Karat Packaging Inc. (KRT) Q3 2026 Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. Hello. And welcome to Karat Packaging Third Quarter of 2026 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. Now I would like to turn the call over to Roger Pondel of Investor Relations. Please. Go ahead.

Roger Pondel: Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging's 2026 Third Quarter Conference Call. I am Roger Pondel with Pondel Wilkinson, 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 Allen, 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 2000. 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's website at www.sec.gov. Alan with other company filings made with the SEC from time to time. Actual results could differ materially from these forward looking statements and Karat Packaging undertakes no obligation to update any forward looking statements except as required by law. Please also note that during today's 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.

Operator: And with that, it is my pleasure to turn the call over to CEO, Alan Yu. Alan?

Alan Yu: Thank you, Roger. Good afternoon, everyone. We deliver solid top line growth in the first quarter with net sales increasing more than 8 percent to $135 million We experienced continued strong momentum in our e commerce business where online sales grew nearly 38%. Compared with the prior year quarter. While increased import costs, higher domestic shipping costs, and elevated risen prices pressure margins. And contributed to the result below our expectation we remain encouraged by the resilience of demand across our business. We continue success in new account wins and the strength in our pipeline. We are confident in our long term growth prospect. In October, we began shipping select products to the 4 new chain accounts that we secure in the second quarter. Notably, we expanded these relationships during the third quarter. Winning additional business across multiple product lines such as paper bags, bagesse trays, and others. With shipment expected to begin in early 2027. Building on these wins, we recently 4 additional chain accounts, further expanding our distribution footprint. We believe these new relationships underscore the appeal of our broad product offering, flexibility, and outstanding service, as well as our reliability as a value supplier. These new business wins support our continued focus on deepening Carrot's market penetration on the East Coast and Midwest. Sales on the East Coast grew 19% year over year while Midwest sales increased 22% compared to the prior year quarter. Beyond these new accounts, we are testing phases with other large chains across different product categories. We are also building inventory to prepare for the shipments in the first and second quarter of 2027. Our new 47 thousand square foot distribution center in Orlando, Florida is expected to be fully operational in November 2026. To serve customers throughout the Southeast. The facility is expected to strengthen fulfillment capabilities for our growing e commerce business. Help reduce delivery time and provide additional infrastructure to support future growth. To address elevated oil prices and ongoing cost pressures, we continue to realign and optimize Karat Global Supply Chain and diversify sourcing from regions With More Favorable Trade Conditions And Freight Costs. Including Indonesia, Malaysia, and South America. We have also implemented price increases on select items this month, and we expect to implement additional price increases early next year to help offset higher costs. Aggregated purchases from Indonesia, South America, and Malaysia increased to 19.4% of total sourcing, while sourcing from Taiwan, China and The U. S. Accounted for 39.1%, 14.4%, and 16.7%, respectively of total purchases. We believe our expanded distribution capacities together with our supply chain and pricing initiatives, along with the continuous strength of our online channel and new chain account wins, will position Karat to accelerate revenue growth and improve operating performance and profitability in the quarters ahead.

Operator: I will now turn the call over to Jian Guo, our Chief Financial Officer to discuss the company's financial results in greater detail. Jian?

Jian Guo: Thank you, Alan. I will begin with a summary of our Q3 performance, followed by an update on our guidance. Net sales for the 2026 third quarter increased to $134.7 million up 8.2% from $124.5 million in the prior year quarter. The increase primarily reflected $10.7 million in volume growth and product mix. And a $400 thousand favorable impact from pricing partially offset by a $800 thousand in shipping and handling fixed revenue. As Alan mentioned earlier, online sales rose 37.7% in the third quarter of 2026, compared with the prior year quarter Sales to chains and distributors, our largest sales channel, increased 3.9% year over year. And retail channel sales declined 18.4% from the third quarter of 2025, primarily due to lower logistics service revenue. Cost of goods sold for the 2026 third quarter increased 9.8% to $89.6 million from $81.6 million in the prior year quarter This increase was primarily driven by higher product costs of $7.2 million due to higher sales volume and recent prices. As well as higher import costs. Ocean freight costs increased $2.4 million, including a 17.0% increase in average container rates and an 11.7% increase. In the number of containers imported versus the prior year quarter. Partially offset by a decrease in duty and tariffs of $1.1 million compared with the prior year quarter. Gross margin for the 202 thousand third quarter increased 5.2% to $45.1 million from $42.9 million in the prior year quarter. Gross margin was 33.5% in the 2026 third quarter, compared with 34.5% in the prior year quarter. The decrease was primarily driven by higher product costs which represented 60.6% of net sales. Compared with 48.9% in the prior year quarter. The increase in product costs was partially offset by lower depreciation expense of 1.0% as a percentage of net sales from 1.3% in the prior year quarter. Operating expenses in the 2020 third quarter increased 17.2% to $40.3 million from $34.3 million last year. The increase primarily reflected higher shipping and transportation of $2.8 million, mainly due to the increase in online shipping costs, fulfillment fees of $900 thousand and online marketing of $700 thousand. Additionally,, salaries and benefits of $900 thousand warehouse expenses increased $400 thousand and stock based compensation expense increased $400 thousand. Operating income in the 2026 third quarter was $4.9 million compared to $8.6 million in the prior year quarter. Other income net for the 2026 third quarter was approximately $1 million, compared to $1.3 million in the prior year quarter. The decrease was primarily due to a $500 thousand decline in the gain on foreign currency transactions. Net income for the 2026 third quarter was $4.7 million, compared to $7.6 million for the prior year quarter. Net income margin was 3.5% in the 2026 third quarter, compared with 6.1% for the prior year quarter. Net income attributable to Karat for the 2020 third quarter was $4.4 million, or $0.22 per diluted share compared to $7.3 million, or $0.36 per diluted share in the prior year quarter. Adjusted EBITDA for the 2026 third quarter was $8.9 million compared to $13.1 million for the prior year quarter. Adjusted EBITDA margin was 6.6% of net sales. For the 2026 third quarter, compared with 10.5% for the prior year quarter. Adjusted diluted earnings per common share was $0.24 for the 2026 third quarter, compared with $0.37 per share in the prior year quarter. As September 30, 2026, we had working capital of $87 million, $37 million in financial liquidity with $10 million in short term investments. During the third quarter, we generated operating cash of $9.7 million and free cash of $9.1 million We paid a regular quarterly dividend of $0.47 per share to shareholders on August 28, 2026. Additionally, Global Wealth our consolidated variable interest entity, fully repaid the remaining balance of $11.2 million on 1 of its term loans. That matured on September 30, 2026. Further reducing our consolidated leverage ratio going forward. During the third quarter of 2026, the company did not repurchase any of its common stock under its previously announced share repurchase program. For the first 3 quarters of 2026, the company repurchased $2 million of its common stock. As of September 30, 2026, approximately $10 million remained available for future repurchases under the program. On 11/03/2026, our Board of Directors approved a regular quarterly dividend of $0.47 per share payable on or about November 27, 2026, to stockholders of record as of November 19, 2026. Alan outlined the initiatives that we are implementing to support our long term growth and enhance profitability in the quarters ahead while navigating significant pressure from resin products and oil prices. Against this backdrop, I will provide an update to our guidance. For the 2026 fourth quarter, we expect net sales to grow by 9% to 11% from the prior year quarter. We expect gross margin for the 2026 fourth quarter to be within 33% to 35% and adjusted EBITDA margin to be in the high single digits. For the full year of 2026, we expect net sales to grow by 9% to 11% over the prior year. We expect gross margin for the full year 2026 to be between 39% to 41% and adjusted EBITDA margin to be in the mid teens. Both margin expectations include the iEPR tariff refunds recorded during the first half of 26. Alan and I now will be happy to answer your questions, and I will turn the call back to the operator.

Operator: Thank you. Quick reminder before we start the Q&A. A. We would like to advise that you pick up your handset when asking for optimal sound quality. And if you are muted locally, please remember to unmute your device. We will take our first question from Ryan Myers from Lake Street Capital Markets. Please go ahead.

Ryan Meyers: Hey, guys. Thanks for taking my question. First 1 for me,, can you just walk us through what you saw on the revenue side of the business during the quarter and where the delta was for the growth rate where it actually came in at versus where you guys had guided to?

Jian Guo: Sure. For the third quarter, we missed it, our revenue by $2.5 million.

Alan Yu: Fundamentally, it is by 1 thing is we expected some of the chain account to start pulling the orders They have been delaying for testing purposes. So they will be pushed forward into the fourth quarter. that is why we. We are looking at the guiding the fourth quarter to be in the 9% to 11%. They were supposed to take it in the third quarter. They moved toward in the fourth quarter. And at the same time, we have been adding additional new chain account that is. Signed up to start in the first quarter of 27. So we will be ramping up inventory in the fourth quarter for them to start taking in the first quarter. 1 of the common practice for the chain account is they. Even though they, committed to buying from us, pull from us, they have to deplete their inventory from their previous vendors. So often that kind of pushes us away in terms of guidance. Okay. Makes sense.

Ryan Meyers: And then thinking about where gross margin came in at a little bit below the prior guidance, can you just break out how much of that was driven by the resin costs versus ocean freight versus domestic shipping? And if there is any other factors, and then how we should think about you know, the impacts there in the rest of this year and then maybe what cost pressures you think could persist into 2027.

Alan Yu: I can give a kind of an idea of what on the ocean freight side first. Ocean freight, our contract to rate is $2.5 thousand that we signed in the second quarter. So that is what is supposed to start in May 1. But during the third quarter of the year, because of oil price increase, and the, around more issues. This carrier has been raising their peak season charge adding bunker fees and additional fees. And shorting on the containers that we have to pull additional containers, not from the contractor. there is no. Traditional contract. So our rate have been basically averaging about $4.5 thousand to $6 thousand a container. We were expecting $3.5 thousand based on normal season surcharge. And, normally, these containers supposed to like, the peak season for a couple months only. And this year, they extended even longer period of time. And, also, carriers then removed peak season and the bunker. It added additional fees claiming that the Iran war raised. Has raised the price of the oil, gas, and delaying the shipment, delaying-- there is overdemand. So I mean, we are fortunate to pay $4.5 thousand to $6 thousand. We are seeing other noncontracted people paying. our competitors have been paying $7 thousand to $10 thousand for the East Coast. So for us, we happen. We are happy to competitive on the ocean freight compared to other people. Now looking forward at the. Going forward, we are seeing that the containers cost did not reduce during the month of October. It kinda slowly dropped a little bit, but we are seeing. We are hearing that the, the cost is. Should be coming down in the fourth quarter, the last month, December of this year. As yesterday, we knew that the midterm election was over, and a lot of these carriers are looking to reduce the looking like they will reduce the bunker fee and peak season earlier. So we are waiting to see when they will start. Okay. Got it. Thank you for taking my questions.

Operator: Thank you. Our next question comes from the line of George Staphos from Bank of America. Please go ahead.

George Staphos: Hi, everyone. Good evening. Thanks for taking my question. Congratulations on the progress. I guess my first question Alan, to the extent that you have a view on this 2 days after the fact, does the election outcome change what you think the buying preferences might be over the next year? And how are you positioned for it? And do you need to worry at all? Or do your customers have to worry at all? Does it mean a likelihood of more fiber versus plastic? How would you have us think about that to the extent that you might have a view? Second question, retail was down 18% You might have mentioned your remarks and I missed it, but what was driving that? And then the pipeline, you talked about adding a new retail outlets and you having new products. Help us understand how that might add to your revenue base for 2027.

Alan Yu: Sure, George. Now first to go to a question after 2. For the election. Now we. Well, with the election,, first of all, originally, that we were wondering if the Iran war was continue because there were threats from the president that after the election, he was going to go all out with the war. all out with the war and bomb Iran. Which we would expect. We would expect the oil prices to go even higher. That will basically raise the price of all the resin and cost. So we actually in the third quarter, we did not actually take any step into raising prices to our customer, passing the cost to our customer. We were anticipating the war to end because every time there was a peace talk. I am sure you heard of peace talk during the second. The third quarter, it was gonna end. It was gonna end. So we thought that it was gonna end, but it did not and in the. After the election, it seems like the war's gonna end. And right now, but we did not account for the war to be ended. 2. A week ago. So we actually made a pricing preannouncement in October We added a few surcharge. to kind of offset some of the costs delivered. November, we actually announced a price increase, which we started 2 days ago, a price increase across the board for all of our. Most of our client except for some chain account. And some chain account, we did add a price increase. And we also, just last Friday, we announced another price increase, a bigger price increase, January 1, 2027, 3% to 13% price increase. Because we feel that we cannot rely on the fact that the war's gonna be over. That the risen cost is gonna come down, the cost of Mhmm. The delivery. Mean, 1 key thing that hurt our. Impacted our margin is online shipping. We use UPS for online shipping. Actually, it was FedEx. Okay. We use FedEx for online shipping. They have a few surcharge gauge that go up and down with the. This diesel price going up, the fuel surcharge was up as much as 40%. So we are paying more. The more we sell online, we are paying more. But we cannot charge this pass on this to online customer because this is. A lot of these are. They prepay online orders or we actually have a fee to it. So with the anticipation now that the war is gonna end, and the gas prices come down, earlier in the fourth quarter, we feel that with our price increase, and the decrease in the diesel prices and delivery cost, that is definitely gonna help our march to normalize And we see not our margin deteriorate even further down. So I feel that with these the election, the midterm election, the results is going to have a favorable effect on the cost of the oil prices. that is 1. Second, With the Democratic Party winning the election, they will be most likely. The states will be pushing more further into compostable, more biodegradable product, ecofriendly item, which we have been gaining traction in terms of the products, fiber product, and also the paper product. As I mentioned earlier in our, calls that we have a few additional pipeline Most of these additional pipeline are related to the fiber product and the paper related product. Some are plastic cups, but mostly are the fiber product that we wanted to push for So we feel that in 2027, our fiber paper growth can grow as much as double. that is how we feel for 2027. And the margin is actually a little bit higher on the fiber side. Because our competitors have been have been enjoying a higher margin. As we come in, Even though we are being competitive, we are still seeing a better margin than selling the paper. Traditional paper plastic cup. Okay? Did that answer the 2 questions? that is correct. I just want to ask just a point of clarification. I think you said your fiber paper sales can double Just to make sure it was not a double digit. You expect it would double. And then Double. Can you give us rough sizing? Is paper half of your portfolio,, 5% of your portfolio, like just size it relative to the whole of Karat? Right now, currently, we basically, we have a revenue in terms of calculating, like, bagesse sales monthly. it is $850 thousand. So it is not a huge. We only have a big base of the fiber product line. Now doubling that will be $1.6 million to $1.7 million in revenue per month. Basically, looking at that. Our paper shopping bag business I think Jen might have a better idea in terms of what is our current paper shopping bag in terms of winning additional. Because on the pipeline, we have. We are seeing more and more paper companies coming for us for the paper shopping bag. Mainly chain account. So when we have mentioned about the 4 pipeline, 5 pipeline, these are all national chain accounts. That we are converting. Into the pay. The fiber and also paper product. that is why we are seeing we are more confident in terms of 2027. This actually, this election is gonna be and also this war the ending of the war and, also, recently, there is a. There will be a shortage,, a major shortage of the product. That I am seeing just as bad as in 2022. Right now. For the next couple months. The inventory wise. Yeah. Of everything or just the paper? Everything. Okay. Because of the container, the 1 of the way that the shipping company have been able to raise their prices and gouge all these importers is by reducing shipping space, so they cancel almost 40% of the shipping coming to North America. So they can create kind of a shortage and raise their price. And container coming out of Indonesia most of the importer can get 50% out of the 100 per-- 55 out of 100 containers they want. Out of Vietnam right now, they can probably get 30 containers out of 100 containers they need. We, fortunately, have more of experience in terms of dealing with this situation. So we are getting around 30% to 80% of what we need for our product. So we will at least have product in our warehouse. But we have been seeing shortages. We have been shorting customers. We try to fulfill as much as we can, but during the latter part of the third quarter, we have started to short customers. In the fourth quarter, we are seeing shortages. that is why there is a. The price increase is necessary. Understood. I wanna turn it over to the others to be fair. But just on the last question, just on retail being down 18%, what was driving that? Thanks, Alan. No problem. Jian, can you answer that question? Because I know that our online sales is up, but the retail side down 18%, I was not aware of that.

Jian Guo: Yeah. Retail Sure. I will take that question. Hi, George. On the retail side-- hey, George-- was partly-- the decline was primarily in the logistics services. that is a really small piece of our revenue stream, as we have our own fleet to provide logistic services to some of our customers. So the. Almost the entire amount of the decline in a retail channel is logistics sales revenue. Okay. I will turn it over. Thank you very much.

Alan Yu: Sure.

Jian Guo: Thank you.

Operator: Our next question comes from the line of Michael Francis from William Blair. Please go ahead.

Michael Francis: Hi, Alan, Jian. Thanks for the questions. This is Mike on for Ryan. Wanted to start with the new chain accounts Can we get a sense how quickly it takes those to ramp from the first shipment to sort of a full bore?

Alan Yu: For some of these chain accounts, they would actually do a regional test and then full blown. Majority of the train that we deal with they would actually start when we have all the inventory available to ship in all of our distribution centers. So what we normally do with the chain is they have for example, a chain with 500 stores. They need to. They have. They need to ship to 8 of their different locations, the distribution centers. So we have to put the product into California, Texas, South Carolina, or Washington. A lot of time, we get our product into then we transfer them into Texas and other places. At the same time, we ship from overseas into Washington and New Jersey and South Carolina. So Let's take this 1-- ramp up first,, have the inventory. Approximately when, and when will they be depleted the inventory from the previous vendor. Sometimes they are accurate Sometimes they are a little bit off. Sometimes the previous vendor would tell them, hey. They found extra 1 month inventory. So they asked to ask us to wait for an extra month. But normally, it will be 90 days. To start shipping. For the first shipment into the DCs. If basically, everything's okay. Okay.

Michael Francis: And then on the gross margin side, you gave the drivers, and it seems like the container rates is a big piece. But what were the things that caught you off guard the most there? And then as we think about 2027, you talked a little bit about what recovers, but what do you think might be the first sign of a recovery if that starts to improve?

Alan Yu: The resin cost increased the most, and in most years, in most cases, resin cost or raw material cost spike up for a couple months and come back down. But this year, the anticipated everybody, not just ourselves, anticipated the war to be ended quickly. No more than 3 months. But this war has started since March, and, basically, it did not end until the day of midterm election. So that part of it was the biggest part that caught us off guard. Because when we thought that the war end, the oil price would come down sharply, as well as the raw material. that is 1 thing. But, also, with the war going on, the oil prices continue to rise with the diesel price going beyond $5.75 per gallon. Our delivery costs were up. Most major. Majority of our contracts are delivered price. We actually added the cost of the delivery into the product itself So when the oil price is high, we have to absorb that cost. And we once we begin to realize this war is not ending, we started. We finally announced price increase and fuel surcharge. In October 1, November 1, that is where we see that we cannot rely on the from what we are hearing from the government that the war's ending. And, basically, we just we wanted to help our customer to see that if this is gonna end, we lower. We would not have to raise the price. But it got to a point that we had to raise our prices for our customer. And initially, we raised a nominal number basically on October. And a different number in November. But then just made an announcement that we have to go even higher in January 1, because now it is not only the oil prices that is causing the price to go up; the disruption in ocean freight is causing-- cost-- Is gonna cause a disruption in the supply chain throughout not just us, for every importer and manufacturer that purchases from overseas in Asia, is going to suffer-- see a major supply chain disruption in the upcoming month. But we are. We are prepared for it, basically. So I am sure that we will be benefiting additional revenue At the same time, without raising the prices, our customer's not gonna be complaining because you cannot find product out there in the market. In the next 2 months. K. And then last 1 for me. Are the chain accounts you are winning, Is there a difference in the profitability of those? And some of your existing business or sort of your overall business profile?

Jian Guo: Well, the chain account likes to have the stability in prices. They do not. They tend-- They tend. it is more of a kind of business relationship that if we can absorb the price cost, but passing the chain price mainly on a yearly basis. Unless there is a major issue. In this case, we did kind of tell the chain that, hey. The war is more like a force majeure situation. So we did increase a nominal increase in the fourth quarter. But late. Latter part of the third quarter starting in some chain. Some other chains in the first part of the fourth quarter. Other chains, we may announce on that first month of the year, January 1, is when their price increase take place. Because we know that now that, basically, the raw material might not come back down to normalization, anytime soon. So what we the chain understood. Because they know they. Themselves are getting the price increase notice from every vendor out there. from their food supplier,, from the distribution center that helped them distribute the product to store, like Sysco and US Foods. Everyone is putting a huge surcharge not 5%, but more like 15% to 20% huge surcharge on top of the normal delivery fees. So it is now become a norm that if you do not raise the price, you are just taking a hit on the margin side.

Alan Yu: So we are taking action in terms of protecting our margin in the fourth quarter and first quarter, ongoing.

Jian Guo: So on that, I just wanted to talk. Also add a couple of data points just maybe to help quantify, help us quantify thinking about really the pressure on the margin side. I know we talked about. Alan talked about the resin price,, the ocean freight, just some additional data points here is over the past couple of years, our average product cost as a percentage of total net sales is around 47%. that is our average In Q3 2026, we are at just a little over 50%. So that is so obviously, just the majority of our product cost, it is our imported finished goods. So very closely correlated with the price. On the ocean freight, our average is about 11% over the past couple of years. Q3 26, we were at 14.2. Just wanted to add some data points there. So I know Alan also talked about the price increases that we implemented in Q3. Sorry, in Q4. As well as that would. The increases that we are planning to implement in Q1 27 to help offset some of the pressure that we are facing on margin side.

Michael Francis: Okay. Very helpful. I will pass it on.

Jian Guo: Thank you. Thank you.

Operator: We have reached the end of the Q&A session. I will now turn the call back over to Alan for closing remarks. Thank you, operator.

Alan Yu: And thanks to everyone for joining us today. We are encouraged by the positive sales momentum and geographic expansion. We remain focused on executing our growth strategy and look forward to keeping you updated on our continued progress. Have a nice day.

Operator: The meeting has now concluded. Thank you all for joining, and you may now disconnect.