Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging's 2026 first quarter conference call.

I'm Roger Pondel with PondelWilkinson, Karat Packaging's investor relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu, and its Chief Financial Officer, Jian Guo.

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 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, 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, all of 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. With that, I will turn the call over to CEO Alan Yu.

Alan?

Thank you, Roger. Good afternoon, everyone.

We began 2026 with a robust first quarter. Year-over-year sales increased almost 13%, with momentum building throughout the quarter.

Our performance during the quarter accelerated significantly, starting with modest weather-impacted growth in January to growth exceeding 20% in March, which included some pull-forward of orders. The acceleration reflected improving demand, strong execution across the organization, and continued gain in the market share.

Notably, our online sales, which are typically at a higher contribution margin, returned to robust growth this quarter after we pivoted to grow and fulfill our own online sales on our company storefront and third-party platforms. Compared to the prior-year quarter, online sales increased almost 10% to $19.5 million in the first quarter of 2026 from $17.8 million in the prior-year quarter, with momentum building steadily throughout the first quarter, achieving 19% year-over-year growth in March 2026.

Gross margin remained resilient at 35.5%, despite the continued impact of higher tariffs. This performance demonstrated the effectiveness of our diversified sourcing strategy and was further supported by a favorable product mix and pricing.

As we look ahead, we are closely managing a dynamic cost environment given the sharp increase in oil prices and the resulting impact on product costs. We are implementing price increases on select plastic items beginning in the middle of this month.

While certain source product costs are rising, we expect tariff savings under current trade policy to begin reducing cost of goods sold this month. These savings should partially offset inflationary pressure, and together with our pricing action, we expect to support gross margin stability.

Importantly, we are well positioned to continue gaining market share amid ongoing resin supply challenges. Our strong inventory position and disciplined supply chain execution give us confidence in our ability to consistently serve customers and meet demand.

Turning to innovation and sustainability, our paper bag product category continues to expand steadily, driving a year-over-year increase in eco-friendly product sales of 16.9% in the first quarter. We also successfully closed another national chain account for paper bags during this quarter, further strengthening our leadership position and reinforcing our long-term strategy in sustainable packaging solutions.

Our sourcing diversification initiative continues to deliver tangible benefits. We have proactively rebalanced import volumes across geographies in response to evolving tariff structures, strengthening our cost competitiveness and consistent product availability.

In this quarter, we increased domestic purchase to 18% compared to 14% in the prior-year quarter, and increased sourcing from Malaysia and Vietnam to an aggregate of 17% from 12% in the prior-year quarter. At the same time, we reduced purchase from Taiwan in the current quarter to 46% compared to 54% in the prior-year quarter, and reduced sourcing from China to 11% compared to 18% in the prior-year quarter.

Additionally, we expanded our sourcing footprint by adding a new supplier in South America, which further reduces geographic risk and enhances supply chain flexibility. We remain focused on providing responsive customer service and disciplined execution, which are a hallmark of Karat Packaging, while advancing Karat's operational efficiencies.

These efforts are reflected in better operating cost leverage, which decreased to 28.3% in the first quarter of 2026 from 31.8% in the prior-year quarter. In summary, we delivered a strong start to the year, maintained margin resilience in a challenging environment, and continue to invest in growth areas that align with our customer demand and long-term industry trend.

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

Thank you, Alan. I'll begin with a summary of our Q1 performance, followed by an update on our guidance.

Net sales for the 2026 first quarter increased to $116.9 million, up 12.9% from $103.6 million in the prior-year quarter. The increase primarily reflected $12.1 million in volume and mix, and a $2.0 million favorable impact from pricing.

Sales to chain accounts and distributors, our biggest sales channel, were up by 15.1% in the 2026 first quarter. Online sales, as Alan discussed earlier, rose almost 10% over the prior-year quarter, and sales to the retail channel declined 12% from the 2025 first quarter.

Cost of goods sold for the 2026 first quarter increased 20% to $75.4 million from $62.9 million in the prior-year quarter. The increase was driven primarily by sales growth and higher import costs of $7.3 million, primarily as a result of higher import duty and tariffs, which increased from $3.4 million for the three months ended March 31st, 2025 to $10.5 million for the three months ended March 31st, 2026.

Gross profit for the 2026 first quarter increased to $41.5 million from $40.8 million in the prior-year quarter. Gross margin for the 2026 first quarter was 35.5% compared with 39.3% a year ago.

The year-over-year decline in gross margin reflects the expected impact from higher import costs, which increased to 13.8% of net sales from 8.6% in the prior-year quarter, as well as elevated inventory adjustments as a percentage of net sales. These impacts were partially offset by lower product costs as a percentage of net sales.

Operating expenses in the 2026 first quarter increased to $33.1 million from $32.9 million last year. The increase was primarily driven by higher rent expense of $0.6 million associated with the opening of the company's new Chino distribution center in March 2025, along with a $0.6 million increase in salaries and benefits.

These increases were partially offset by a $0.7 million reduction in online platform fees resulting from a shift away from third-party fulfillment of online orders, as well as a $0.4 million decrease in shipping and transportation costs due to lower online shipping rates. Operating income in the 2026 first quarter increased 8.2% to $8.5 million from $7.8 million in the prior-year quarter.

Total other income net decreased to $0.9 million for the 2026 first quarter from $1.1 million in the prior-year quarter. Net income for the 2026 first quarter increased 4.8% to $7.1 million from $6.8 million for the prior-year quarter.

Net income margin was 6.1% in the 2026 first quarter compared with 6.6% last year. Net income attributable to Karat for the 2026 first quarter increased 5.2% to $6.7 million, or 34 cents per diluted share, from $6.4 million, or 32 cents per diluted share, in the prior-year quarter.

Adjusted EBITDA for the 2026 first quarter rose to $12.5 million from $11.9 million for the prior-year quarter. Adjusted EBITDA margin was 10.7% compared with 11.5% for the 2025 first quarter.

Adjusted diluted earnings per common share increased to 34 cents for the 2026 first quarter from 33 cents per share in the comparable prior-year period. We executed strong working capital management during the first quarter, generating operating cash flow of $7.2 million and free cash flow of $6.3 million, despite continued heavy duty and tariff payments, as discussed earlier.

We paid out a regular quarterly dividend of 45 cents per share to shareholders on February 27th, 2026. As of March 31st, 2026, we had $90.7 million in working capital and $36.4 million in financial liquidity, with another $5.7 million in short-term investments.

On May 5th, 2026, our Board of Directors approved a regular quarterly dividend of 45 cents per share, payable May 28th, 2026 to stockholders of record as of May 21st, 2026. Looking ahead to the 2026 second quarter, we expect net sales to increase by approximately 8% to 10% from the prior-year quarter.

As Alan noted earlier, some timing shift of orders in March contributed to a softer starting in April. Since then, we have replenished inventory, and we are confident in our ability to achieve our sales target.

We expect gross margin for the 2026 second quarter to be within 35% to 37% and adjusted EBITDA margin to be within 11% to 13%, excluding potential tariff refund impact under the current trade policy. For the full year 2026, we expect net sales to grow in the low double-digit range over the prior year.

We expect gross margin for the full year 2026 to be within 34% to 36% and adjusted EBITDA margin to be within 11% to 13%, excluding potential tariff refund impact under the current trade policy. As Alan mentioned earlier, we are seeing accelerated growth in our pipeline, reflecting our strong market positioning and initiative to continue gaining market share in a dynamic trade and supply chain environment.

We expect to continue to drive top-line growth, sustain our gross margin, and continue to deliver strong profitability with enhanced operational efficiency and disciplined cost management. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator.

Hi, this is Kyle Benvenuto on for George. Thank you for taking my question.

You noted the sharp increase in oil prices is pressuring costs across source products and plastics. Within both your 2Q and 2026 margin guidance ranges, what oil price assumptions are embedded, and at what point would the mid-May plastic price increases no longer be sufficient to protect the 34% margin floor for the year?

Here's what we see on the oil prices. Yes, you are correct, oil price has gone up and raw material has gone up so sharply.

This issue is we were able to negotiate with our vendor to support our less increase versus the full increase impact of the oil prices. Majority of our partner vendors overseas have absorbed majority of the increases.

Also that's what we're seeing that we're giving minimal increase in the May 15th to June area. That's how I see it.

Is this tension going to escalate more? Right now, we see that the resin price has stabilized in Asia and has come down a little bit also.

We do not see at this point that the raw material price will go up even higher from this point.

Thank you, Alan. Then one more question for you and I'll turn it over.

Your guidance points to 8% to 10% sales growth for 2Q. How much of this is driven by the expansion of new national accounts versus organic volume growth from your existing customer base?

Thank you.

We're seeing a sharp increase in our online sale portion of our business. For example, last month, April, we top our record over double digit in terms of online sales.

We do foresee that this quarter, we will have a record sales online as well. Last year, we did about $72 to $73 million online revenue, and this year, we are on track for $100-plus million on online revenues.

A big chunk of the growth is from online sales revenue. From our national chain accounts, yes, we do see some of national chain pipeline converting to revenues.

That is also a segment that we do see a growth in the national chain account, especially it's summer season. Most of these chains are going to increase their order for their drink cups and carriers, as well as the diesel part of our food side segment of our business is what we will expect to increase in that segment as well.

These are all organic growth right away.

Thank you and congrats on the quarter.

Thank you.

Hey guys, thanks for taking my questions. First one for me, and I just want to make sure I understand this dynamic correctly.

Alan, you had called out the 20% growth that you saw in the month of March, and then obviously, the second quarter guidance is only 8% to 10% revenue growth. It sounds like you guys saw some pull-forward in order demand that drove the strength in March, and then things kind of stabilized a little bit in the second quarter.

That's where that delta is between that 20% and that 8% to 10% growth is. It's not necessarily the business is slowing?

No, it's not. Also, we want to be conservative in terms of our growth numbers.

We do expect our full-year guidance to be in range with what we have guided earlier this year. Second quarter, we're seeing some softening in April because the pull-forwarding from March.

In this month so far, we're seeing a very positive revenue growth in terms of May. Then we want to be conservative, cautious in terms of making sure that we meet the guidance, yeah, or exceed the guidance.

Yep, fair enough. Nope, that makes sense.

Then just thinking in terms of pricing, you called out that in the prepared remarks and talked a little bit about that, but how much price do you feel like needs to be taken for you guys to preserve your gross margins? Then thinking about that industry-wide, what does your price increases look like compared to competitors?

Are you still feeling like you're priced below where the market is, and that's allowing for some of those share gains?

We're hearing that our price announcement was 5% to 15%, depend on category-wise. Our peer group seem to have a price increase of 8% to 12%.

We are in the lower range of the price increase among our peer group because we understand that this is a difficult environment, that food service is having a challenging year and all the beef price has gone up. We do want to be support our partners in this term.

Instead, we were actually announcing a lower price increase. Because of some help with the tariff that in the past 12 past 6 or 9 months, we were paying 20% tariff.

Now we're down to 10% tariff. There may be changes in July and August, but at least for now, we're seeing 10% tariff reduction is helping our gross margin a lot.

That's what we see that we do see a stronger gross margin for this quarter versus the prior quarters. That's why we're seeing that we should be on track with our net sales.

Got it. Thank you for taking my questions.

Thank you, Ryan.

Hey, good afternoon. Thanks for the questions.

This is Ben Schmid on for Ryan. First question here, just to put a finer point on March and April.

Is there any way to size the pull-forward impact in March? It sounds like April might have been down, just a finer point there would be great.

I would think that about $2 million were pull-forward from April to March.

Got it. Thank you.

Then last one for me. I know you guys mentioned a win this quarter, but any other updates on the pipeline potential wins you guys discussed last quarter?

We are working with a few large chains, that might be converting in this quarter or at least next quarter. This quarter, we are converting some of the existing customers, adding additional SKU to the existing customers, such as there's eco-friendly product line and paper bags.

That's what we're seeing right now.

All right, got it. It's all for me.

Thanks, guys.

Thank you. As

Thank you everybody for joining our conference call first quarter Karat Packaging earnings. We look forward to seeing you next time.

Thank you very much and have a wonderful day. Bye-bye.