Karat Packaging Inc. Q2 FY2025 earnings call

• Achieved record second quarter performance with 13% sales volume increase, 10% net sales growth, and 20% net income growth despite currency headwind.
• Diversifying global sourcing, reducing reliance on China to 10% in Q2 and expanding into new countries/geographies.
• New distribution center near Chino headquarters fully operational, strengthening logistics and enabling faster delivery.
• Implemented price increases in April and May, and focusing on operational efficiency through cost management, like switching shipping providers and shifting online sales to own e-commerce storefront.
• New business wins from large national chains scheduled to begin shipping in Q3 and Q4.

In the second quarter of 2025, Karat Packaging achieved a record performance with net sales of $124 million, up 10.1% from $112.6 million in the prior year quarter. Sales volume increased by 13%. Net income grew by 20% year-over-year. Sales to chain accounts and distributors were up 11.4%, online sales increased 6.8%, and retail sales turned positive with a 1.9% increase. Cost of goods sold increased due to higher product costs from volume growth, partially offset by favorable vendor pricing and product mix. Gross profit increased to $49.1 million, a 13.1% rise from the prior year quarter, with gross margin at 39.6%. Operating income increased 48.9% to $16.6 million. Net income was $11.1 million, up 19.8% from the prior year quarter. Adjusted EBITDA was $17.7 million, with an adjusted EBITDA margin of 14.3%.

• Expect net sales for Q3 2025 to increase by approximately 9% to 10% over the prior year quarter.
• Q3 gross margin expected to be in the low to mid-30s, and adjusted EBITDA margin within 10% to 12% due to tariff impacts.
• Full year 2025 guidance for net sales, gross margin, and adjusted EBITDA margin maintained pending potential impact from additional tariff changes.

• Currency fluctuations, as seen with the significant weakening of the U.S. dollar against New Taiwan dollar impacting results.
• Tariff impacts, including higher ocean freight and duty costs, which affected cost of goods sold and gross margin.
• Supply chain uncertainties related to global sourcing and potential trade uncertainties.

Q: Why was price negative on the quarter and what to expect for the second half?

A: Pricing was negative due to chains and distributors growing outpacing online and retail channels. Expect pricing to be close to breakeven in the second half compared to negative 3% in the quarter.

Q: What's the reason for sequential decline in gross margin?

A: Third quarter has lower gross margin due to tariffs brought in Q2 being sold in Q3, and currency FX loss from devaluation of Taiwan dollar into U.S. dollars. Positive impact of new sourcing will be seen in Q4.

Q: Guidance on online sales for second half and M&A landscape?

A: Online sales expected to return to double-digit growth in Q4 with the Sysco Marketplace. For M&A, still looking at strategic locations, client bases, or product lines not currently carried, with discussions ongoing for partnerships and joint ventures.