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

Ladies and gentlemen, thank you for standing by. Hello, and welcome to Carrot 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 Pondell of Investor Relations. Please, go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to Carrot Packaging's 2026 third quarter conference call. I'm Roger Pondell with Pondell Wilkinson, Carrot 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, Jan Gao. 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 in 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. Along 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 gap measures. To the non-GAAP financial measures is included in today's press release, which is now posted on the company's website. And with that, it is my pleasure to turn the call over to CEO Alan Yu. Alan?

Thank you, Roger. Good afternoon, everyone. We deliver solid top-line growth in the third quarter, with net sales increasing more than 8% to about $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 four 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 paperbacks, bagasse trays, and others. with shipment expected to begin in early 2027. Building on these wins, we recently secured four 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 carrots 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 quarter. Beyond these new accounts, we are testing phases with other large chains across different product categories. We are also building inventory to prepare the shipments in the first and second quarter of 2027. Our new 47,000 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 CARIC global supply chain and diversify sourcing for 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 dependent distribution capacities Together with our supply chain and pricing initiatives, along with the continued strength of our online channel and new chain account wins, we'll position Carrot to accelerate revenue growth and improve operating performances and profitability in the quarters ahead. 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?

Thank you, Alan. I'll 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 quarter. The increase primarily respected... $10.7 million in volume growth and product mix, and a $0.4 million favorable impact from pricing, partially offset by a decrease of $0.8 million in shipping and logistics 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 to $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 tariff costs of $1.1 million compared with the prior year quarter. Gross margin. For the 2026 third quarter, increased 5.2% to $45.1 million from $42.9 million in the prior year quarter. Growth margin was 33.5% in the 2026 third quarter compared with 34.5% in the prior year quarter. The decrease... It 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 a lower depreciation expense to 1.0% as a percentage of net sales from 1.3% in the prior year quarter. Operating expenses in the 2026 third quarter increased 17.2% to $40.3 million from $34.3 million last year. The increase primarily reflected higher shipping and transportation costs of $2.8 million, mainly due to the increase in online shipping costs of $2.8 million. of $0.9 million and online marketing expenses of $0.7 million. Additionally, salaries and benefits increased $0.9 million, warehouse expenses increased $0.4 million, and stock-based compensation expense increased $0.4 million. Operating income in the 2020 third quarter was $4.9 million compared with $8.6 million in the prior year quarter. Other income net for the 2026 third quarter was approximately $1.0 million compared with $1.3 million in the prior year quarter. The decrease was primarily due to a $0.5 million decline in the gain on foreign currency transactions. Net income for the 2026 third quarter was $4.7 million compared with $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 carrot for the 2026 third quarter was $4.4 million. or $0.22 per diluted share, compared with $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 with $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 24 cents for the 2026 third quarter compared with 37 cents per share in the prior year quarter. As of September 30, 2026, we had working capital of $87.0 million and $37.0 million in financial liquidity with another $10.0 million in short-term investments. During the third quarter, we generated Operating cash flow of $9.7 million and free cash flow 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 one 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 three quarters of 2026, the company repurchased a total of $2.0 million of its common stock. As of September 30, 2026. Approximately $10.0 million remained available for future repurchases under the program. On November 3rd, 2026, our board of directors approved a regular quarterly dividend of $0.47 per share, payable on or about November 27th, 2026. Two stockholders of record as of November 19th, 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 risen products and oil prices. Against this backdrop, I'll 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 growth margin for the full year 2026 to be between 39% and 41% and adjusted EBITDA margin to be in the mid-teens. Both margin expectations include IEPA tariff refunds recorded during the first half of 2026. Alan and I now will be happy to answer your questions, and I'll turn the call back to the operator.

Thank you.

Quick reminder before we start the Q&A. If you'd like to ask a question, please press star as number 1 on your telephone keypad to raise your hand and enter the key. If you'd like to address a question, simply press star 1 again. We would like to advise that you pick up your hands when asking for optimal sound quality, and if you're 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. Hey, guys. Hey, guys. Thanks for taking my question. You know, first one 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?

Sure. For the third quarter, we missed a revenue by $2.5 million. Fundamentally, one thing is we expected some of the chain accounts to start pulling the orders. They have been delaying for testing purposes, so they will be pushed forward into the fourth quarter. That's why we're looking at the guiding the fourth quarter to be in the 9% to 11% because they were supposed to take it in the third quarter. They moved toward it in the fourth quarter. And at the same time, we have been adding additional new chain account that has signed up to start in the first quarter of 2027. So we will be ramping up inventory in the fourth quarter for them to start taking in the first quarter. One of the common practices 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 away in terms of guidance.

Okay, makes sense. And then thinking about where gross margin came in at, you know, a little bit below the prior guidance, you know, can you just break out, you know, how much of that was driven by the resin costs versus ocean freight versus domestic shipping and if there was 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.

I can give a kind of an idea what's on the Ocean Freight side first. Ocean Freight, our contract rate is about $2,500 that we signed in the second quarter. That's what was supposed to start in May 1st. But during the third quarter of the year, Because of oil price increase and the around-world issues, the carrier has been raising their peak fees and charge, adding bunker fees and additional fees, and shorting on the containers. So we have to pull additional containers, not from the contractor, their traditional contract. So our rate has been basically averaging about $4,500 to $6,000 of containers. We were expecting about $3,500 based on normal peak season surcharge, and normally these containers, like the peak season, is for a couple months only, and this year it extended an even longer period of time. And also, the carriers removed the peak season and the bunker. It added additional fees, claiming that the Iran war has raised the price of the oil, gas, and delaying the shipment, delaying there's an over-demand. So, I mean, we're fortunate to pay $4,500 to $6,000. We're seeing other non-contracted people paying, our competitors have been paying. $7,000 to $10,000 for the East Coast. So for us, we're happy to be competitive on the ocean freight compared to red people. Now, looking forward, going forward, we're seeing that the containers costs did not reduce during the month of October. It kind of slowly dropped a little bit. But we're seeing, we're hearing that the costs should be coming down in the fourth quarter, the last month, December of this year. As yesterday, we knew that the mid-turing election was over, and a lot of these carriers are looking to reduce the, looking like they will reduce the bugger fee and peak season earlier. So we're waiting to see when they will start.

Okay, got it. Thank you for taking my questions. Thank you.

Our next question comes from the line of George Staffos from Bank of America. Please go ahead.

Hi, everyone. Good evening. Thanks for taking my question. Congratulations on the progress. I guess my first question, Alan, to the extent that you, you know, would have a view on this two days after the fact. So 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 the 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 talk about adding the new retail outlets and you having new products. Help us understand how that might add to your revenue base for 27.

Sure, George. Now, first to go to a question after the election. Now, with the election, first of all, originally That we were... We were wondering if the Iran war was going to continue because there were threats on the president that after the election, he was going to go all out with the war and bomb Iran, which we would expect the oil price to go even higher. That will basically raise the price of all the risen and costs. So we actually, in the third quarter, we did not actually take any stepping through 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'm sure you heard the peace talk during the third quarter, it was going to end. It was going to end. So we thought that it was going to end, but it didn't. After the election, it seems like the war is going to end. And right now, but. We did not account for the work to be ended a week ago, so we actually made a price increase announcement in October. We added a few surcharge to kind of offset some of our costs on delivery. In November, we actually announced a price increase, which we started two days ago, a price increase across the board for all of our, most of our clients except for Sunchain account. In Sunchain account, we did add a price increase. And we also, just last Friday, we announced another price increase, a bigger price increase, January 1st of 2027, 3% to 13% price increase, because we feel that we can't rely on the fact that the war is going to be over, that the risen cost is going to come down, the cost of delivery. I mean, one key thing that 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 diesel price going up, the future charge was up as much as 40%. So we're paying more. The more we sell online, we're paying more. But we can't charge this to pass on this to online customer because this is a lot of these are prepaid online orders or we actually have a fee to it. So, with the anticipation now that the war is going to 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 costs, that is definitely going to help our margin to normalize. And we see not our margin deteriorate even further down. So I feel that with the election, the mid-turing election, the result is going to have a favorable effect on the cost of the oil prices. That's one. Second. With the Democratic Party winning the election, there will be most likely the state will be pushing more further into composable, more biodegradable products, eco-friendly items, which we have been gaining traction in terms of the products, fiber products, and also the paper product. As I mentioned earlier in our calls, that we have a few additional pipelines. Most of these additional pipelines are related to the fiber product and the paper-related Some are plastic cuts, but mostly are the fiber products that we wanted to push forward. So we feel that in 2027, our fiber paper growth can grow as much as double. That's how we feel for the 2027 year. And the margin is actually a little bit higher on the fiber side, because our competitors have been enjoying a higher margin. As we come in, even though we're being competitive, we're still seeing a better margin than selling the traditional paper plastic cups. Does that answer the two of your questions?

Alan, that's great. I just want to ask just a point of clarification. I think you said your fiber paper sales can double. Just make sure it wasn't a double digit. You expect it would double. And then can you give us rough sizing? Is paper half your portfolio, 5% of your portfolio, like just size it relative to the whole of carrot?

Right now, currently, we basically have a revenue in terms of calculating like a bagel sales monthly. It's around $850,000. So it's not a huge—we don't have a big base of the fiber product line. Now doubling that would be $1.6 million, $1.7 million total in revenue per month, basically, looking at that. Our paper shopping bag business, I think Jan and I 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're seeing more and more— Paper companies coming for us for the paper shopping bag, mainly chain account. So when we mention about the four pipeline, five pipeline, these are all national chain accounts that we're converting into the fiber and also paper product. That's why we're seeing we are more confident in terms of 2027. This is – actually, this election is going to be – and also this war, the ending of the war, and also recently there will be a shortage, a major shortage of the product. that I'm seeing just as Bad as 2022.

Right now. For the next couple months. The inventory-wise.

Yeah.

Of everything or just the paper?

Everything.

Okay.

Because of the container, one of the ways that the shipping company has 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. Thank you. Container coming out of Indonesia, most of the importer can get 50% out of the 100% – 550 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, we have more of an experience in terms of dealing with this situation, so we're getting around 70% 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. I mean, we try to fulfill as much as we can, but during the latter part of the third quarter, we have started shorting customers, and the fourth quarter, we're seeing shortages. That's why the price increase is necessary.

Understood. I want to 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. Jan, can you answer that question? Because I know that the online sales is up, but the retail side down 18 percent, I wouldn't wear that.

Yeah, retail, sure, I'll take that question. Hi, George. On the retail side, the decline was primarily in the logistics services. That's a really small piece of our revenue stream is we have our own fleet provide.

Okay.

I will turn it over. Thank you very much.

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

Hi, Alan, Jan. Thanks for the questions. This is Mike on for Ryan. I 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?

Some of these chain accounts, they would actually do a regional test and then full-blown, but the majority of the chain 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 us to ship to eight of their different locations, the distribution centers. So we have to put the product into California, Texas, South Carolina, or Washington. So a lot of times we get our product into California, then we transfer them into Texas and other places. At the same time, we ship the revenue to oversee into Washington and New Jersey and South Carolina. So to us, it gets one wrap up. First, we have to tell them we have the inventory, approximately when, and when will they be depleted, the inventory from the previous. Uh, vendor. Um, sometimes they're accurate. Sometimes they're a little bit off. Um, sometimes the, the previous vendor would tell them, hey, they found extra one month inventory. So they asked 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. 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?

The risen costs. Increase the most. And in most years, most cases, risen costs, the raw material costs spike up for a couple months and come back down. But this year, we anticipated everybody, not just ourselves, anticipated the war to be ended quickly, no more than three months. But this war has started since March, and basically it didn't 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 ended, the oil price would come down sharply, as well as the raw material. That's one thing. But also, with the war going on, the oil prices continue to rise, with the diesel price going beyond $650, $750 per gallon. Our delivery costs went up. The 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 once we began to realize this war is not ending, we finally announced a price increase in fuel surcharge in October 1st, November 1st. That's where we see that we have, we cannot rely on the, from what, what, where we're hearing from the government that the war's ending. And basically, we wanted to help our customer to see that if this was going to end, we wouldn't have to raise the price. But it was 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 we just made an announcement that we have to go even higher in January 1st, because now it's not only the oil prices is causing the price to go up, the disruption, the ocean freight is going to cause a disruption in the supply chain throughout. Not just us, but every importer manufacturer that is purchased from overseas in Asia is going to see a major supply chain disruption. In the upcoming month. But we are prepared for it, basically. So I'm sure that we will be benefiting additional revenue. At the same time, without raising the prices, our customers are not going to be complaining because you can't find product out there in the market in the next two months.

Okay, and then last one for me. Are the chain accounts you're winning, is there a difference in the profitability of those and some of your existing business or your overall business profile?

Well, the chain account likes to have the stability in prices. We, they don't, they don't, they tend, it's more of a kind of a business relationship that if we can absorb the price toss, but passing the chain price mainly on a yearly basis, unless there's 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 the latter part, the third quarter, starting in some change. Some other change in the first part of the fourth quarter. Other change, we may announce that. First month of the year, January 1st, is when their price increase takes place. Because we know that now that basically the raw material might not come back down to normalization anytime soon. So the chain understood because they know they themselves are getting the price increase notice from every vendor out there, from their soup food supplier, from the distribution center that helped them distribute the product to the store, like Cisco and U.S. Food. Everyone is putting a few surcharge, not 5%, but more like 15%, 20% few surcharge on top of the normal delivery fees. So, it's not become a norm that if you don't raise supplies, you're just taking a hit on the margin side. So, we are taking action in terms of protecting our margin in the fourth quarter and first quarter ongoing.

On that, I just wanted to… I 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 raising price, the ocean trade, 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 about 47%. That's our average. Q3, 2026, we're at just a little over 50%. So obviously just the majority of our product cost, it's our imported finished goods. So very closely correlated to the price. And on the ocean freight, our average is about 11% over the past couple of years. Q3, 2026, we were at 14.2, so 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 the increases we're planning to implement in Q1, 2027 to help offset some of the pressure that we're facing on the margin side.

Okay, very helpful. I'll pass it on.

Thank you. Thank you.

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, and thanks to everyone for joining us today. We're 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.

The meeting is now concluded. Thank you all for joining, and you may now disconnect.