Karat Packaging Inc. (NASDAQ:KRT) Q3 2023 Earnings Call Transcript

Jake Bartlett: Great, thanks for taking the question. I just want to build on the last question about the pricing. You’ve seen many pricing decelerating over the last few quarters, kind of even as you’ve lapped lower prices a year ago. And so, I guess the question is how confident are you, Alan, that you’re reaching a point where pricing is stabilizing? How much of a risk do you see that that just continues in ’24 as supply chain is eased, and your competitors can maybe better more easily compete on price?

Alan Yu: Well, so here’s what we’re seeing. In the past year, historically, we actually do better in an environment like this because we’re always competitive against our domestic manufacturers, like [indiscernible], and other manufacturers out there in the U.S., where actually we move faster, quicker. So, during this price competitive environment, we actually gain more new account than versus losing accounts. So, we do see this as a positive thing in terms of next year, that our — that’s why we’re increasing our sales force network, that we’re able to take on more accounts, more new customers, versus we have no space, we have no capacity. So, right now, we’re building on new warehouses so that we can increase our inventories and also service new customers.

And right now, we’re already in the pipeline. We do have a pipeline with full of accounts that is about to start opening up and start turning their business over. That’s where we see that very strong growth in terms of positiveness in 2024.

Jake Bartlett: Okay, great. The other question is about where does gross margins land. And I’m trying to parse through that. Obviously freight costs are very low or shipping costs or ocean freight costs are very low right now. And that should probably go up, but then you’ll have a benefit from having less manufacturing. So, I heard that the 35% to 37% kind of longer-term target, but how do you get there versus what we were talking about maybe a year or two ago? And specifically, how much does moving from a mid-20% to, call it, low teens on manufacturing mix, how much is that alone support or boost gross margins?

Alan Yu: Well, what we saw in the first quarter and second quarter of this year, especially second quarter this year, we saw our gross margin increase significantly. And that was mainly due to the fact that we scaled back, reducing manufacturing in California. California manufacturing has been very costly. And we saw that, and we — actually we went from a monthly production output of 145,000 units to just around 45,000 units, and that alone boosted our margin by at least four basis points — three, four basis points. And now we’re scaling back in Hawaii and also Texas in terms of — and scaling even more back in California. So that we’re importing more product from overseas where it’s lower cost, versus U.S. manufacture; costs continue to increase here.

So, we’re seeing that this — and we started just this quarter, and the scaling back in other manufacturing facilities. So, we’re going to see that benefit fully realized in the first quarter of 2024. And that’s where I said that we will see, after the first quarter of 2024, where our gross margin is going to really lie on for the remaining of the years.

Jake Bartlett: Got it, okay, great. And the last question is just on operating costs on G&A. There was a pretty big increase quarter-to-quarter in the G&A, kind of even recurring. Is that level of somewhere close to $19 million, is that the right level to build from or is there anything abnormal in G&A costs in the third quarter that wouldn’t recur, just trying to figure out whether this is the right run rate to grow from?

Alan Yu: I’m going to leave this question to Jian. Jian?