5: Got it. No, that's great to hear. That's awesome. And then lastly, you mentioned in the press release that you guys added four new chain accounts during the quarter.
Speaker #5: How should we think about the timing and potential contribution from those wins?
Speaker #3: We're thinking about the fourth quarter.
Speaker #5: Okay. Got it.
Speaker #3: So, we'll start to ship the product. Yes, it takes us two to three months to ramp up the inventory and then start the—so we promised the customers that in the fourth quarter we'll start shipping the product.
Speaker #5: Okay. Got it. No. That's helpful. Thanks for taking my questions.
Speaker #3: Thank you Ryan.
Speaker #1: This concludes our question-and-answer session. I would like to turn the conference back over to Alan Yu for any closing remarks.
Speaker #3: Thank you operator and thank you to everyone for joining us today. Terrace build on a strong business foundation and we are encouraged by the positive momentum across our business.
Speaker #3: We remain focused on executing our growth strategy and look forward to keeping you updated on our continued progress. Have a nice day everyone. Thank you.
Speaker #3: Bye-bye.
