Earnings call transcript: Karat Packaging Q1 2025 beats EPS expectations

Karat Packaging Inc. reported its first-quarter 2025 earnings, surpassing analysts’ expectations with an EPS of $0.33, compared to the forecasted $0.28. The company’s revenue also exceeded projections, reaching $103.6 million against an expected $102.07 million. Following the announcement, Karat Packaging’s stock price rose by 1.79% to $27.34 in aftermarket trading. According to InvestingPro analysis, the company maintains a "GREAT" financial health score of 3.06 out of 4, indicating robust operational efficiency and strong fundamentals.

Key Takeaways

• EPS of $0.33 beat the forecast of $0.28.
• Revenue increased to $103.6 million, surpassing expectations.
• Stock price rose by 1.79% in aftermarket trading.
• Continued growth in online sales and reduced reliance on China for sourcing.
• New distribution center and manufacturing diversification initiatives.

Company Performance

Karat Packaging reported strong performance in the first quarter of 2025, with net sales increasing by 8.4% year-over-year. The company benefited from a 10.9% growth in sales volume and maintained a consistent gross margin of 39.3%. Net income rose by 5.2% to $6.8 million, indicating robust operational efficiency despite market challenges.

Financial Highlights

• Revenue: $103.6 million, up 8.4% YoY
• Earnings per share: $0.33, exceeding the forecasted $0.28
• Gross profit: $40.8 million, up 8.4%
• Net income: $6.8 million, up 5.2%
• Adjusted EBITDA: $11.9 million
• Operating cash flow: $7.7 million

Earnings vs. Forecast

Karat Packaging’s EPS of $0.33 exceeded the forecast of $0.28 by approximately 17.9%. This positive surprise reflects the company’s effective cost management and strategic initiatives, marking a continuation of its strong performance trend in recent quarters.

Market Reaction

Following the earnings release, Karat Packaging’s stock price increased by 1.79% in aftermarket trading, reaching $27.34. This movement aligns with investor optimism driven by the company’s better-than-expected financial results and strategic advancements. The stock remains within its 52-week range, between $23 and $33.89, indicating steady investor confidence. InvestingPro analysis suggests the stock is currently slightly undervalued, with strong fundamentals supported by an Altman Z-Score of 5.14, indicating solid financial stability.

Outlook & Guidance

Karat Packaging anticipates high single to low double-digit growth in net sales for the second quarter, with expectations of maintaining a consistent gross margin. The company is poised to continue its diversification efforts and expand its market share, leveraging its new distribution center and reduced dependence on China for manufacturing.

Executive Commentary

CEO Alan Yu remarked, "We have been prepared. It’s just that it came earlier than we planned it," highlighting the company’s proactive approach to market changes. He also noted, "We’re seeing a lot of our competitors or importers stop importing 100%, and they’re coming to us for everything," emphasizing Karat Packaging’s competitive advantage amid supply chain disruptions.

Risks and Challenges

• Potential supply chain disruptions and product shortages.
• Tariff impacts and geopolitical tensions affecting manufacturing costs.
• Margin compression in the latter half of Q2.
• Dependence on key markets such as Texas and the Midwest for growth.
• Competition from other packaging suppliers adapting to market changes.

Q&A

During the earnings call, analysts focused on the impact of tariffs and the company’s manufacturing diversification strategy. Discussions also revolved around Karat Packaging’s pricing strategy and its ability to adapt to changing supply chain conditions, providing insights into the company’s resilience and future growth prospects.

Full transcript - Karat Packaging Inc (KRT) Q1 2025:

Conference Operator: Good afternoon, and welcome to Carrot Packaging’s twenty twenty five First Quarter Conference Call. 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. After today’s presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today.

I would now like to turn the conference over to Roger with Pondell Wilkinson. Please go ahead, sir.

Roger Pondell, Investor Relations, Pondell Wilkinson: Thank you, operator. Good afternoon, everyone, and welcome to Carrot Packaging’s twenty twenty five First Quarter Conference Call. I’m Roger Pondell with Pondell Wilkinson, Carrot 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 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 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 ks 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 could differ materially from those forward looking statements and Carrot Packaging undertakes no obligation to update any forward looking statements except as required by law. 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. And with that, I will turn the call over to CEO, Alan Yu.

Alan?

Alan Yu, Chief Executive Officer, Carrot Packaging: 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 February, 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. 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 dynamic. At the end of first quarter, we had approximately $80,000,000 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’ need. We believe Carrot is well positioned to address ongoing supply chain challenges and navigate an uncertain trade environment.

As previously announced, we implemented price increases for certain product on April 1 with higher cost of goods anticipated from more recent global tariff development. We expect to implement additional price increases to most of our product in mid May. Geographically, our strongest growth for the quarter came from Texas and the Midwest. Sales in California, our largest market, also continued to improve, particularly in the retail and distribution and chain sectors. We remain focused on the expanding wallet and market share as well as growing our online businesses, 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. 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. Carrot has consistently proven to be a reliable supplier to our customers, not only during the height of the COVID-nineteen period, but also post pandemic when there was widespread product shortages.

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

Jan Go/Guo, Chief Financial Officer, Carrot Packaging: Thank you, Alan. I will first provide an overview of our Q1 performance and then close with a guidance update. Net sales for the twenty twenty five first quarter were $103,600,000 up 8.4% from ninety five point six million dollars in the prior year quarter. As Alan mentioned, volume grew 10.9% year over year. Pricing was unfavorable by $3,900,000 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. This change has increasingly blurred the distinction between sales to chains and distributors. 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 continued focus on expanding this high margin category.

Sales to the retail channel decreased 3.2%. Cost of goods sold for the twenty twenty five first quarter was $62,900,000 compared with $58,000,000 in the twenty twenty four first quarter. The increase was primarily driven by a 3,000,000 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 costs of $2,000,000 reflecting a 15.5% increase in import volume and a 4.3 increase in ocean freight container rates. Gross profit for the twenty twenty five first quarter increased 8.4% to $40,800,000 from $37,600,000 in the prior year quarter. Gross margin remained consistent at 39.3 for the first quarter of both twenty twenty five 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 freight and duty costs as a percentage of net sales. Operating expenses for the twenty twenty five first quarter increased 11.6% to $32,900,000 from $29,500,000 in the prior year quarter. The increase was primarily due to a $3,400,000 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 $900,000 increase in rent expense due to the opening of our new distribution center and lease extension in Chino. Additionally, marketing expense and professional service expense also increased $400,000 and $300,000 compared with the prior year quarter, respectively. The increases were partially offset by a $2,000,000 noncash 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 twenty twenty five first quarter was $7,800,000 versus $8,100,000 in the prior year quarter. Net income for the twenty twenty five first quarter increased 5.2% to $6,800,000 from $6,500,000 in the prior year quarter. Net income margin was 6.6% in the twenty twenty five first quarter compared with 6.8 in the prior year quarter. Net income attributable to Carrot for the twenty twenty five first quarter was $6,400,000 or $0.32 per diluted share compared with $6,200,000 in the prior year quarter or $0.31 per diluted share. Adjusted EBITDA for the twenty twenty five first quarter was $11,900,000 compared with $13,500,000 for the prior year quarter.

Adjusted EBITDA margin was 11.5% of net sales for the twenty twenty five first quarter compared with 14.2 for the prior year quarter. Adjusted diluted earnings per common share was $0.33 for the twenty twenty five first quarter compared with $0.40 for the same quarter last year. We generated operating cash flow of $7,700,000 in the first quarter and ended the quarter with $111,900,000 in working capital. Our free cash flow was $6,600,000 in the first quarter. As of 03/31/2025, we have financial liquidity of 46,700,000 with another $23,800,000 in short term investments.

On 05/06/2025, our Board of Directors approved the quarterly dividend of $0.45 per share payable 05/23/2025 to stockholders of record as of 05/16/2025. Looking ahead, we expect net sales for the twenty twenty five second quarter to increase by high single digits to low double digits over the prior year quarter. We expect our gross margin for the twenty twenty five second quarter to be in line with the first quarter and adjusted EBITDA margin to be in the mid teens. Currently, we are reiterating our twenty twenty five full year guidance on net sales, gross margin and adjusted EBITDA margin. Alan and I now will be happy to answer your questions, and I’ll turn the call back to the operator.

Conference Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you’re using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press then 2. And our first question here will come from Jake Bartlett with Truist Securities.

Please go ahead.

Larsen, Analyst, Truist Securities: Hi, guys. This is Larsen on for Jake. Congrats on the strong quarter. Just had a few here if we could get through. The first one I just wanted to touch on, 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 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 or, you know, anything you could add for context there.

Alan Yu, Chief Executive Officer, Carrot Packaging: 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 majority into Malaysia, Indonesia, Vietnam, and we’re adding more product into Thailand.

That’s where we’re moving majority of the product to.

Larsen, Analyst, Truist Securities: Great. Thanks. Appreciate that color there. And then on on the price I I do wanna add one

Alan Yu, Chief Executive Officer, Carrot Packaging: more thing. I’m sorry, Lawson. Sure. I do wanna add one more thing. We’re actually looking into, gaining product from, Middle East as well.

So basically, will be will be, we wanna diversify out of not just % out of Asia and moving to other part of the continent. That’s that’s part of our goal for this year too.

Larsen, Analyst, Truist Securities: Great. Thanks. 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 gonna absorb some of that in margins? Or how are you sort of thinking about

Alan Yu, Chief Executive Officer, Carrot Packaging: Well, we have, implemented a price increase April 1 on certain items. And we’ve already announced an across the board increase, May 19, that’s on every item. It’s ranging from 5% to somewhere 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 is in high demand right now. We’re seeing a lot of our competitors or importers stop importing 100%, and they’re coming to us for everything. And there is there has been already a major shortage of product already in certain category.

Jan Go/Guo, Chief Financial Officer, Carrot Packaging: And I just wanted to add on to that just real quick. 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, 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.

Larsen, Analyst, Truist Securities: Great. Appreciate that. And then on on how do you guys think about reciprocal tariffs? You know, is that factored into guidance? Or or what do you think that means for for the business?

Alan Yu, Chief Executive Officer, Carrot Packaging: Right. Well, currently, we’re just doing business as we go because, as everyone knows, that these situations changes not by the month or by the quarter. Situations are being changed by the days. So it’s hard for anybody to prepare anything, to think of any reciprocal tariff because we don’t even 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.

Basically, it’s really hard to find anything like this at this point.

Larsen, Analyst, Truist Securities: Yep. Fair point. 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?

Alan Yu, Chief Executive Officer, Carrot Packaging: Yes. I think that we we have been prepared. It’s just that it came earlier than we planned it. That’s all.

Larsen, Analyst, Truist Securities: Yeah. Fair enough. And the last one here, just, you know, how much, so did you say that the the freight cost that you’re seeing in the quarter were actually higher this past quarter, or was that, was that lower?

Alan Yu, Chief Executive Officer, Carrot Packaging: Again, everything changes. Last quarter, the first quarter, the freight was lower than the fourth quarter. This upcoming quarter, second quarter, the freight is looking higher than the first quarter, but this is only this month. We don’t know if something’s gonna change because, all the shipments are delayed or actually they stop shipping and it’s gonna be very competitive. So price may come down, you know, next week.

So everything is so fluctuating right now. Yeah.

Larsen, Analyst, Truist Securities: Yeah. Yeah. Fair point. 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 that you could share as an example, something like that that would be good to contextualize?

Alan Yu, Chief Executive Officer, Carrot Packaging: Yes. I think Jen can go over it on the cost saving initiatives we have.

Jan Go/Guo, Chief Financial Officer, Carrot Packaging: Yeah. Sure. 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 spent 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’s call.

Larsen, Analyst, Truist Securities: Wonderful. Thanks, guys. Appreciate it.

Conference Operator: Our next question will come from Ryan Myers with Lake Street. Please go ahead.

Ryan Myers, Analyst, Lake Street: 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?

Alan Yu, Chief Executive Officer, Carrot Packaging: Jen, can you answer that question for Yes,

Jan Go/Guo, Chief Financial Officer, Carrot Packaging: I can take that. Ryan, thanks for the question. So you are absolutely right. So at this point, we do expect our second quarter gross margin to be consistent with the first quarter. We are saying that because we have good visibility into our gross margin even with I know, obviously, we’ve been talking about the tariff and the freight cost and obviously we’re sitting in May.

I say we have good visibility because our inventory turns roughly about, it takes about six, roughly sixty days to turn. That’s the reason why we have a good idea just based on all the freight cost, what we have paid over the past couple of months. I mean, that gives us a good idea of what the second quarter gross margin looks like. So that’s on the second quarter. In terms of the full year, yes, you are right.

We at this point, obviously, tariff is 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 margin is gonna 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 on 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.

Ryan Myers, Analyst, Lake Street: Got it. That makes sense. And then my next question, I was curious to see that you guys ramped up domestic manufacturing. 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?

Alan Yu, Chief Executive Officer, Carrot Packaging: In the first quarter, we didn’t actually ramp up much of it. Domestic manufacturing was pretty much stable. But in starting, recently, we’ve seen that there’s a shortage the household, increase in demand, overwhelmingly increasing demand on our products. So we’re turning on machines that we didn’t have them on before, and also we’re asking our employees to come in and work overtime to produce more product, because we are, as I mentioned earlier, there has been shortages in the market already, and basically, our products are being really, we’re we’re actually telling customer not to stock up inventories, and we’re not allowing people to buy for. So this this will not, disrupt our inventory level, but we do need to additional inventory because we are seeing more and more customer giving us a forecast that they’ll be taking inventory from us by stopping importing from what they’ve been done they’ve been doing.

So that’s where we’re at right now. But in terms of percentage wise, we actually don’t have that yet.

Ryan Myers, Analyst, Lake Street: Got it. That makes sense. 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 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?

Alan Yu, Chief Executive Officer, Carrot Packaging: Well, one thing is credibility. We built a great relationship in during the COVID period, that we’re a stable company and reliable. We will make sure that, we’re prepared for anything happens. And, good thing is that, because of our additional warehousing chain that we signed up in March, we were able to build additional inventory cushion just for the upcoming summer and, that’s when our new President Trump announced the tariff in early April, everybody started to scramble, that’s too late. But we started to, gear up back in March.

Didn’t expect it’s gonna be this much, the tariff, the volume increase in our sales part is gonna be that much. But good thing is we’re ready and our customer’s happy that we’re ready. And because we built an existing relationship with a lot of these clients, now they’re in need and they’ve come to us. And, basically, we’re doing our best to help whatever we can. Yeah.

Ryan Myers, Analyst, Lake Street: Got it. Thank you for taking my questions.

Larsen, Analyst, Truist Securities: Brian.

Conference Operator: And this concludes our question and answer session. I’d like to turn the conference back over to Allen Yu for any closing remarks.

Alan Yu, Chief Executive Officer, Carrot Packaging: Well, thank you everybody for joining our, earning conference calls in first quarter twenty twenty five. We look forward to seeing all of you on the next quarterly meeting. Thank you very much. Have a nice day. Bye bye.

Conference Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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