Karat Packaging Inc. Q1 FY2025 earnings call

• Achieved nearly 11% increase in sales volume and 8.4% growth in net sales year over year.
• Reduced sourcing from China from 20% at end of 2024 to 15% in March 2025, aiming to be under 10% by end of Q2; temporarily suspended imports from most Chinese vendors mid-April.
• Implemented price increases on April 1 for certain products and to most products in mid-May.
• Strong growth in Texas and Midwest; California sales improving, with online sales up nearly 20%. New 187,000 square feet distribution center in Chino operational this month.
• Focus on lowering operating costs, including enhancing distribution efficiency, lowering third-party domestic shipping costs starting March, and reducing online selling expenses.
• Generated strong operating cash flow and liquidity; board committed to balanced capital allocation strategy, shareholder returns, and long-term growth investments.

Net sales for the 2025 first quarter were $103.6 million, up 8.4% from $95.6 million in the prior year quarter, with volume growing 10.9% year over year. Pricing was unfavorable by $3.9 million year over year. Sales to chain accounts and distributors were up by 7.1%, online sales increased 19.6% over the prior year quarter, while sales to the retail channel decreased 3.2%. Cost of goods sold for the 2025 first quarter was $62.9 million compared with $58 million in the 2024 first quarter. Gross profit for the 2025 first quarter increased 8.4% to $40.8 million from $37.6 million in the prior year quarter, with gross margin remaining consistent at 39.3%. Operating expenses for the 2025 first quarter increased 11.6% to $32.9 million from $29.5 million in the prior year quarter. Operating income for the 2025 first quarter was $7.8 million versus $8.1 million in the prior year quarter. Net income for the 2025 first quarter increased 5.2% to $6.8 million from $6.5 million in the prior year quarter. Adjusted EBITDA for the 2025 first quarter was $11.9 million compared with $13.5 million for the prior year quarter.

• Expect net sales for the 2025 second quarter to increase by high single digits to low double digits over the prior year quarter.
• Q2 gross margin to be in line with the first quarter, and adjusted EBITDA margin to be in the mid-teens.
• Reiterated 2025 full-year guidance on net sales, gross margin, and adjusted EBITDA margin.

• Uncertain trade environment and rapidly changing reciprocal tariffs, which are difficult to plan for.
• Fluctuating freight costs and supply chain disruptions impacting operations.

Q: Touch on China exposure reduction, countries being looked at.

A: Moving majority to Malaysia, Indonesia, Vietnam, and exploring Middle East for sourcing.

Q: Pricing balance, absorbing costs.

A: Implemented price increases, and looking internally at efficiency to save costs to absorb some price increases.

Q: Reciprocal tariffs factored into guidance.

A: Hard to plan as situations change rapidly, so not factored into specific guidance.

Q: Freight costs in Q2.

A: Higher than Q1 but fluctuating due to changing shipment dynamics.

Q: Cost-saving initiatives, example.

A: Switching third-party carriers to reduce shipping costs starting March, seeing initial savings.

Q: Gross margin outlook.

A: Q2 gross margin consistent with Q1, second half may be compressed due to tariffs.

Q: Domestic manufacturing mix.

A: Ramping up domestic manufacturing but no specific percentage on revenue contribution yet.

Q: Share gain attributed to.

A: Credibility built during COVID, reliability, and inventory cushion from new distribution center.