Conference Transcript - KRT 2026-06-11

Michael Liu, Analyst — Wells Fargo

Good afternoon, everyone. Thank you for joining us today for the Carrot Packaging Fireside Chat. I'm Michael Liu, I'm Managing Director with Wells Fargo here. We're very fortunate to have Alan Yu, the Chairman, CEO, and Co-Founder of Carrot Packaging here with us. I really appreciate you, first of all, taking the time to share all the exciting things that are happening at the company. Obviously, a lot of growth happening at Carrot, four consecutive quarters of growth now, double-digit growth. It's very exciting. So I guess really without further ado, I wanted to just really dive into it, and especially for folks who are new to the CARE story, you know, wanted to see if you could maybe provide a snapshot of the company where we are, overview of the products, the customers, and really kind of start with that.

Alan Yu, CEO

Thank you, Michael. Thank you for inviting me to this fireside chat. Well, first of all, CARE packaging, we specialize in all the service packaging out in the marketplace. If you dine out and you go to any of these fast food restaurants, most likely on your daily basis, you'll be using our product. Like for instance, if you go to In-N-Out Burger, we sell them their straws, their portion cup, their cups, and other items if they're short. If you go to Chipotle, we sell them portion cup, straws, and paper straws, and some other items. If you go to Chili's, basically we sell them 70% of the packaging goods from paper shopping bag to the food containers to the takeout containers to the portion cup to their back of the house, grease trap tray, modified tray. If you go to Texas Real House, Chick-fil-A, if you go to Jack in the Box, you name it, basically we sell over 150, actually over 150 QSR chains out in the U.S. So basically our volume is pretty big in terms of in the food service sector. Now we also sell through online channel. Online channel has been one of our biggest growth area. A lot of companies, people don't realize that how lucrative, how profitable this online business is and also less cost, less operation wise. 18% of overall revenue derived from our online sales. Last year we did about $75 million online sales. This year, we're looking to hit over $100 million in revenue online sales. We are targeting $130 million to $150 million online sales. And the number is growing faster and faster. And the amount of customer we can reach is just unimaginable.

Michael Liu, Analyst — Wells Fargo

Very good. The company has been around for over 25 years now, right? And obviously, it's evolved quite a bit over the years, and you guys have stayed very nimble. Maybe could you speak a little bit to CARE's kind of competitive differentiation, right? whether it's the products, the global sourcing, the customer relationships, what's really supported the kind of defensible moat of the business over all these cycles and over the years?

Alan Yu, CEO

Well, we see our competitors in the marketplace. They're either a distributor or a manufacturer that does some of the imports. And for the manufacturer that does some of the imports, they're still in the old school mentality that they only have one channel of sales, which is selling to distribution, okay? They have limited growth capacity if they don't invest more CapEx into their equipment. They can't grow. And we see that that segment is growing either negative in the past two years or single digits, low single digit that some of our competitors are doing. Distribution wise, that's different. They don't have any CapEx expenditures, so less leverage and lower leverage on that. and they can grow faster, but still they're growing single digit as well. And margin, I would say that if you're an importer, distributor, your margin will be higher than the manufacturer on that part. Now for Carrot, our advantage is we do everything. We sell to a small channel restaurant down the street. We can sell to a gas station through online. And we have a bubble tea supply that we also carry. That's $40 million plus revenue from our overall revenue source. It carries a higher profit margin, which none of our competitors does. We started, that was one of our bread and butter when we first started the business. And we continue to grow on that as well, okay. Now for the segment, we have manufacturer, it's very small manufacturing. Right now, manufacturer generates 9% of our overall revenue. We stopped investing in CapEx on manufacturing equipment since 2022. Ever since 2022, after we stopped manufacturing capex, expenditure on capex and manufacturing equipment, we were able to issue dividends, reserve a lot of our cash and pay back to our shareholder, as well increase our gross margin from a low 20-ish to the high 30s margin profile. So these are some of the advantages that we have versus our competitor. And also our competitor grow that single digit by, mainly by acquisition. We grow organically for the past 25 years, except one small acquisition out of Hawaii, and we spent a million dollars back in 2020, and that was it.

Michael Liu, Analyst — Wells Fargo

And the organic growth has certainly been impressive. And maybe talking a little bit more about kind of supply chain, you know, the sector as a whole has obviously seen a lot of disruption, right? um tariffs uh you know we can consumer restaurant softness right supply chain volatility overall i guess how have these periods of disruption and you you've kind of seen it all island how they actually work to kind of carriage advantage in terms of new customer acquisitions

Alan Yu, CEO

and winning new business well because care is nimble and that's one of our strengths um i we we feel that we grow better doing a uh a bad economy doing a supply chain disruption one One of the things that it's helping us, like for instance, 2020 was one of our best year ever because of the COVID. People were shut down, hard to get product from overseas. You can't open your restaurant without having a face mask for your employee. So we imported face masks, air cargo. So we were able to help a lot of our clients or non-client, future potential clients with their face mask needs. And in 2022, there was a major supply chain issue with the ocean freight has gone up over $15,000 from $3,000 per container that time we actually gained a lot of new business as well and our revenue was the highest ever and then after the supply chain disruption ended in 2024 2324 our revenue dropped a little bit because of the we had to lower the price that was inflated back in 2022 and now last year year 2025, we saw a tailwind for the tariff hitting because the tariff actually helped us. We were not heavily in debt. We can afford to pay up the high tariff versus a lot of smaller importers that were competing against us. They were not a business and they couldn't afford to pay product, import product themselves. There was a lot of tariff involved. And because of that, also, the U.S. Custom has been examining more containers, and each time they hold in the container for examination, it costs the importer a lot of money, which the small importer can afford. So that helped us a little bit. Now this year, the high oil prices, the increase in oil prices, the spike also helped us a little bit, somewhat, because we have the capability to buy in bulk. We have the capability to diversify our vendors that we source our product from. So our cost increase with minimum compared to some of our competitors on that part. So every time we see a supply chain disruption, a spike in prices, a bad economy, our business do better. Our company does better in that sense.

Michael Liu, Analyst — Wells Fargo

That's very impressive. I guess talking more about winning new business and commercial momentum, you know, looking at your sales pipeline, really what are the biggest drivers of growth that give you guys confidence? You guys have guided to kind of a low teens annual growth rate on top line. You know, what are these biggest drivers? I think you alluded to some of it earlier, online, product innovation, and it's the overall nimbleness, right? And really how much of that is volume versus price?

Alan Yu, CEO

our pipeline is built based on two things one is our existing wallet share how can we grow with our existing wallet share we are continuing doing that right now like you mentioned earlier are there any more business opportunity with the existing chain that we're doing yes there are there is and also new potential clients that basically have not started doing business with us. A lot of time it takes us over a year to convert them. Testing, testing, confirmation, the artwork design, everything, initial ramp up period. So they take time. We feel that we have those book. New SKU is one of the key to our growth driver. This year we're focusing on paper shopping bag, SOS bag, grease bag, bread bag, all type of bag business and And paper board business, a lot of bakeries they want to instead of using plastic containers they want to use paper board now. So we're focusing on that segment as well. So and also that segment has a higher margin versus the traditional plastic and paper boxes on that part. So these are the segments that we're seeing that we're growing in region. We're growing in Chicago here in this area. So far, our warehouse was set up about two and a half, two years ago, and today versus last year, year over year growth, comparison, it's over 100% growth. We're adding more trucks in this area. We're looking to expand our existing warehouse, double the size. We're looking to see if we can sublease another warehouse or add another warehouse nearby our current existing location, and also we can make it more delivery in this area. This is a very area that we see an expansion potential or we're looking to add another warehousing in Orlando, Florida. That's our fourth largest online channel area, sales, that's where our customers are. So we're looking to do that so the customer can receive their product the next day versus three days after. That's one of the key to a success is making sure the customer can get their product immediately, quickly, faster when they order it versus later.

Michael Liu, Analyst — Wells Fargo

very good uh and you alluded to it just now around kind of sales uh you guys have picked up a lot of new national chain wins recently you maybe walk us a little bit more through kind of typically how long it takes to convert this from you know initial contact to kind of the first orders and really maybe more importantly how you know how does carrot really kind of grow these longer terms the strategic partnerships um and really how do you guys kind of build that kind of share share of wallet and really kind of get into that share of wallet more?

Alan Yu, CEO

Well in a normal environment it would take about two years to convert a national chain account. But in an environment that is very hostile or very competitive environment like today where there's so many issues on pricing, on supply chain, it may be just three months to convert a national chain account. They expedite it, speed up the process, they skip all these protocols just because they want to get the product in. Like for instance, McDonald's, they said normally it would take two years to get a vendor into our system. But right now because of some of the shortage, we might be able to get in our foot in the door very quickly, that part.

Michael Liu, Analyst — Wells Fargo

Are there any recent examples, you know, kind of anecdotes basically of new customer wins or you've grown the relationship in kind of similar manner to McDonald's, kind of anecdotes? Are there recent chains or any examples you may want to kind of speak to and highlight?

Alan Yu, CEO

Like what?

Michael Liu, Analyst — Wells Fargo

For these new customer wins, right, to kind of demonstrate the expansion, like once you kind of get in and kind of land the account to grow that, have there been recent successes you want to kind of highlight?

Alan Yu, CEO

Yeah, there's a lot. Like for instance, Chile was one of them. We first got into Chile by selling them the food container. There's actually three SKU about seven years ago. And from there on, we sold them the takeout container night by night because our competitor didn't want to do it or was taking too long to do it. And the competitor was telling them it takes 12 months to ramp up. We told them four months, so we got the business. And from there on, adding new skew would be much faster. That's one truly example. For Panda Express, same thing, we started with them with bubble tea supply. And from there on, when there's a shortage, the owner says, told the buyer, said, hey, why don't we check out LolliCup, see if they have the product. It's every time that we can come up and product solution faster than our competitor, we immediately get our foot in the door. And that's one of the key things. Carry packaging, we're nimble and fast. We can move fast, we can bring things fast, we're making the decision quick. and we can, our sourcing team, keys to our success is we have a great sourcing team that move fast as well.

Michael Liu, Analyst — Wells Fargo

Fantastic. Yeah, I think the integrated kind of production and the ability to design and customize all these really rapidly, obviously, kind of helps with that acquisition process and that ramp up time as well.

Alan Yu, CEO

Correct. Yes.

Michael Liu, Analyst — Wells Fargo

You alluded to earlier as well on the online growth piece, obviously a big driver of growth for the overall business. You know, I think it's slated to go to $100 million by the end of this year. What are really kind of, you know, some of the drivers of that 30-plus percent? I mean, it's obviously a very big number. Is it new customer acquisition, new partnerships, you know, is it really, as you mentioned earlier, pushing more volume to existing wallet, I guess. What are the various levers there?

Alan Yu, CEO

There are a few drivers to our online growth right now that we're seeing. One is adding additional platform, bringing our product into different platform. Like, for example, Cisco, last year they just started the Cisco.com, made it available to all their customers. They can order our product through Cisco.com. And we first started last year with just $50,000 revenue a month. Now we're doing $700,000 a month, which is about $8.4 million a year, and it's still growing. How we grow from there, we initially started with just 15 SKUs. And then right now, I think we have over 2,000 SKU out of 8,000 SKU on the Cisco.com website. Once we load up more SKUs, our revenue will grow faster. Second, for online growth, we used to sell online with one cases to two cases to other customers, single cases. Now we've enabled customers to buy full pallet, 20 cases, 40 cases with volume discount. So we're seeing more and more customers not buying one case, two case, they're buying 20 and 40 cases, which is taking up a lot of our inventory immediately. That's causing shortages for the short term. So we're ramping up our inventory in some of the warehouses right now, instead of having them carry just not enough inventory, but we're carrying more inventory. So we're seeing that within the next few weeks later, once our inventory restock, our revenue can grow even more with the online.

Michael Liu, Analyst — Wells Fargo

And that then comes at a higher margin as well, which is great. So maybe talking a little more about margins, your gross margin guidance for the year, 34% to 36%. I guess despite some of the rising cost elements you talked about earlier, oil input costs, I guess how do you feel comfortable supporting that level of margin? And could there be incremental upside even as you think about the year ahead?

Alan Yu, CEO

Prior to the tariff, initiation of the tariff, our margin was about high 30s, okay? And when the tariff hit, our margin dropped to the mid-30s. And with the tariff refund on the way, we see that adding that back to the past 12 months, we see that the past 12 months we gained it back to the high 30s, okay? In our last quarter guidance, we mentioned that our expectation was $26 million to be refunded to our company. And now that the tariff is down from 20% to 10%, we feel that we can confidently say that we should be able to accelerate and advance our current margins more. We feel that there's more room to expand our current margin versus how we guided it.

Michael Liu, Analyst — Wells Fargo

That's certainly a very strong margin profile relative to the sector. So I guess maybe a little bit more on the supply chain, right? You talked about it a little bit earlier, but the evolution of your sourcing strategy, you know, how have you really adapted over the years, right? This company had a lot of manufacturing earlier, and it's over time has shifted. I think you mentioned 9% manufacturing, now largely an import and distribution business. But really, how have you adapted, and really what is your process, if you could speak to it, to help onboard new suppliers really efficiently, right? And while ensuring product quality, availability, and consistency for your customers.

Alan Yu, CEO

Well, initially when we first started getting new vendors, a lot of these vendors, they don't have the exact same product that we need. So what we have to do is we may have to purchase the equipment for them and then train them. Having our staff go over there and train them to run the business, run the equipment for us. But then that way we can ensure the quality, the spec are the same. That's how we started initially. And then as they grew, they continued to evolve and they excelled in that segment. They can actually buy more equipment themselves and support us in terms of our growth. Now adding new vendors, same thing. we sold recently a couple of our equipments into a Latin American manufacturer and they started just started supporting supplying our product about last month and this is what's good because when we sold them the equipment we didn't realize there was a war going on. The raw material was going to skyrocket and that manufacturer can actually stock up, load it up, freeload it, the free, actually the lower cost, the raw material was in. So we're able to receive product at a lower cost. And that's one of the things that we're able to keep our costs lower than our competitors is diversifying manufacturer vendors when you have different vendor competing for a business with a higher volume business like ours we can negotiate a higher better pricing versus our competitor we're where is the manufacturing

Michael Liu, Analyst — Wells Fargo

footprint now I know there was a lot of China exposure before how's that evolved and really what does it look like what does the map look like now well if it

Alan Yu, CEO

was a seven eight years ago China was 55 percent of overall imports today China China is only less than 9% of our overall import. We shifted our import from China to Taiwan, Indonesia, Malaysia, Vietnam, and now Latin America. We were thinking of Turkey, but with this war going on, we scrapped the idea of Middle Too much issue going on over there. So I know that some of our competitors are still buying from Middle East. They're getting screwed right now, get their product out, the container cost is over ridiculous. So it's a good thing that we kind of diversify our research. So right now we have over 145 vendors that supply our product. There's not like a single concentration of vendors.

Michael Liu, Analyst — Wells Fargo

Very good. Switching gears a little bit, this question gets asked a lot these days, but I guess thinking about AI and technology and really long-term productivity, how is you care at utilizing AI in your back office to support your growth really to kind of drive long-term kind of productivity gains as we think about SG&A and some of the operating leverage you guys might get?

Alan Yu, CEO

Well, one of the biggest costs for all companies is labor costs. Labor costs is one operation expense that everyone is looking to see if they can reduce. Our company basically had over 1,000 employees four years ago. Today, we're looking at less than 650 headcounts. We are reducing HECOM by utilizing automation, paperless work, more data in the cloud and of course I've asked all of our team to look into AI to reduce work from anywhere from accounting to purchasing to customer service like for instance our online team we have over 7,000 orders a day. Before, we had to hire four or five people to handle customer service calls, over thousands of calls a day. Right now, 99% of our customer service online call questions are answered by AI. So we have much less work to do right now with the assistive AI.

Michael Liu, Analyst — Wells Fargo

That's very good to hear. You guys are implementing and integrating into your business already. You know, maybe taking a step back a little bit, how do you, Alan, think about, or I guess what metrics can you look at from the broader sector? Like the feedback from your clients, right, in the food service sector, what metrics do you kind of look at to kind of monitor the health and kind of like the growth aspect and really where to invest? You know, obviously investing in AI was a major investment, right? But how do you think about metrics and broader industry trends as you make these strategic decisions?

Alan Yu, CEO

Well, we do listen to market intel. That customer would tell us, hey, this item, Alan, you guys don't carry it? Or would you consider bringing that item? And then we would ask our sales rep to check in the market. Is there a demand for this product? Is there someone willing to make a commitment if we were to bring in this item? Who would do? How much commitment can we get? If we have a commit, people committing to a certain item, some quantity on the new item, we definitely bring in. Because we can bring in not only for that customer, we can also bring in for other customer. Just like for example, one item that we recently brought in, it's a multi-fiber grease saver for the back of the house. After you deep-fried chicken or french fry, you bring the product up, you have a multi-fiber tray to absorb the grease first, then you put it into the takeout containers. We didn't have that item before. It was not because it's chilly that they needed that. It's a, there's really no one else having that product. We brought it in and we made it available for other customers as well as online. So these are how, that's how, this is one best way to bring in new SKUs. Where a demand, not just blindly bring some item in and maybe we can't sell it, yeah.

Michael Liu, Analyst — Wells Fargo

Got it. As we conclude, I guess, you know, looking two, three years out, you know, what does success look like for care packaging? what would you like investors to understand about the long-term opportunity that you don't feel like is reflected in the value of the business today?

Alan Yu, CEO

Well, Cara, in the past year, prior to 2020, when we were still a smaller company, our revenue is growing 25% plus year over year. We double our revenue every three, four years. Right now, I think that we're in the path to also double our revenue organically in three to four years. If we have a new acquisition, that might speed up the revenue growth. At the same time, other company grew by acquisition, but also they took on heavily leverage and also reduced their profit margin, and which reduces their ability to profit, make profit, and their stock price suffer. Our goal is not to do that. Our goal is making sure that if we have any merger acquisition, it will not hurt our current trajectory our current EPS or EBITDA it will only help us have a better synergy to grow even faster and better on that part so that's where I see in the next three or five years very likely we will grow double-digit and maintaining a current margin that's our goal and our EBITDA increase our EBITDA on that part

Michael Liu, Analyst — Wells Fargo

very good so it sounds like you guys want to remain disciplined in kind of how you approach M&A, the basis for it is now a very solid kind of foundation for you, for which you guys can now execute M&A more so in the next three or five years.

Alan Yu, CEO

Yes, we're very conservative. That's why right now our dividend is paying out more than 6%, and we're pretty confident we can maintain that level, and we want to continue that as well.

Michael Liu, Analyst — Wells Fargo

Very good. Well, that wraps up all the questions I had for you. Look, we really appreciate your time and appreciate the audience. We'll probably have to give you guys a little bit of your time back, which I'm sure folks don't mind. So thanks, you guys, for attending.

Alan Yu, CEO

Thank you.