Financial Data and Key Metrics Changes - The company achieved a record second quarter performance with a 13% increase in sales volume, 10% growth in net sales, and 20% growth in net income year over year [4][10] - Net sales for the second quarter were $124 million, up 10.1% from $112.6 million in the prior year quarter, driven by a 13% volume growth [10] - Net income increased by 19.8% to $11.1 million from $9.2 million in the prior year quarter, with a net income margin of 8.9% compared to 8.2% a year ago [14] Business Line Data and Key Metrics Changes - Sales to chain accounts and distributors increased by 11.4%, while online sales rose by 6.8% [10] - Retail channel sales turned positive with a 1.9% increase [10] - The company improved operating cost leverage, saving $1 million in online shipping and marketing costs [9] Market Data and Key Metrics Changes - The company is diversifying its sourcing, reducing reliance on China to just 10% in the second quarter, and expanding sourcing across other Asian countries and Latin America [5] - Strong business trends are expected to continue, particularly in California, with new business wins from large national chains scheduled to begin shipping in the third and fourth quarters [6] Company Strategy and Development Direction - The company is focused on accelerating top-line growth and profitability through product innovation and strategic expansion [8] - A new distribution center near the Chino headquarters is now fully operational, enhancing logistic capabilities and enabling faster delivery times [6] - The company is maintaining its full-year 2025 guidance for net sales, gross margin, and adjusted EBITDA margin, pending potential impacts from additional tariff changes [16] Management's Comments on Operating Environment and Future Outlook - Management noted that currency pressure is starting to ease and that the company is well-positioned for continued profitable growth [5][9] - The company expects net sales for the third quarter to increase by approximately 9% to 10% over the prior year quarter [16] - Management anticipates a sequential decline in gross margin for the third quarter due to tariffs, with recovery expected in the fourth quarter [22][25] Other Important Information - The company generated operating cash flow of $9.8 million in the second quarter and ended with $116.8 million in working capital [15] - A quarterly dividend of $0.45 per share was approved, payable on August 27, 2025 [16] Q&A Session Summary Question: Why was pricing negative in the quarter, and what should be expected for the second half? - Management indicated that they are currently holding on to pricing with minor increases in certain categories, and they expect pricing to be close to breakeven in the second half [20][21] Question: What are the factors contributing to the sequential decline in gross margin? - Management explained that the impact of new sourcing will be felt in the fourth quarter, while the third quarter will still reflect higher tariff costs from the second quarter [22][24] Question: What trends are being observed in July, particularly regarding customer buying behavior ahead of August tariffs? - Management reported strong sales trends in July, especially from national chain accounts, with double-digit sales increases in California [27] Question: What is the outlook for online sales growth in the second half of the year? - Management believes online sales will continue to grow, with expectations of returning to double-digit growth in the fourth quarter due to new platforms being added [35][37] Question: What is the company's stance on M&A activity? - Management stated they are still looking at M&A opportunities, focusing on strategic acquisitions that enhance product lines or market share [38][40]

[Financial Performance Overview](index=1&type=section&id=Financial%20Performance%20Overview) [Second Quarter 2025 Performance](index=1&type=section&id=Second%20Quarter%202025%20Performance) Karat Packaging achieved record Q2 2025 net sales of **$124.0 million** and net income of **$11.1 million**, driven by volume growth and improved gross margin despite foreign currency losses [Key Highlights and Guidance](index=1&type=section&id=Key%20Highlights%20and%20Guidance) Q2 2025 Financial Highlights (vs. Q2 2024) | Metric | Q2 2025 | Q2 2024 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $124.0M | $112.6M | +10.1% | | Gross Profit | $49.1M | $43.4M | +13.1% | | Gross Margin | 39.6% | 38.5% | +110 bps | | Net Income | $11.1M | $9.2M | +19.8% | | Adjusted EBITDA | $17.7M | $15.7M | +12.8% | - The company successfully navigated trade uncertainty by diversifying its supply chain, reducing sourcing from China to just **10%** in the second quarter, with plans to expand into other Asian countries and Latin America[3](index=3&type=chunk) Q3 2025 Guidance | Metric | Expected Range | | :--- | :--- | | Net Sales Growth (YoY) | High single-digit to low double-digits | | Gross Margin | Low to mid 30s | | Adjusted EBITDA Margin | 10% to 12% | [Detailed Financial Results (Q2 2025)](index=2&type=section&id=Detailed%20Financial%20Results%20(Q2%202025)) - Net sales growth was driven by a **$14.2 million** increase from volume and product mix changes, partially offset by a **$3.3 million** unfavorable impact from year-over-year pricing[6](index=6&type=chunk) - Gross margin improved to **39.6%** from **38.5%**, benefiting from lower product costs due to favorable vendor pricing and product mix, partially offset by higher ocean freight and duty costs[8](index=8&type=chunk) - Operating expenses saw a minimal increase of **0.8%**, as higher shipping and rent costs were largely offset by reductions in online platform fees, marketing expenses, and stock-based compensation[9](index=9&type=chunk) - A significant unfavorable variance in other income/expenses was primarily caused by a **$2.9 million** loss on foreign currency transactions due to the weakening of the U.S. Dollar against the New Taiwan Dollar[10](index=10&type=chunk) [Six-Month 2025 Performance](index=3&type=section&id=Six-Month%202025%20Performance) For H1 2025, net sales increased **9.3%** to **$227.6 million** and net income grew **13.8%** to **$17.9 million**, primarily due to volume and product mix changes [Detailed Financial Results (H1 2025)](index=3&type=section&id=Detailed%20Financial%20Results%20(H1%202025)) H1 2025 Financial Summary (vs. H1 2024) | Metric | H1 2025 | H1 2024 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $227.6M | $208.2M | +9.3% | | Gross Profit | $89.9M | $81.0M | +10.9% | | Gross Margin | 39.5% | 38.9% | +60 bps | | Net Income | $17.9M | $15.7M | +13.8% | | Diluted EPS | $0.86 | $0.76 | +13.2% | - The increase in net sales for the first half was primarily driven by a **$26.1 million** contribution from higher volume and changes in product mix, partially offset by a **$7.4 million** unfavorable pricing comparison[13](index=13&type=chunk) - Operating expenses increased by **6.0%** to **$65.5 million**, mainly due to higher shipping costs (**$4.6 million**), increased rent expense (**$2.1 million**), and higher professional fees (**$0.5 million**) related to a secondary offering[16](index=16&type=chunk) [Shareholder Information](index=4&type=section&id=Shareholder%20Information) The board approved a regular quarterly dividend of **$0.45 per share**, with an investor conference call scheduled to discuss Q2 results - On August 5, 2025, Karat's board of directors approved a regular quarterly dividend of **$0.45 per share**, payable around August 27, 2025, to stockholders of record as of August 20, 2025[21](index=21&type=chunk) - An investor conference call was scheduled for August 7, 2025, at 2:00 p.m. Pacific Time to discuss the second quarter results[22](index=22&type=chunk) [Financial Statements](index=6&type=section&id=Financial%20Statements) Unaudited financial statements detail Q2 and H1 performance, showing growth in net sales and income, with "Chains and distributors" as the primary sales channel [Condensed Consolidated Statements of Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Income) Income Statement Summary (in thousands) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $123,986 | $112,600 | $227,610 | $208,213 | | Gross profit | $49,107 | $43,407 | $89,869 | $81,009 | | Operating income | $16,550 | $11,115 | $24,370 | $19,191 | | Net income | $11,052 | $9,227 | $17,867 | $15,703 | [Net Sales by Category](index=7&type=section&id=Net%20Sales%20by%20Category) Net Sales by Channel (in thousands) | Channel | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Chains and distributors | $97,165 | $87,228 | $177,835 | $162,596 | | Online | $20,884 | $19,546 | $38,675 | $34,425 | | Retail | $5,937 | $5,826 | $11,100 | $11,192 | [Selected Balance Sheet and Cash Flow Information](index=7&type=section&id=Selected%20Balance%20Sheet%20and%20Cash%20Flow%20Information) Selected Balance Sheet Data (in thousands) | Account | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $30,549 | $31,584 | | Inventories | $88,779 | $70,722 | | Total assets | $320,963 | $294,522 | | Total liabilities | $158,257 | $132,323 | Selected Cash Flow Data (in thousands) | Account | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $17,476 | $20,254 | | Net cash provided by (used in) investing activities | $1,164 | $(8,467) | | Net cash used in financing activities | $(19,675) | $(15,552) | [Non-GAAP Financial Measures](index=9&type=section&id=Non-GAAP%20Financial%20Measures) The company uses non-GAAP measures like Adjusted EBITDA and Adjusted Diluted EPS to provide additional insight into core operating performance, with reconciliations provided [Reconciliation of GAAP to Non-GAAP Measures](index=9&type=section&id=Reconciliation%20of%20GAAP%20to%20Non-GAAP%20Measures) Adjusted EBITDA Reconciliation (in thousands) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $11,052 | $9,227 | $17,867 | $15,703 | | Adjustments | $6,641 | $6,456 | $11,739 | $13,521 | | Adjusted EBITDA | $17,693 | $15,683 | $29,606 | $29,224 | Adjusted Diluted EPS Reconciliation | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | Diluted EPS (GAAP) | $0.54 | $0.45 | $0.86 | $0.76 | | Adjustments (per share) | $0.03 | $0.04 | $0.04 | $0.12 | | Adjusted Diluted EPS | $0.57 | $0.49 | $0.90 | $0.88 | Free Cash Flow Reconciliation (in thousands) | Metric | H1 2025 | H1 2024 | | :--- | :--- | :--- | | Cash from operating activities | $17,476 | $20,254 | | Purchase of property and equipment | $(1,263) | $(2,456) | | Free Cash Flow | $16,213 | $17,798 | [Use and Definition of Non-GAAP Measures](index=11&type=section&id=Use%20and%20Definition%20of%20Non-GAAP%20Measures) - Management uses non-GAAP measures to assess the core performance of the business and believes they provide useful information to investors for evaluating performance and comparing results across periods[42](index=42&type=chunk) - Key non-GAAP measures are defined as follows: - **Adjusted EBITDA:** Net income excluding interest, taxes, D&A, stock-based compensation, and certain other non-recurring items - **Adjusted Diluted EPS:** Diluted EPS adjusted for items like stock-based compensation and their tax effects - **Free Cash Flow:** Cash from operations less purchases of property and equipment[40](index=40&type=chunk)[44](index=44&type=chunk) [Corporate Information and Forward-Looking Statements](index=4&type=section&id=Corporate%20Information%20and%20Forward-Looking%20Statements) [About Karat Packaging Inc.](index=4&type=section&id=About%20Karat%20Packaging%20Inc.) Karat Packaging is a specialty distributor and manufacturer of disposable foodservice products, offering a wide range of items including an eco-friendly line and customized solutions - Karat Packaging is a specialty distributor and manufacturer of disposable foodservice products for restaurants and foodservice settings in the U.S[23](index=23&type=chunk) - The company's product portfolio includes food containers, bags, tableware, cups, and specialty beverage ingredients, also featuring the eco-friendly Karat Earth® line made from renewable resources[23](index=23&type=chunk) - In addition to its product offerings, Karat provides customized solutions, including new product development, design, printing, and logistics services[24](index=24&type=chunk) [Caution Concerning Forward-Looking Statements](index=5&type=section&id=Caution%20Concerning%20Forward-Looking%20Statements) This section warns that forward-looking statements, including financial guidance, are subject to risks and uncertainties that could cause actual results to differ materially - Forward-looking statements, including financial guidance, are predictions based on current expectations and are not guarantees of future performance[25](index=25&type=chunk) - Actual results could differ materially from those expressed in forward-looking statements due to various risks and uncertainties, as detailed in the company's SEC filings[25](index=25&type=chunk)

Core Insights - Karat Packaging Inc. reported record quarterly net sales and net income for the second quarter of 2025, demonstrating resilience amid supply chain disruptions and trade uncertainties [5][8][13] - The company successfully reduced its sourcing from China to 10% and is diversifying its supply chain by expanding operations in other Asian countries and Latin America [5][6] - Despite facing foreign currency headwinds, the company achieved a gross profit increase and maintained strong business trends heading into the third quarter [5][8][12] Financial Performance - Net sales for Q2 2025 increased by 10.1% to $124.0 million, up from $112.6 million in the prior-year quarter, driven by a $14.2 million increase in volume and product mix [6][8] - Gross profit rose by 13.1% to $49.1 million, with a gross margin improvement to 39.6% from 38.5% in the prior-year quarter [8][10] - Net income for Q2 2025 increased by 19.8% to $11.1 million, with a net income margin of 8.9% compared to 8.2% in the prior-year quarter [8][13] Operational Highlights - The new Chino warehouse is fully operational, enhancing logistics capabilities and enabling faster delivery times [5] - The company is experiencing sustained double-digit sales growth across all major markets, including California, with new business wins from large national chains expected to contribute in the latter half of 2025 [5][8] - Operating expenses for Q2 2025 were $32.6 million, a slight increase from $32.3 million in the prior-year quarter, primarily due to higher shipping costs and rent expenses [11][18] Guidance and Future Outlook - The company maintains its full-year guidance for 2025 on net sales, gross margin, and adjusted EBITDA margin, despite potential impacts from additional tariff changes [8][12] - For Q3 2025, net sales are expected to increase by high single-digit to low double-digit percentages compared to the prior-year quarter [8][12] - Adjusted EBITDA for Q2 2025 was $17.7 million, up 12.8% from the prior-year quarter, with an adjusted EBITDA margin of 14.3% [8][14]

Company Overview - Karat Packaging Inc. is a specialty distributor and manufacturer of environmentally friendly disposable foodservice products, primarily serving national and regional restaurants in the United States [3] - The product range includes food and take-out containers, bags, tableware, cups, lids, cutlery, straws, specialty beverage ingredients, equipment, gloves, and more [3] - The company offers an eco-friendly product line called Karat Earth®, which focuses on sustainability and is made from renewable resources [3] - Customized solutions are also provided, including new product development, design, printing, and logistics services [3] Financial Results Announcement - Karat Packaging Inc. will release its 2025 second quarter financial results after market close on August 7, 2025 [1] - An investor conference call will be held on the same day at 2:00 p.m. PT / 5:00 p.m. ET [2] - The conference call can be accessed via phone or webcast, with an archive available for approximately one year [2]

Core Viewpoint - Karat Packaging Inc. has announced the pricing of a secondary offering of 1,500,000 shares at $27.00 per share, with an additional option for underwriters to purchase 225,000 shares [1][2]. Company Overview - Karat Packaging Inc. is a specialty distributor and manufacturer of disposable foodservice products, including food containers, bags, tableware, cups, and eco-friendly products under the Karat Earthline brand [5]. - The company primarily serves national and regional restaurants and foodservice settings across the United States, offering customized solutions such as product development and logistics services [5]. Offering Details - The secondary offering is set to close on June 12, 2025, pending customary closing conditions, and the company will not receive any proceeds from the sale of shares by the Selling Stockholders [1]. - The offering is conducted under a shelf registration statement filed with the SEC, which was declared effective on March 28, 2025 [3]. - BofA Securities and William Blair & Company are acting as joint lead book-runners for the offering [2].

Core Viewpoint - Karat Packaging Inc. has announced a proposed underwritten public offering of 1,500,000 shares of its common stock by certain members of the management team, with an additional option for the underwriter to purchase up to 225,000 shares [1][2]. Company Overview - Karat Packaging Inc. is a specialty distributor and manufacturer of disposable foodservice products, including food containers, bags, tableware, cups, lids, cutlery, straws, and eco-friendly products under the Karat Earthline brand [5]. - The company primarily serves national and regional restaurants and foodservice settings across the United States, offering customized solutions such as product development, design, printing, and logistics services [5]. Offering Details - The offering is being made under a shelf registration statement filed with the U.S. Securities and Exchange Commission (SEC) on March 21, 2025, and declared effective on March 28, 2025 [3]. - The company will not receive any proceeds from the sale of shares by the Selling Stockholders [2]. - BofA Securities and William Blair & Company are acting as the joint lead book-runners for the offering [2]. Legal and Compliance - The press release clarifies that it does not constitute an offer to sell or a solicitation of an offer to buy these securities in any jurisdiction where such offer would be unlawful [4].

Financial Performance - Net sales for the three months ended March 31, 2025, were $103.6 million, an increase of 8.4% compared to $95.6 million for the same period in 2024[109]. - Cost of goods sold increased to $62.9 million for the three months ended March 31, 2025, reflecting an 8.4% rise from $58.0 million in the prior year[110]. - Gross margin remained consistent at 39.3% for the three months ended March 31, 2025, compared to the same period in 2024[103]. - Net income for the three months ended March 31, 2025, was $6.8 million, a 5.2% increase from $6.5 million in the same period in 2024[103]. - Gross profit for Q1 2025 was $40.8 million, an increase of $3.2 million or 8.4% from Q1 2024's $37.6 million, with a consistent gross margin of 39.3%[113]. - Operating income decreased to $7.8 million in Q1 2025, down $0.3 million or 3.2% from $8.1 million in Q1 2024, attributed to higher operating expenses[115]. - Other income, net increased significantly to $1.1 million in Q1 2025, up $0.7 million or 197.6% from $0.4 million in Q1 2024, mainly due to increased rental income[116]. - Adjusted EBITDA for Q1 2025 was $11.9 million, representing 11.5% of net sales, compared to $13.5 million or 14.2% of net sales in Q1 2024[125]. - Free Cash Flow for Q1 2025 was $6.6 million, an increase from $5.6 million in Q1 2024, reflecting improved cash generation from operations[129]. Cash Flow and Liquidity - The company generated $7.7 million in net cash from operating activities, marking a 17.8% increase compared to the prior year[103]. - Net cash provided by operating activities for the three months ended March 31, 2025, was $7.726 million, an increase from $6.559 million in the same period of 2024[140]. - The company experienced a net cash inflow of $3.533 million from investing activities in Q1 2025, compared to a net outflow of $7.947 million in Q1 2024[142]. - Net cash used in financing activities increased to $10.370 million in Q1 2025 from $8.544 million in Q1 2024, primarily due to higher cash dividends paid to shareholders[144]. - The company adjusted net income of $6.8 million for Q1 2025 for non-cash items totaling $5.5 million, including depreciation and stock-based compensation[140]. - The company is exploring options to expand liquidity to support business growth and enhance shareholder value amid uncertain macroeconomic conditions[136]. Operational Highlights - Operating expenses rose to $32.9 million in Q1 2025, up $3.4 million or 11.6% from $29.5 million in Q1 2024, primarily due to increased shipping costs and new facility expenses[114]. - Import from China as a percentage of total sourcing decreased to 18.4% for the three months ended March 31, 2025[103]. - The company is focusing on enhancing supply chain resilience by diversifying sourcing and ramping up domestic production to mitigate cost pressures from imports[100]. - The company operates approximately 500,000 square feet of distribution center in Rockwall, Texas, and has expanded its distribution capabilities with a new lease of 187,000 square feet in Chino, California[101]. - The company plans to continue focusing on inventory management and optimizing accounts payable to improve cash flow in future quarters[138]. Shareholder Returns - The company declared a quarterly cash dividend of $0.45 per share, payable on or about May 23, 2025[104]. - The company declared a quarterly cash dividend of $0.45 per share, to be paid on May 23, 2025, totaling $9.0 million in dividends for the current fiscal year[136]. Balance Sheet Overview - As of March 31, 2025, the company had an outstanding balance of $27.5 million under the 2027 Term Loan and $20.8 million under the 2026 Term Loan[134]. - As of March 31, 2025, the company's working capital decreased to $111.9 million from $114.6 million as of December 31, 2024, representing a decrease of $2.7 million, or 2.3%[138]. - Current assets increased by $11.0 million to $171.979 million, while current liabilities rose by $13.6 million to $60.083 million, primarily due to increases in accounts payable and income tax payable[138]. - The increase in current assets was mainly driven by a $9.2 million increase in inventories and a $5.7 million increase in accounts receivable due to stronger sales[138]. - Cash and cash equivalents saw a net change of $889,000 in Q1 2025, recovering from a decrease of $9.932 million in Q1 2024[140]. - The increase in current liabilities was partially offset by a reduction in other current liabilities of $0.8 million due to tax withholding payments[138].

Core Viewpoint - Karat Packing (KRT) reported quarterly earnings of $0.33 per share, exceeding the Zacks Consensus Estimate of $0.31 per share, but down from $0.40 per share a year ago, indicating a 17.5% year-over-year decline in earnings [1][2] Financial Performance - The company achieved revenues of $103.62 million for the quarter ended March 2025, surpassing the Zacks Consensus Estimate by 1.26% and showing a year-over-year increase from $95.61 million [2] - Over the last four quarters, Karat Packing has only surpassed consensus EPS estimates once and has topped revenue estimates just once [2] Stock Performance - Karat Packing shares have declined approximately 11.2% since the beginning of the year, compared to a decline of 4.3% for the S&P 500 [3] - The stock currently holds a Zacks Rank 4 (Sell), indicating expectations of underperformance in the near future [6] Earnings Outlook - The current consensus EPS estimate for the upcoming quarter is $0.51 on revenues of $121.97 million, and for the current fiscal year, it is $1.60 on revenues of $461.89 million [7] - The trend of estimate revisions for Karat Packing has been unfavorable leading up to the earnings release [6] Industry Context - The Containers - Paper and Packaging industry, to which Karat Packing belongs, is currently ranked in the bottom 41% of over 250 Zacks industries, suggesting potential challenges ahead [8] - Empirical research indicates a strong correlation between near-term stock movements and trends in earnings estimate revisions, which could impact investor sentiment [5]

Financial Data and Key Metrics Changes - Net sales for Q1 2025 were $103.6 million, an increase of 8.4% from $95.6 million in the prior year quarter [10] - Sales volume grew by 10.9% year over year [10] - Gross profit increased by 8.4% to $40.8 million from $37.6 million in the prior year quarter, with a consistent gross margin of 39.3% [12][13] - Net income for Q1 2025 increased by 5.2% to $6.8 million from $6.5 million in the prior year quarter, with a net income margin of 6.6% [14] - Adjusted EBITDA for Q1 2025 was $11.9 million compared to $13.5 million for the prior year quarter, with an adjusted EBITDA margin of 11.5% [14][15] Business Line Data and Key Metrics Changes - Sales to chain accounts and distributors were up by 7.1% [11] - Online sales increased by 19.6% over the prior year quarter, reflecting a focus on expanding this high-margin category [11] - Sales to the retail channel decreased by 3.2% [11] Market Data and Key Metrics Changes - Strongest growth for the quarter came from Texas and the Midwest, with California, the largest market, also showing improvement [8] - The company is strategically managing inventory to address anticipated supply chain disruptions [6][7] Company Strategy and Development Direction - The company aims to reduce imports from China to under 10% by the end of Q2 2025, with a shift towards sourcing from Malaysia, Indonesia, Vietnam, and Thailand [5][20] - Price increases were implemented on April 1 and are expected to continue in mid-May, ranging from 5% to 20% depending on the product [8][23] - A new distribution center is expected to enhance capacity and support anticipated growth [9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating supply chain challenges and an uncertain trade environment [7] - The company expects net sales for Q2 2025 to increase by high single digits to low double digits over the prior year quarter [16] - Gross margin for Q2 2025 is expected to be in line with Q1, but a potential compression in the second half of the year is anticipated due to tariffs [38] Other Important Information - The company generated operating cash flow of $7.7 million in Q1 2025 and ended the quarter with $111.9 million in working capital [15] - A quarterly dividend of $0.45 per share was approved, payable on May 23, 2025 [16] Q&A Session Summary Question: What countries are being considered for sourcing as China exposure is reduced? - Management indicated that sourcing is shifting to Malaysia, Indonesia, Vietnam, and Thailand, with plans to diversify sourcing beyond Asia [20][21][22] Question: How will the company manage the impact of tariffs on pricing? - Price increases have been implemented, and while not all costs will be passed to customers, the company is seeing high demand for its products [23][24] Question: What is the outlook on reciprocal tariffs? - Management stated that the situation is fluid and difficult to predict, making it challenging to prepare for potential reciprocal tariffs [25][26] Question: Is the company in a position to benefit from tariffs due to quicker sourcing? - Management believes they are well-prepared and have been able to capture market share due to their proactive sourcing strategy [27] Question: What is the current status of freight costs? - Freight costs were lower in Q1 compared to Q4, but are expected to rise in Q2, with fluctuations anticipated [28][29] Question: What cost-saving initiatives are being implemented? - The company is negotiating with third-party carriers to reduce shipping and transportation costs, with initial savings already observed [31][32] Question: What is the expected gross margin trend for the year? - Management expects Q2 gross margins to be consistent with Q1, but anticipates potential compression in the second half due to tariffs [36][38] Question: What factors are driving market share growth? - The company's credibility and reliability during the COVID period have strengthened customer relationships, contributing to increased market share [42]

Financial Data and Key Metrics Changes - Net sales for Q1 2025 were $103.6 million, an increase of 8.4% from $95.6 million in the prior year quarter [10] - Sales volume grew by 10.9% year over year, while pricing was unfavorable by $3.9 million [10] - Gross profit increased by 8.4% to $40.8 million, with a consistent gross margin of 39.3% [12][13] - Operating income for Q1 2025 was $7.8 million, down from $8.1 million in the prior year quarter [14] - Net income rose by 5.2% to $6.8 million, with a net income margin of 6.6% [14] - Adjusted EBITDA for Q1 2025 was $11.9 million, compared to $13.5 million in the prior year quarter, with an adjusted EBITDA margin of 11.5% [14][15] Business Line Data and Key Metrics Changes - Sales to chain accounts and distributors increased by 7.1%, while online sales rose by 19.6% [11] - Retail channel sales decreased by 3.2% [12] - The company is combining net sales to chain accounts and distributors into a single category for reporting purposes [11] Market Data and Key Metrics Changes - Strongest growth came from Texas and the Midwest, with California, the largest market, also showing improvement [7] - Online business experienced nearly a 20% sales increase during the first quarter [7] Company Strategy and Development Direction - The company is focused on reducing imports from China, aiming to lower it to under 10% by the end of Q2 2025 [6] - Price increases were implemented on April 1, with additional increases expected in mid-May [7][24] - A new distribution center is expected to enhance capacity and support anticipated growth [9] - The company is committed to balancing shareholder returns with long-term growth investments [10] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in navigating supply chain challenges and an uncertain trade environment [6] - The company anticipates net sales for Q2 2025 to increase by high single digits to low double digits compared to the prior year quarter [17] - Gross margin for Q2 2025 is expected to be in line with Q1, with adjusted EBITDA margin projected in the mid-teens [17] Other Important Information - The Board of Directors approved a quarterly dividend of $0.45 per share, payable on May 23, 2025 [16] - As of March 31, 2025, the company had financial liquidity of $46.7 million and $23.8 million in short-term investments [16] Q&A Session Summary Question: What countries are being considered for sourcing to reduce China exposure? - The company plans to move sourcing to Malaysia, Indonesia, Vietnam, and Thailand, aiming for less than 10% exposure to China by August [21][22] Question: How will the company manage the impact of tariffs on pricing? - Price increases have been implemented, ranging from 5% to 20%, depending on the product, with the company absorbing some costs due to high demand [24][25] Question: How are reciprocal tariffs factored into guidance? - The company is currently operating on a day-to-day basis due to the unpredictable nature of tariff changes [26] Question: Is the company in a position to benefit from tariffs compared to competitors? - The company has been proactive in sourcing outside of China, positioning itself to gain market share [28] Question: What is the current status of freight costs? - Freight costs were lower in Q1 compared to Q4, but are expected to rise in Q2 due to ongoing shipping delays [29] Question: What cost-saving initiatives are being implemented? - The company is negotiating with third-party carriers to reduce shipping costs, with initial savings already observed [33][34] Question: What is the expected gross margin trend for the second half of the year? - The company anticipates some compression in gross margins in the second half due to tariffs and duties [40] Question: What is the mix of revenue from domestic manufacturing? - Domestic manufacturing was stable in Q1, but the company is ramping up production due to increased demand [42] Question: What factors are contributing to market share growth? - The company's credibility and reliability during the COVID period have strengthened customer relationships, leading to increased market share [45]