Karat Packaging Inc (KRT) Q2 2024 Earnings Call Highlights: Navigating Growth Amidst Challenges

Despite a rise in net sales and online growth, Karat Packaging Inc (KRT) faces profitability pressures and competitive market dynamics.

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Oct 09, 2024
Summary
  • Net Sales: $112.6 million, up 3.5% from $108.7 million in the prior year quarter.
  • Sales Volume Growth: 3.2% compared to the 2023 second quarter.
  • Gross Margin: 38.5%, consistent with the prior year quarter.
  • Net Income: $9.2 million, down from $10.7 million in the prior year quarter.
  • Net Income Margin: 8.2%, compared to 9.8% in the prior year quarter.
  • Adjusted EBITDA: $15.7 million, compared to $21.1 million in the prior year.
  • Adjusted EBITDA Margin: 13.9%, down from 19.4% in the prior year quarter.
  • Adjusted Diluted EPS: $0.49 per share, compared to $0.69 per share a year ago.
  • Working Capital: $114.2 million as of June 30, 2024.
  • Financial Liquidity: $55.5 million with an additional $32.7 million in short-term investments.
  • Online Sales Growth: Up 26.2% in the second quarter.
  • Eco-friendly Products Sales: 32.3% of total sales in the second quarter.
  • Dividend: Regular quarterly cash dividend of $0.35 per share and a special dividend of $0.15 per share.
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Release Date: August 08, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • Net sales for the second quarter of 2024 grew by 3.5% compared to the prior year, indicating steady growth.
  • Online sales increased by 26.2%, benefiting from the inclusion of online platform fees and reflecting strong digital channel performance.
  • The company maintained a stable gross margin of 38.5% despite higher ocean freight costs, showcasing effective cost management.
  • Eco-friendly products accounted for 32.3% of total sales, highlighting the company's commitment to sustainable products.
  • Preliminary sales in July showed a more than 10% year-over-year increase, suggesting strong momentum going into the second half of the year.

Negative Points

  • Net income for the second quarter decreased to $9.2 million from $10.7 million in the prior year, reflecting a decline in profitability.
  • Adjusted EBITDA margin dropped to 13.9% from 19.4% in the previous year, indicating margin compression.
  • The distributor channel remains challenging with competitive pricing pressures affecting sales.
  • Higher operating expenses, including increased marketing and stock-based compensation, impacted overall profitability.
  • The onboarding of new national and regional chain accounts took longer than expected, affecting sales growth projections.

Q & A Highlights

Q: Why is the change in sales growth lower for 2024? Is it due to new business taking longer or macro pressures like restaurant traffic?
A: Alan Yu, CEO: Our sales for 2024 are expected to be higher than 2023, with overall growth of 7% to 15%. The lower range is without acquisitions, while the higher range includes them. Some chain accounts are taking longer to convert to our products, so we are being conservative with our guidance.

Q: July was stronger; do you expect this to continue? Was this growth across all segments?
A: Alan Yu, CEO: July showed double-digit growth across all segments, including chain accounts, bubble tea supplies, and online sales. We are pushing for $80 million in online revenue, up from the initial $70 million goal, with strategies like adding more items to Amazon FBA and offering volume discounts on Shopify.

Q: Why does the guidance for the third quarter imply a deceleration from July's growth?
A: Alan Yu, CEO: We are being conservative. The business is encouraging, and we want to ensure we meet our guidance. The onboarding of new accounts took longer than expected, but we see pricing stabilizing and are competitive in the market.

Q: How do ocean freight rates impact you if you have contracted rates through April 2025?
A: Alan Yu, CEO: Despite contracted rates, peak season surcharges and container shortages led to higher costs. We had to use some containers outside our contracted rates, but this was limited to 10% of our shipments. We expect rates to normalize as container availability improves.

Q: What is the risk of tariffs being implemented, and how is Karat mitigating this?
A: Alan Yu, CEO: We are reducing reliance on China by sourcing from Malaysia and Vietnam. We are also exploring joint ventures to bring manufacturing to the US. If tariffs increase broadly, it will affect everyone, leading to price increases across the board.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.