Conference Transcript - KRT 2026-06-03

Ryan Merkel, Analyst — William Blair

Alright, why don't we get started? Good morning. This is the Carrot Packaging presentation. I'm Ryan Merkel. I cover building products and packaging and distribution at William Blair. Before we begin, I need to remind you that a complete list of disclosures and conflicts of interest is available on our website. With us today is Alan Yu, Chairman and CEO, and Jan Gao, CFO. For background, Carrot is a fast-growing manufacturer and distributor of eco-friendly, single-use, disposable food service products. Key products include food packaging, containers, cups, and straws. We have confidence that industry tailwinds and company initiatives will allow Carrot to drive double-digit top-line and mid-teens EBITDA growth long-term. Let me turn it over to Alan.

Alan Yu, CEO

Thank you, Ryan. Good morning, everyone. Welcome to the Carrot Packaging presentation. First of all, I'd like to say that most of you have used our packaging product in your daily life. If you go to fast food casual, fast casual chains or restaurants such as Chili's, Applebee's, Chipotle, Panda Express, Watto Pretto, Dutch Brothers, you'll very likely see our product throughout the U.S., even on the island of Hawaii. We do have a great presence in the island of Hawaii where sustainable products are being those are compostable utensils and cuts. We actually service a majority of the chains on the island. One of the things about carrot packaging is we're a one-stop shop. What I mean a one-stop shop is that we would be able to supply a restaurant with almost all the items except for equipment that they use for packaging. And some of the restaurants, we We service them with Poppy Pearls, syrup product, such as Monin, Da Vinci, 1883, as well as Torani syrups. So basically, if a customer has a knee, we would be able to source it for them and carry them and supply them, as well as online. Now we basically want to go through their revenues. In the past years, Cary has been growing revenues, both top line and bottom. uh for examples uh right now last 20 25 our revenue was 467 million dollars and we grew not only our revenue we grew on our net profit as well as our gross margin okay uh this year we i would say that carrier packaging will be expected to grow over five half a million half a billion dollars this year okay now some of the investment highlights that we have is that we offer a diverse range of product the latest addition to our product line is paper product paper bag we have extensive categories supply chain of paper product handle sack back we're adding we've been adding additional paperback product to our carrier packaging as well as back for bakery items these are items we're looking to add additional 100 SKUs this year just on paperback item, and aluminum product, as well as the cup carrier, and also the different type of drink packaging. Now, eco-friendly line. Carrier started with the eco-friendly line back in 2007, when most of the companies are still using styrofoam. So we were one of the first company to pioneer and brought into the U.S. the composable line of PLA line paper, Co-Cup, PLA line paper hot cup plastic cup as well as utensils and this year we've added more composable product to our categories offering now on our customer base we service hundreds of large chains mid-side chains throughout the U.S. they could be from a company in Texas a peterry or an in-n-out burger or a company out in tennessee or southeast dutch brothers or seven brews or other restaurants such as chili's panda express and as the list goes on okay we are continuing to growing our client base as this year we are looking to add additional 10 to 20 national chain accounts to our customer base. Okay, so Carrot, we currently have 10 warehouses of which three of them manufacture domestically throughout the U.S. We have over 75 trucks that we operate on our own and we're adding additional 10 to 20 trucks this year to service our customer. customer. One of the key things to success for Carrot is that we can not only source product or oversee, we can also deliver it. So the last mile, we can also do it ourselves in certain categories, certain areas, certain cities. If not, we usually have third party, we have partner carriers that help us do the delivery. So we sell through not only online, we also sell through distribution, we also sell through our self direct in this offering here. So you can see that Carrot has been moving away the manufacturing from U.S. into outsourcing overseas. Our manufacturing sales numbers this year is down to, last year is down to 9% over our sales, whereas it was 25% five years ago. This year we see that this number will continue to fall down drop lower as we scale down our manufacturing domestically and if needed we can scale up uh for example right now we have a shortage in terms of a cup and other containers we've increased our capacity this past two months okay so we're able to be nimble and flexible in terms of grow or expand or de-scaling back on our manufacturing um Distribution. One of the things about distribution, sourcing, the key part of our success is sourcing. We have over 150 partner vendors overseas, all spread throughout the Southeast Asia, South Asia. Recently, we added Latin America into our sourcing partners. So we source from Taiwan, China, Vietnam, Malaysia, Indonesia, Korea, Thailand, and also Mexico and Latin America. Why? Because due to the complex tariff issues as well as the supply chain disruption issues, we want to mitigate our dependency on one area. For example, if we have a product such as a cup, we would be sourcing it from Taiwan, China, Latin America and also Indonesia, not not just one part of the world, just to prevent in case there's a political geographic turmoil or disruption in that country, so we can also quickly shift our purchasing to another country. Supply chain, that's what I mentioned earlier that this is a key part of XSS, is having a diverse supply chain sourcing. And that's part of our, especially nowadays, whereas tariff can be high in one region and lower in the other region. And recently there might be a shift into China due to a favorable tariff. Now, compared to our peer group, we seem to grow not only in terms of volume, revenue-wise, but also volume. And our growth rate, revenue growth rate, this year we're looking at double-digit revenue growth versus last year, high, mid-single-digit growth last year, okay, and our peer groups seem to be growing single-digit, and also some of the peer group competitors are growing negatively. Now, our growth profit margin, okay, last year we saw a growth margin to be around 35 to 36% range, and the prior year was 38, 39% range, and we do see that this year, 2026, our growth margin should be higher back to normal where we used to be and it's moving up and down based on the cost ocean freight and that's all also tariffs so there's a lot of issues that may change the growth margin so we're where our goal is still growing in our growth margin compared to last year and volume one thing to to notice that is our volume has increased not only a revenue increase our gross margins increase our sales volume per case has also increased this year we're looking at double digit growth in terms of sales volume now on the financial highlights um maybe i can have jen to go over the financial highlight with with all of you uh in terms of selling net profit

Jan Gao, CFO

and everything yeah sure thank you ellen good morning everyone thank you ellen so on these slides i think our numbers are pretty self-explanatory i won't spend too much time to go through all these numbers i think really the key message just to reiterate what alan's talking about i think if you look at our financials ever since we started being a public company then really the story is we started small but we really outgrow we are disruptor in this industry we really outgrow our competitors this is a very kind of traditional consumer products industry very mature most of our competitors are in a break-even kind of around zero or sometimes negative one or two percent growth so really with these numbers we just wanted to showcase This is just a highlight of our Q1 2026 performance, where we achieved more than double-digit revenue growth, as well as really strong gross margin, so really strong, much, much superior performance compared to a lot of our peers. The green is the next?

Alan Yu, CEO

Green is four.

Jan Gao, CFO

Green is four. This one, right? No, this is green. Oh, oh, okay, thank you. So this is a quick summary of our five-year history of some of the key metrics that we monitor. If you look at revenue, gross margin, adjusted EBITDA, and net income. So over the past few years, obviously, this is a highly dynamic industry, right? With the COVID, the supply chain issues, the tariff. but as you can tell within the last few years we were able to continue this high growth mode and we've continued to achieve really strong adjusted EBITDA margin as well this is a quick summary of our free cash flow and the return on capital so in terms of our return on capital we started providing on top of the the growth in the stock itself we also started providing dividend to our shareholders as another way of returning providing superior return to our investors and then we're also providing reiterating our second quarter 2026 kind of the guidance here as summarized here as well this is a quick summary of our liquidity overall liquidity position as you can tell as a company we don't have much leverage and we really build a very strong balance sheet. I'm not going to go over all the appendixes. We have this website posted on the conference as well as our IR deck. I think we're just going to leave the rest of the time for Q&A with Ellen.

Alan Yu, CEO

I did miss one of the highlights of the company and I do want to share with everyone. One of the highlights that's driving our growth in the company is our online sales. Our website, we started our website lollycupstore.com in the year 2004, selling just Bobati supplies and also some of the syrups. Today, this year, we are expected to hit over $100 million in revenue just on online sales. Now, where do we sell online? We sell on Amazon.com. We sell on lollycupstore.com. That's Shopify, operated by our own company. We sell through Cisco.com. We sell to TikTok.com. We sell through Target. We're actually working with Target to have a product. so on target.com we currently sell on walmart.com some of the key item that we were selling strong are the janitorial supplies and trash can linens on walmart.com tick tock we're selling some of the popping pearls and other t-zone supplies on tick tock and some of the hot cups on tick tick tock so we're adding additional channels in terms of platforms to sell our product online okay we're also looking to have our partners to add their product using our own platform to as a platform for other businesses partners to sell their product on our platform and we can take commission on that as we grow our customer base we do have a strong base customer base in terms of people buying from our website this year like I said our target is hundred million dollars last year a revenue on the online from the online sales was approximately 72 to 75 million not sure how exactly how much of us it was range of 72 to 75 so this year we're seeing a very significant growth from last year and once we hit that 100 million I think we can shoot another another target of 140 to 150 million next year as we expand our team online sales okay the key to the online success is having warehouses additional warehouse space having the last mile deliver ship and customer can order and receive within 48 hours of their ordering and that's something that we're we have been doing this this year and which helped us to grow our online revenue last year customer order product may take over 72 hours or beyond so this year what we excited to ourself if a customer order M on Amazon the product will be shipped within 24 hours and that we we tracked ours our delivery time is within two to three days 40 hours to 72 hours from the time that customer order so that's a very key matrix and also one of the reason we're adding new trucks for delivery is that metropolitan cities like Los Angeles Dallas Houston New York Chicago air metropolitan Chicago area Washington customer can order online and we can deliver it within this within three to five days using our own truck that also helps in terms of reducing the cost of shipping when a key part component of a cost of a product it's not just a product itself it's logistic fuel cost has been very has gone up in the past two months so this is something that every customer looking to to looking to in terms of saving so that's one of the thing that carrots not just a manufacturer importers sourcing it is also a channel that we sell through online okay thank you right now we're seeing restaurant traffic have have kind of increased in a single digit most of our chain account even the best chain I can't say the name they're telling us that this year has been a challenging year and they have slowed down in terms of adding store numbers as well as their restaurant visit has not grown over double digit single digit some of these are some of the best chains that we are working with right now now for some of the not so well known chains they may have a negative per store sales and that's what we're seeing mom and pop shops are suffering the most that's what i'm seeing we're seeing inflation on the packaging and food side we're seeing more inflation on the food side right now the produce one of the key part of the inflation that causing in accelerator pricing is the logistic for example LTL carrier that we used to contract to ship a product from one pallet into from California to Colorado which used to be $250 now at $400 they've added additional few surcharge every company out there is adding a few surcharge which is ridiculous and that one of the things that's pushing us into uh bringing our own truck to reduce that cost minimize that cost and of course these extra additional fuel costs surcharges are adding to the product itself okay so this is where we see the major cost of inflation on that part of course we heard that beef price has gone up those companies like one of our customers that does mainly chicken they benefited because chicken price didn't go up as much as the uh the beef And so on the packaging side, this is what we see on the packaging. Every manufacturer in the U.S. have made an announcement, an increased announcement of 5% to 15%. It started in May. We also made an increased announcement of 5% to 10% that started in May or as early as May 15. And some of the customers pushed back to June 1st. and we've seen at the same time the same manufacturer that now made the announcement the price increase is doing another price increase in July I do not know how customer will be taking that two increases within two months but this is mainly caused by the oil cost oil pricing has gone up the risen prices anything that's related to plastic has gone up the raw material price has gone up minimum of 40% in the past two months. The what? Well, currently tariff it seems that has dropped mostly from 20% to 10%. And we've been dealing with tariffs the past 12 months, 13 months by moving product sourcing different countries. And that's why we added Latin America, Mexico due to the tariff policy that we have in place. But, of course, when it was deemed as illegal, we're waiting for the next, what is the next kind of a reason for additional new tariff that was supposed to be starting in July. So we'll see how we handle it. I guess nowadays, these tariff has seemed to be an everyday business. It's kind of normal now, having a tariff. It's just that how do we adjust to it? And I guess we're used to it now. Yeah, because people are saying that there might be an additional 15 or 20% tariff, but there might be rumors. You know, it might just retract that rumors afterwards. So we'll see how it goes, if it's there. You know, at Stranglish, there has not been an increase in the raw material for composable product versus the plastic product. It's coming from different sources, different material, I guess. This is what I was told. So that's why there's the only kind of increase that people are adding as an excuse to raise prices is that they're seeing everyone else is raising prices. Might as well raise prices. But of course, the real cost of increase, if any, will be a logistic cost. You know, your shipping freight, import cost increase, like the ocean freight increases. Of course, you pass on, you can pass on to the consumers. But in the past years, they have been absorbed by the manufacturer and import because it goes up and it comes down. There's always a peak season surcharge from the month of June to September. And if it kind of peaked there, it falls backward to the normal price. So that's kind of a normal business. But I would say it's for the compostable product. If anyone's raising their prices, it's an excuse because other people are doing it. We're seeing national accounts converting from right to left. One of the reasons is that the supply chain disruption is causing it. Recently, you'll probably go to your favorite coffee house and found out that they don't have a four-cup carrier. There is a major shortage of four-cup carrier in the U.S. Well, if you are a national chain, if you have single source, and all of a sudden, that single source is telling you, we can't give you anything for the next two months, or we have to allocate, you'll be you'll be definitely you'll be start looking for a secondary partners and we've always mentioned to all of our customers chain accounts you know you don't have to use us as a primary we don't want to be a single source of any product either you can use us as a secondary or third source to mitigate a potentially you know disruption in the supply chain i think this has been the norm ever since COVID started because back in 2022 there was a major supply shortage of everything out there in the market and that's what caused most of the previous buyers to quit resign and all the new buyer when they came aboard they started changing the method of purchasing

Speaker 3

and that benefited us well 2025 the tariff really impact it has an impact negative impact on our

Alan Yu, CEO

gross margin. But of course, we all know that it was deemed illegal. So we as we as a company, we apply for the refund. And we have received the initial refund of that, that would should have been going back to added back to the 2025 gross margin, because it was the growth that was the money that we pay back in 2025, that which impacted our share, as well as our gross margin. Now with the refund coming back, that should help us. I don't think we want to go back to restate our financials, but it should have been the part of that, our gross margin should have been better. So that's why we're seeing 2026 as the tariff dropped from 20% to 10%. We initially didn't know that if this is going to be sticking for fact, or if there's going to be a change back some additional excuses or additional reason to raise it back to 20% because the administration has threatened that even though it's being illegal, they will find other ways to impose additional new tariffs. So we couldn't actually account for the 2026 gross margin, any positive impact or not. But so far, we see a positive impact in the second quarter already as the tariff reduced starting in April. So the second quarter, April, May, June, tariffs dropped from 20% to 10%. Of course, it will have some favorable impact on our gross margin, which we did not discuss back a couple months ago during our earning conference call because it was not for certain. But right now, we're already into the end of the second quarter. So far, it has not been any changes to that tariff policy. Well, in the past years, eco-friendly product has been driven by ESG requirement, government regulation, city and state regulation. I believe nowadays it's actually because more and more people are using ESG product, composable So the price has come down. In the past years, composite products were more expensive than the paper, regular paper and plastic product. We have taken the initiative to reduce the cost that we sell to our customer because our cost of purchasing has been reducing. So we have been reducing as much as 25% from where we used to sell a year ago. And our volume has doubled, tripled in terms of numbers that we sell in certain category lines that we were pushing like for instance if you go to a chipotle there's a bowl a oval bowl that is composable that kind of product basically we have reduced our we have made a price announcement last month in may of 10 to 15 price reduction and that we see that our volume has gone up since online and offline and we're actually we're setting a price reduction across the board to support our customers whereas they've seen all they've seen is negative news on the price increase size but we have taken the initiative of starting reducing the price which we feel that once the price drop the volume will automatically goes up because styrofoam is going raising prices people thought styrofoam was cheap but no it's not it's getting more expensive more and more expensive to a point that why use styrofoam it has not changed again our cost has come down we're passing through the cost saving to our consumer to drive additional growth in that category I don't I don't have not seen our competitor peer group doing so we have been ice in the market we have been the one the first to do that right now we're seeing customer buying trash can line them by the hundreds cases at a time we used to sell online customers that would buy a single case two cases now we're seeing people buying 20 cases 40 cases 60 cases and you know some of these smaller chains they have three stores they're buying for self distribution that's what we're seeing so so that's what we're seeing down that part growth in that part that's why our online revenue has been growing significantly in the past few months I think this year especially last year we had a record sales online last month not last year last month yes that's a very higher margin channel and that's why our gross margin has been higher compared to our peer group because we have an online channel thank you thank you everyone thank you for attending