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Karat Packaging (KRT)

Participants
Roger Pondel PondelWilkinson
Alan Yu Chairman & CEO
Ann Sabahat CFO
Jake Bartlett Truist Securities
Michael Hoffman Stifel, Nicolaus & Company
Ryan Merkel William Blair & Company
Call transcript
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Operator

Good afternoon, and welcome to the Karat Packaging Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Roger Pondel. Please go ahead.

Roger Pondel

Good afternoon, everyone, and welcome to Karat Packaging's 2021 Second Quarter Earnings Call. PondelWilkinson, Investor with firm. Pondel Roger Karat Relations Packaging's I'm the momentarily Executive Chief It Sabahat. pleasure introduce Financial company's Ann its is my and to Chief Yu; Officer, Officer, Alan

turn Regulation comparable call forward-looking press no EBITDA now Alan? measures non-GAAP statements, measures time. reconciliation required A during from EBITDA the could defined most Karat also to note adjusted we'll Factors the these Risk over over include Securities are the materially the of this in company's may in Yu. forward-looking statements and to subject forth to on non-GAAP www.sec.gov, posted set forward-looking many those other within margin any to filings Reform adjusted within as the conditions, Alan on the and including IPO Alan as update that along that, call company's Act with directly today's SEC copies available of forward-looking of the will call, company of meaning to time statement release, undertakes with at the GAAP beyond by Actual Securities made turn and listeners that be section I included G. numerous is differ is I except CEO, registration measures I SEC's are Before the which control, financial today's the Commission website statements law. with the to Please discussing statements with want from Private remind the of the filed which Packaging of all call and Such by results And website. which company's to financial are as Exchange obligation Litigation SEC XXXX.

Alan Yu

with Thank today. of you Good everyone. here be all afternoon, We're you, to pleased Roger.

a quarter leading and solid demand Our business as We earlier solutions customizing for its company's in suppliers and the prowess at that expanding second to a grow strong pace results base. nimbleness a financial diverse reported robust today. continued of reflect customer

environmentally-friendly the and and continue Packaging. of In for addition, solutions service drive industry adaptation demand to increasing products particularly for Karat food

quarter, ahead were increasing strong national distribution the of online channel. For the XX% sales and year-over-year our in second expectation, performance with net

products the and Excluding personal rate most year-over-year pace. saw due core freight channels quarter the during towards sales last the second we also last were year. second prior primarily our equipment product nearly year-over-year high-margin And to our fiscal increased was Online XX% in last XXXX margin shift to period. material period at the a primarily as Gross a well channels. height as protective in lower COVID-XX our comparative continue PPE increases business and the rose year-over-year second the that sales declined on mix PPE of recent in second quarter sales in that saw XX%. the we in second in the double-digit in Retail sales costs distributor to the year through the due - national primarily comparison the for growth to of the we high-margin pandemic, quarter quarter, sales Sales quarter.

the in anticipated second level to multiple this ever year. expect next rate And current price protect seen. our Ocean products early As margins freight on a PPE quarter. the risen than we year's traditional respond to higher to increases and high remain shortly freight increases the closely we saw of product will is rate margin, have and rates highest at we carry in which in quarter. number detail, instituted we've rates XX%, To Ann significant second to explain until last to These our more products. margin in

continue we action price XXXX first company's increased the cost result, history. a the to in with margin increase on basis pass points XXX largest As freight Despite cost, sequentially take over our to in gross higher higher quarter. July,

the third the spending business. continued adaptation growth support the products, profitability. a helping in is consumer of beverage adding also has environmentally-friendly secular We're for tailwind and bubble higher supplies, restaurant momentum positive quarter to high Our margin we're with tea into drive the services demand to our seeing of line demand of and which in our our and seeing opening,

third of currently gross we're high online quarter efficiency half growth in the result, first greater us million higher given in to freight in also confidence in better the Texas. We're our range improve to our ability a cost operation. the the third the cast As in sales $XXX we actions the $XXX XXXX. and in margin off at we net has sales largest At XXXX be quarter. same million to take driving to targeting our are of leveraging margin in base our cost in facility our relative to Moreover, time,

expanding and questions, I of recently Ann Ann? building the our discuss first network warehouse for to want output, in in acquisition addition so our facility increasing distribution Carolina. also of the stop While to turn here leave and over South through a call are time adequate also quarter a will We results detail. we to the

Ann Sabahat

Alan. you, Thank

and height has in than growth. the in by peaked the during Sales increase PPE and decline quarter. as this year's million in quarter and pandemic total represented million. XX% meet increased X% Our of margin quarter expenses. line last XXXX the sales results this to an need second quarter, at in PPE support shifted product year's sales of strong less offset In in then, second reflects quarter. top operating year's our June products to $XX Since of Net import last expected second $XX we critical declined a a second to growth, gross sales

to XXXX products, PPE distributors. second rose Excluding Sales quarter sales XX% in year-over-year. the

make Sales a retail year we Our fell primarily investments products and chain quarter. to existing the quarter channel to significant rose XX% primarily sales grew this the to national business due from continued last PPE largest sales channel. ago, with customers. to XX%, XX%, in channel of more due in expanded sales year's in Online XX% second as to

our year-over-year. sales retail were channel in our PPE Excluding slightly up products,

also We tax to portion utilize retail manage requirements shifted of and conditions, from to labor shipping packing our increased resources. a enabled which better to distributors sales us better mix minimum

was in release quarter, to margin tables offset reference, issued this break afternoon channel. our margin, in basis The the Gross by period to as and with XXXX the year's the PPE sold same products decline XX.X% of reflects XX.X% second compared in second XXX higher margin million high freight in primarily costs excluding a of higher as decline For a the by earnings primarily in second sales. earlier last points PPE year. X% in well partially material products, the XXXX last out quarter. gross traditional profit quarter, sales decreased due Gross margin the of decline gross our $XX

of we've to a costs higher increases. series price taken action mentioned, through in pass Alan As

fees. gain second Our an second offering related higher gross shipping with income and XXXX $XX progress recent million XXXX most from increase quarter Operating workforce with PPE with pressure Operating quarter XX% associated the in X.X% quarter. of professional approximately the in Costs Provision a year-over-year XX.X% due evident year, public shipping principally increased costs. $XXX,XXX labor, in to same reported loan quarter. and for expenses payroll $X higher XXXX to tax the first the reflecting in quarter date the and million second in second $X on timber in to million expansion to margin last just the in margin million, to million our XX% declined the the compared increased second XXXX period facility is freight higher fourth period we XXXX were $X quarter costs the income to borrowed last approximately costs, $X XX.X% was forgiveness, the in quarter from year. from due in to expense which which trend, expenses of last Operating to XX.X% was our XX.X% improved in and second decreased the income from same in quarter. year. primarily in Other

second forgiveness with the subject federal Our tax debt in quarter XXXX our rate loan compared million in effective the quarter in in primarily on $X was the income of the is XX% same not the effective working rate because to gain position, recorded last Excluded period tax. within the tax the year, PPP XX% XX%.

decline purchase Consolidated our We XXXX the our share million $XX.X receivable compared to be compared year. XX.X% same to primarily was same back operating of Karat EBITDA of provided in compared to basis million for the in operating the Adjusted in that quarter first first $X.X of questions quarter in now compared the the or the range. on million in turn was as Alan EBITDA Karat the with call for second growth. in expect activities income be to diluted was primarily margin the due Inc. and amounted Adjusted with with and $XX.X Capital year. will mid-XX% income $X.XX or changes lower in a was activities XXXX cash to the and to in second of a second with any the Karat Inc., quarter share a XXXX increases consolidated year. remarks, second ago XXXX per in may X.X%. the quarter. $X million tax New Alan? $X.XX last net margin attributable EBITDA adjusted $XX.X year was inventory we'll Net answer you was to last Packaging XXXX quarter. Adjusted significantly for our were then million in EBITDA The million closing quarter. working reflects million Packaging manufacturing effective quarter equipment year. Jersey compared quarter used in Net $X.X result and diluted particular, last year-over-year, X% rate the have. XX.X% $XX.X Net in XXXX attributable second per cash attributable construction million million happy period principally period last I in $X second year by the facility XXXX Packaging to million capital, ago a with accounts in $X expenditures the for $XX

Alan Yu

Ann. Thank you,

Our industry. business continued capture service the to trends we positive as food in secular grow

believe a competitors, us Karat tremendous a products, is range we of give to than a nimble quickly advantage. conditions market more our which to supplier wide respond of Packaging As able

to quarter turn the proactively continued that performance second XXXX believe I'll will to contribute for the in which quarter. sales We're that, pressures. over to With in growth Q&A. strong work call we delivered sales be Our third cost we through as our operator solid pleased the another demand solid

Operator

Jake will And Truist. Bartlett first with Instructions]. question [Operator come the from

Jake Bartlett

guidance strong Congrats here. saw based? Are due the that in is about the particular the for on broad question that's second there third. Alan, driving some my the Or first great growth channels any fairly sales is top you quarter the upside line upside? to than it

Alan Yu

- see, do hear Jake, I see me? well, I well. can if can hear you me you do

Jake Bartlett

Yes.

Alan Yu

Okay. supply Well, in Jake, more and are sales. it - this chain is could be there's U.S., people in cup I you think the the online, see out why throughout see you if the more national there? - is second go quarter especially ordering any I the of national I the a disruption account, I to see Everyone online what account. a chain tireless market. chain

have them cup. they ask plastic You a a cup. Normally, for

out that of Now you tell they we're probably cups.

see a we large a every cup. lot cups. and manufacturer online. have of where paper our cup or heard of plastic everyone cup places, distribution to some channel styrofoam normal styrofoam restaurant I bubble in they or is cup. is don't in that find supplies people We tea in producing, having What We even have online, market our the people product going terms or can't the of buying This the - struggling, cup. people, regardless see styrofoam a is when they go their challenge, In straws,

to seen Ann actually like our In what just using growth They They're restaurant. and cups biggest seen cup. own the everywhere talking and Vegas cups digit, guess mentioned they're demand. never tea was paper favorite in are people I their year. They're is the packed they're is Hotels with Vegas, their to sales like Las or supply going that double, the what XXX% upside bubble we've is So triple-digit something one hotels. everywhere. people, a double holding bobas, our conference you that are into described, growth take I Florida, The when in and past earlier she in in growth demands, - a we've almost crazy. people of This increase. traveling. They buying as like cups. plastic year-over-year, go flights cup - going go customers Las

really second in opens has And up. demand the gone up. when quarter, especially economy the the So

we're challenge see challenge I all Why? is actually in it's timely hiring a enough - weeks our is and ship shipped of this orders, growth. - is products. over that the the But product X if we Amazon market do this Amazon. orders Sysco, pack anybody to the the right where is third now. to get quarter. behind facing, catalysts have Bunzl up or it's a So it's it's people I caught - a And these we're Imagine, having of to see on shipping manner. or everywhere a Foods US a - regardless Even the people carried in back Just just don't we're

Ann Sabahat

QX we food for QX XX% is drivers and XX% syrup, with popping over growth follow me of which Q-over-Q. year-over-year pearls XXX% In $XX of XXXX, let The grew revenue Jake, products what million to XXXX, and shared. or Alan our were just food powder. saw main of So, over up boba,

In up QX about of this revenue to robust, QX a at approximately, over cups, cup of $XX and total significantly us this up from our of came in XXXX. and cup terms the XX% and pandemic jackets XXX% compared or XXXX, cups, mix of has in revenue glow QX for year of holders million been XX% for of

the approximately in we QX. that at your XX% and for food the containers remains is printing are us XX% trend for remain company at roughly seeing custom Another about -

Jake Bartlett

could Great. as helpful. a with define you it's just in quarter. how build Earth you my of was what question. But the Actually That's percentage the percentage Karat just environmentally on to friendly, share really next second whether that, sales or maybe both else if

Ann Sabahat

of total $XX about approximated to fold-to-go and of in food demand cold in $X XXXX sales paper revenue, XXXX million cups, $XX roughly company of increase continues million QX and QX of see cups from hot containers, XX% strong Eco-friendly QX Yes. The paper million or in for containers. XXXX.

a sales, QX total Earth, about of it of as XXXX. at we steady revenue terms percentage Karat to for In of see continue X%

Jake Bartlett

one, fairly move from back It next significantly quarter. year Great. quarter up on question the And then my we in last about first is half the was in How SG&A. the the Or quarter-to-quarter growth think forward. my what should the quarter second a good on a Just expect G&A expect kind throughout any should similar year? the second rate? we should help Is we 'XX? from of run as we going of

Ann Sabahat

Yes.

to this we to So similar of QX QX should expect of year. be for that

Jake Bartlett

similar And Okay. that, that be reason kind fourth any for - deviate? should quarter, or of as well

Ann Sabahat

as QX. should That in expectation be similar well

Jake Bartlett

Okay. And last question... then

Alan Yu

mention to conference be higher into a what $XXX it's a think is the QX to I did of I headwind to is quarter I to second Jake, million QX. see want the - is to XX% based reasons we call, going Ann have one the - earlier million, year-over-year mentioned as around than to to $XXX Jake that add on strong In numbers. our - want that which And in this going numbers. our XX% earnings our continue quarter we would is growth. third that QX be

Jake Bartlett

Headwind of headwind what? group or of

Alan Yu

Oh, tailwind. Tailwind.

Jake Bartlett

much in the you versus a the pricing if could third the Great. out Great. in Got That's in company's is what the just mentioned increase that How you it frame system it. of has tailwind. quarter? Yes. the And history. July Got was in second - largest it. kind then quarter

the would quarter, help was us great. be and just it pricing that point this year-over-year could at the in what you is If second what frame

Alan Yu

also here. actually In tremendously of people XX% product some And cost importing the this enough continue is is And we getting freight quarter, of July the of chain in no deterring our on even what's But and with categories. of XX% board we've seen increase. container of lot in in ocean This space. of gone different second across U.S. June the is that month, freight, the we up. space we've still the our unable that nearly are supply increase disruption there price to July high ocean increase more has in end August, to to a go and the stop causing container ocean if chain a since the - some exception imposed the accounts. ever product. a amount this most year, up used you largest is June. pay get pay price April even last to freight the national in Because the of almost even seen like July, triple the actually a But In money and took guarantee competitors the Sure. like, price with it's to bring you June

Operator

Michael question from Hoffman And with comes the Stifel. next

Michael Hoffman

cadence My the question of the center around remainder for the year.

improvement were it about were in So I with all more less came we've it got line meaningful thinking. a the in little analysts you we sell-side IPO. actually maybe was guess as time or the a at but ambitious, of revs. more where EBITDA you in came thought

do you $XX able about that to we balancing how about but freight challenges and original do to out? labor, with on all of sort wells, of a million. So that, was feel global that demand be these really for net accounting good Are still pace EBITDA that and

Ann Sabahat

that Michael, great a is question.

our So will confidence margin, between in EBITDA margin we have XX%. continue terms our EBITDA be to to of X%

trend rest that for to or year. to - of $XX the us remainder terms be million on for yes, should the roughly between In of the so lead million $XX

Michael Hoffman

Okay.

in of sort and reflects you're unprecedented to little and The bit there's costs. end where lower hard the we - the through on it low working on manage a pressures some And price still been started. So fairness, high end. inflation low

Ann Sabahat

we have in of our seen this that absolutely. what to XX.X% year We and QX have freight been protect QX have XX.X% QX margin. XX% do freight able and year. XXXX to I I in of gross mean to in is of the Yes. we then of mean able what rising costs, in been spite is from went this we

protecting have for few in we margin a us. past So in very been quarters expanding also and very proactive tight our

do us XXXX. we to that lead EBITDA would to And so at again our - be for margin X% EBITDA within continue XX% XX% which range, be to to total XX% to

Michael Hoffman

always business. And again, you've gross talked a that margin this gross XX% margins, is speaking about approximately, about

initiatives, mix headed the XX% are trends - the demand, would further given pricing remainder the the some So so the improvement? strong for a we sequential we towards year, of

Ann Sabahat

is we're That is in for gross our margin that QX, expectation, and remainder Michael, going of at QX the year to be expectation our the XX% range.

Alan Yu

in Ann quarter seen is at our already XX%. for to And I already. we've quarter, XX.X%, goal believe, Michael, XX.X% mentioned XX% last second the XXXX

So we're XX% to already near already.

So XX%. our the still for we goal, are shooting basically. That's

started, were the first discussing in Yes. we So when we IPO.

Michael Hoffman

Terrific.

some been So We've menu business. say with of curve kitchens have always chickens. - also sort from menu lots to ghost of of I to then ghost of the get mean opened. there's increasing changes part interesting kitchens, your impacting the question started up indoor the That's expanding is in the things. changing. all to one. this all ghost to announcement dining, wanted have number how takeout I And of say I those to business? showing same ghost restaurants labor But stories heard moving been on has able challenges and of those And

Alan Yu

an started cup. when But restock move larger we've a of napkins, customers restaurant and in using takeout, well basically they to when as started seen demand increased napkin business. a cups pandemic any the opened are everyone utensils. was cup around business to around car basically product. closed, double drop in of for item shut started thing, the drive-thru. added when as the the moving the down, was But compostable that the demand they we're telling containers, dining, mostly The up was cup were we restaurants when to not would containers, when our us shopping to type use drive-through up, open the one saw when a in the open - utensils people line basically down really sharp the the And a the during here's in - Whether rise when we open restaurants takeout unwrapped the drinks of up. up, were seat less seen using takeout and pandemic even the that for dining, they their When they their takeout, the when we've there starts scrambling their the on that the size indoor shut but mall Well, they store the in they pandemic, wrap indoor now. was

guess, drive-throughs opened us. telling every So X up, most when dining, and resorts new just in the open more been up, where And said stores have. the like they actions and - opened up, they has opened that customer opened the to more of high-volume there's all the start demand of when one they hotels That's skyrocketed. opened these stores the of from I a the when tours scenario restaurants fact locations indoor the also it I earlier, when up, for

Michael Hoffman

sheet from the create where that to is one balance me. off to us You the a is, Last about would Packaging of a - start you purposes we've opportunity What different. that? to the was you M&A, prospects Pacific finding IPO looking of Can with. your allow frame talked something about that like Packaging - would you was Pacific something one talk Okay. led pipeline M&A at of possibly another you how even or

Alan Yu

Yes.

to do companies. and received there's and several have also been making we that mix. right And and right with discussing doing have the the thing sure looking diligence. some - we're looking a We Ann - And we're want due I

synergy in management thing the with company offering. another also And we team As a the we're IPO, product for that and the the the a is mentioned leadership, looking locations.

- couple We're looking information that just on we're have of gathering part. at. in discussion these And these things we're with are the a that we more So companies. been

Operator

from next the with Blair. question Ryan be will William Merkel And

Ryan Merkel

major marketplace? your So rates your fill shortages, with this Alan, that is winning market your in first model, the is import competitors? Are in off, better than

Alan Yu

a market. find it's just with people hiring, if I manufacturer, is people indoor manufacturer, you the our shortages. main everyone They there's having the down the the reason to of work the to lot environment. say, and dining have to any just talk It's restaurants. get sure have yes, you well, really I'm one material is to industry restaurants. And cover shortage It's issue, shut and can't in a sector the raw can reasons that's to hard industry the spoken labor mainly one a the there's and one area, to shortage it's that of It's That a supply clean supply come challenging be a to could in to because issue shortage area. issue, indoor the of major to I've work they market Everyone main really dining labors. it is labor. their in tough. it's now of enough not supply but is

Some deliveries. of distributors, forklift our the know and out make in and the managers the to drive trucks then they have

accepting challenge. I think everyone's that

the import. only basically, is alternative So

short we Now when always there's every year shortage. summer kind when - of we - saw comes, knew I the - a that actually, a

So in our of products. had we shortage months X.X

June up import So and started our was low. we in ramping July. our fill then rate And

to that in the And everyone - get issues East of challenges Coast, East Coast So ocean Coast the area. one the Texas supply New more to the the and fill York unable our freight but the Jersey rate There's ocean trying right facing. warehouse line, the the get area, are area. to New product is that's and container freights packed is than West California, is the are into I better now, believe we're in our

to Also, coming would delays. causing major at which is the and including they the the everything their the that a maxed great every are why in out carriers, Coast FedEx There's West Coast, say logistics, East for I struck into ground capacity. congestion was UPS, - logistics. So that's rail is it's

would that our delay is most telling shipping, than - now. you But delay competitors is right that just in definitely delay see today website can a there's You our expect of better I in every delays. there's delivering, a say

Ryan Merkel

is ocean follow-up, Okay. And on my you of you've got rates which going crazy. sort hit freight

you You are and containers other there's facing a congestion, these got late How challenges? high How having that got are delayed. the managing importing rates you are lot fill of effectively that? coming in and people you products when

Alan Yu

the took we of advance. placing initiative Well, in order actually the

like conference that's So call, we're we able we're we're actually to nimble. - marketplace. small the nimble and in our how in We're compete

what out. fulfill peak, out straws business, we move customers. When a fast. and cup a additional we're ran twice of of of we helping now, a And basically, the the So reasons people demand the we our And rising with and ran lot of lot a orders of helping overseas there's that's and these we actually line order. product more out bubble cup national height, also, of to the placed saw chain able lot basically a out We're more all shipping. arriving we're they our of in tea partners, that and out a manufacturers, amount normally of started immediately we ordered with actually they're time, containers. would than one food the And at ran accounts actually, that

If you help people They will Lollicup. would cover mean and might the you to talk out on what's chains, to you industry there. restaurant national come able be tell I them, you. these that's actually going would - to

Ryan Merkel

great. That's Yes.

increases want I material clear, be this quarter a cost Okay. and increases? your That bit, the margins, on just then freight we in hit gross just for your but And little lastly, price to raw did helps. increases cover

Alan Yu

did. it believe I

quarter. in was Because is than in raw As first quarter, material and higher largest Ann May, was in our was in quarter mentioned, and our the first - the the April increase second the was the largest - was raw the increase gross quarter. actually margin it material - increase the not it second

to basically, on to were below So from the increase we our if proactively increases, customers, XX.X%, But I due first margin implemented our the to XX.X% in the we number. were will And passing gross to price increase we that able essence, quarter the actually fact that's believe. to have products. our not fall it on

Ann Sabahat

to cost XX.X% ocean QX to the in the then and quarters. yes, costs in to we QX material we And to To been margin then Alan's Yes. contribute able Yes. have the efficiency and the freight XX.X% over expansion cover to higher rising point, few went past sequentially clarify, and in from additional QX. to increase XX.X%

Operator

back like remarks. any this session. would conference over and concludes Alan for Ladies I to closing turn the gentlemen, our question-and-answer to Yu

Alan Yu

conference joining all call, a better a our thank Have work hard our and value, nice for Thank definitely for and continue we forward next quarter. we Well, to you all. increase day. shareholder you look to will

Operator

for The now has presentation. you attending conference concluded. Thank today's

You now disconnect. may