Karat Packaging Inc. Q3 FY2024 earnings call

• Net sales up nearly 7% and volume up ~10% in Q3. Online business saw 33% increase with $3M online platform fees included. - Expansion into supermarket chain category is generating positive results, with shipments to major grocery chains starting. - Eco-friendly products sales up 9% Y/Y, representing 33.4% of total sales, with new rPET cup and lid line expected by end of Q4. - Gross margin in Q3 was 38.6% vs 36.9% in prior year, despite ocean freight impact. - Implemented inventory optimization procedures, expect to reduce inventory import volume in Q4 2024. - Board approved increase in quarterly cash dividend to $0.40 per share.

Net sales for the 2024 third quarter were $112.8 million, up 6.9% from $105.5 million in the same quarter of 2023. Sales volume grew nearly 10%. Online sales for the 2024 third quarter were up 32.8% due to $3 million online platform fees. Retail channel sales increased 9.2% and distributor channel sales rose 3.3%, while national and regional chains were flat. Sales of eco-friendly products increased 9% year-over-year and accounted for 33.4% of total sales in the third quarter.

• Expect Q4 2024 net sales to increase by mid to high single-digit over prior year quarter. - Gross margin goal for Q4 2024 is approximately 39% to 40%. - Reaffirm full-year 2024 guidance. - If comparing apple-to-apple, real growth in Q4 2024 would be double-digit when excluding the $6M misclassification from last year's Q4.

• Initial investigation of data breach found no material data breach. Amount spent on investigation was nominal and non-material.

Q: Ryan Meyers asked about Q4 guidance, noting previous quarter implied double-digit growth but current guidance is mid to high single-digit. Jian Guo responded that last Q4 2023 included a $6M accounting misclassification adjustment, and with that removed, real growth would be double-digit. Also, on national and regional chain segment being flat, Jian mentioned pricing adjustments and starting shipments to a major supermarket chain with expected benefit in Q4.

A: Jian Guo explained the $6M adjustment from last year's Q4 and that the chain segment had pricing adjustments but started shipping to a major supermarket chain with expected Q4 benefit. Alan Yu added that removing the $6M from last year's revenue shows real double-digit growth trajectory.

Q: Jake Bartlett asked about the supermarket opportunity, size of the opportunity, and what makes Karat suited for it. Alan Yu said initial annualized revenue from supermarket accounts could be $5-6M with potential to reach $15M for one account, and another chain starting at $0.5-1M. Karat is suited because supermarkets use less SKUs, higher volume, and focus on bakery products.

A: Alan Yu detailed the supermarket opportunity size and why Karat is well-positioned for it.

Q: Jake Bartlett asked about gross margin sustainability. Alan Yu said online sales, which have higher margins, are growing (33% Y/Y) and expected to continue, plus stabilizing ocean freight costs will help maintain margins. Volume is expected to be 20% higher in Q4.

A: Alan Yu explained that online sales with higher margins and stabilizing ocean freight contribute to sustainable gross margins, and volume growth in Q4.

Q: Brian Butler asked about 2025 growth expectations and cost of operating costs. Alan Yu said based on trajectory, first quarter 2025 could see double-digit growth, and they would invest in online advertising to support growth, with capital expenditure mainly for additional warehouse space in the Southeast.

A: Alan Yu discussed future growth expectations and capital expenditure plans.

Q: Brian Butler asked about the data breach. Alan Yu said initial investigation found no material data breach, it was due to employees clicking on attachments, and costs were nominal.

A: Alan Yu provided an update on the data breach investigation, stating no material impact.