Karat Packaging Inc. Common Stock 2026 Q2 Earnings Call

Please go ahead. Good afternoon, everyone, welcome to Karat Packaging's 2026 second quarter conference call.

I'm Roger Pondel with PondelWilkinson, Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and his Chief Financial Officer, Jian Guo. Before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10-K, as filed with the Securities and Exchange Commission, and copies of which are available on the sec.gov website at www.sec.gov, along with other company filings made with the SEC from time to time.

Actual results could differ materially from these forward-looking statements, Karat Packaging undertakes no obligation to update any forward-looking statements except as required by law. Please also note that during this call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, and free cash flow, which are non-GAAP financial measures as defined by SEC Regulation G. A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website. With that, I will turn the call over to CEO Alan Yu.

Alan? Thank you, Roger. Good afternoon, everyone.

We delivered record quarterly net sales of more than $136 million, reflecting the strength of our customers' demand and accelerated momentum in our online business growth. During the quarter, our sales pipeline expanded, adding four new chain accounts, which further broadened our market reach and created additional opportunities for future revenue growth. We continue to experience encouraging momentum across our business, highlighted by the strong performance of our online channel, where net sales increased 23.6% year-over-year. Our eco-friendly product portfolio also continued to gain traction, benefiting from the continued expansion of SKUs and growth in the paper-based categories. As a result, eco-friendly products represented 33.8% of total sales during the quarter, compared with 31.8% in the prior year period.

Our results also benefited from IEEPA tariff refunds, which refers higher tariff costs absorbed in the prior periods and further contributed to the strong reported profitabilities. While we were pleased to capture this benefit in the quarter, our focus remains on the fundamental drivers of the business and sustaining strong long-term financial performances. To support our long-term growth strategy, we are currently finalizing a lease for a 47,000 square foot warehouse for a new distribution center in Orlando, Florida, which we expect to be operational by the third quarter of this year. The new facility is expected to enhance Karat's ability to better service customers throughout the Southeast, improve fulfillment capability for our growing e-commerce business, reduce delivery time, and provide additional infrastructure to support future growth. At the same time, we remain focused on driving operational excellence.

We are continuing to execute initiatives designed to enhance efficiency across the organizations while carefully managing costs, aiming to support sustainable profitabilities and position the company for continued success. During this quarter, we achieved gross margin of 56.6%, including the benefit from the IEEPA tariff refund of 1,890 basis points. Despite higher product costs and ocean freight rates, the performance underscores the strength of our sourcing capabilities. Our sourcing diversification initiatives continues to deliver tangible benefits, strengthening Karat's competitive advantage through reliable product availability and cost competitiveness. In the second quarter, domestic purchase increased to nearly 20% of total sourcing, while importing from Taiwan represented 46%, China represented 11%, and sourcing from Indonesia, Singapore, and South America represented an aggregate of 12%.

Overall, we are pleased with the progress we are making with the expanding sales pipeline, new customer wins, strong e-commerce growth, and a continued focus on the operational discipline. We believe Karat is well-positioned to advance profitability and long-term growth. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company financial results in greater detail.

Jian? Thank you, Alan. I'll begin with a summary of our second quarter performance, followed by an update on our guidance.

Net sales for the 2026 second quarter increased to $136.3 million, up 9.9% from $124.0 million in the prior year quarter. The increase primarily reflected $13.1 million in volume growth and product mix, and a $0.4 million favorable impact from pricing, partially offset by a decrease of $1.1 million in shipping and logistics revenue. Sales to channel accounts and distributors, our biggest sales channel, were up by 9.0% in the 2026 second quarter. Online sales, as Alan discussed earlier, rose 23.6% over the prior year quarter, and sales to the retail channel declined 23.4% from the 2025 second quarter, primarily from the decrease in shipping and logistics revenue.

Cost of goods sold for the 2026 second quarter, including the benefit of $25.8 million from IEEPA tariff refunds, decreased 21.0% to $59.1 million from $74.9 million in the prior year quarter. This benefit was partially offset by higher product costs of $6.9 million and increased import costs of $3.5 million, including an 8.9% increase in average container rates and a 4.3% increase in the number of containers imported versus the prior year quarter. Gross profit for the 2026 second quarter increased to $77.2 million from $49.1 million in the prior year quarter. Gross margin increased to 56.6% in the second quarter of 2026 from 39.6% a year ago, reflecting a 1,890 basis point contribution from IEEPA tariff refunds.

Product costs represented 49.2% of net sales, up from 48.5% in the prior year quarter, while import costs increased to 11.1% of net sales from 9.5%, primarily to freight and import related expenses. Operating expenses in the 2026 second quarter increased to $39.6 million from $32.6 million last year. The increase was primarily driven by higher shipping and transportation costs of $3.1 million, along with increases in online platform of $0.6 million and marketing expenses of $0.5 million. We also incurred higher costs of $1.1 million in salaries and benefits, while bad debt expense and warehouse expenses increased by $0.6 million and $0.4 million, respectively. Additionally, the second quarter included a $0.1 million loss on the disposal of machinery, compared with a $0.3 million gain recognized in the prior year quarter from routine asset disposals.

Operating income in the 2026 second quarter increased 127.2% to $37.6 million from $16.6 million in the prior year quarter. Other income net for the 2026 second quarter was $1.4 million, compared to other expenses net of $2.0 million in the prior year quarter. The year-over-year improvement was primarily driven by significantly lower foreign currency transaction losses, which were $0.1 million in the current quarter, compared with $2.9 million in the same period last year. In addition, interest income increased by $0.5 million, reflecting $0.9 million of interest income associated with IEEPA tariff refund, partially offset by a $0.4 million decline in interest income earned on investments in certificates of deposit. Net income for the 2026 second quarter increased 168.3% to $29.6 million from $11.1 million for the prior year quarter.