HF Foods Group Inc.

Hello, everyone. Welcome to HF Foods Group second quarter 2024 earnings conference call. Joining me on today's call are Peter Zhang, Chief Executive Officer, Felix Lin, President and Chief Operating Officer, and Cindy Yao, Chief Financial Officer. By now, everyone should have access to the earnings release for the period ended June 30th, 2024 that went out Tuesday, August 6th at approximately 4 or 5 p.m. Eastern Time. The press release is accessible on the company's website at investors.hffoodsgroup.com. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as the company currently sees it, and as such, does not include risks and insurgencies. If you refer to HF Foods' earnings release, as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially as a result of those forward-looking statements. Please remember that the company undertakes no obligation to update or revise those forward-looking statements in the future. In these remarks, the company will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspectives on the underlying growth trends of the business and have included in the earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Now, I will turn the call over to Peter.

Hello, everyone. Welcome to HFO's second quarter's earnings call. Our President and COO, Phyllis, will provide an operational update and our CFO Cindy will speak to our second quarter financial results. Before I turn it over to them, I would like to share how pleased we are with the final settlement in the second quarter regarding our legacy SEC matters. Along with our board, the management team is laser focused in both our short-term and long-term plan to drive value for our shareholders.

Now over to you, Curtis. Thank you. Echoing Peter's comments, I'm incredibly excited about the future of HF Foods. Our team is fully aligned in the mission ahead of us, which is to transform our business so that we can deliver sustainable long-term growth for years to come. I'm pleased to be speaking with you after we have made meaningful progress on our key financial metrics, including year-over-year improvements in net revenue, gross profit, and adjusted EBITDA. It is notable that we achieved these results while undergoing major transformations in all areas of our business. The results also included the impact from our discontinued chicken processing businesses in 2023, which was a $3.1 million offset to revenue during the second quarter. Cindy will provide further details about these key financial metrics that underscore our progress. Our comprehensive operational transformation plan is well underway. with each of our initiatives having significant growth or cost reduction impact to HF foods for years to come as we set the stage for success. I'll offer some updates on our progress. We continue to make progress on our centralized purchasing program. As noted previously, we piloted the program with a handful of seafood products in 2023 and have now expanded the program to a majority of our seafood category buys. In Q2 2024, we have seen our seafood margin grow significantly versus same period last year. The ongoing improvement in seafood margin helps offset margin impacts in other categories, such as chicken, which experienced significant cost volatility in the first half of 2024 compared to prior periods. In the first half of 2024, we expanded the purchasing program to include a portion of our chicken buys Specifically, we shifted a significant volume of our chicken breast and leg meat purchases from spot buys to contract commitments with larger processing plants, bypassing brokers. Despite experiencing volatility in inflation in chicken prices, we have successfully expanded our margin on a per pound basis compared to the same period last year. This achievement is particularly challenging given our customer's price sensitivity to high volume items like chicken. Our focus remains on driving gross profit dollar growth, which will help us effectively neutralize major volatilities in key categories. In the coming months and quarters, we're actively working on expanding the program to include other key product categories, such as grain and cooking oil. With our ongoing plan to implement a new ERP system across all of our distribution centers, we anticipate demonstrating more significant progress beyond 2024. We're also making progress on improvements to our fleet and transportation. We have implemented a unified fleet telematics system across all of our trucks, enabling us to effectively track and monitor fleet performance on a common platform. This shift allows us to focus on driving operational efficiencies. For example, we're actively working to reduce fleet idle times, which will significantly impact our fuel costs. Over time, this will directly lower our distribution costs to customers. Another key focus area is centralizing our inbound freight program to improve margins from a total cost perspective. Alongside the centralized check-in purchasing program initiated in 2024, we have also consolidated our shipping lanes for those products. This initiative has yielded positive results and we plan to expand it further. I'm excited to announce that we are making very good progress with our digital transformation. as we recently completed implementation of our modern ERP solution at one of our California distribution centers. The implementation will help to streamline our operations, improve data accuracy, enhance overall efficiency. This successful ERP rollout marks a milestone in our journey toward greater operational excellence and customer satisfaction. We look forward to applying the insights gained from this process to other distribution centers to ensure a smooth transition and minimize any disruption to operations. We expect to complete implementation at all of our distribution centers by the end of 2024. As I noted earlier, this initiative will yield significant dividends in our effort to expand the centralized purchasing program beyond 2024. Our facility upgrade plans are progressing well. We have recently begun renovating our Charlotte, North Carolina facility, which spans over 100,000 square feet and includes nearly 30,000 square feet of cold storage space. Once operational, this facility is expected to significantly enhance our distribution operations on the East Coast by reducing route lanes for nearly half our customers in the Southeast market. We anticipate completing the renovation by early 2025. Additionally, we're close to finalizing the lease for a new facility in Atlanta, which will effectively double our capacity in that market. This added capacity will enable us to drive growth through cross-selling in the southeast. Once the lease is finalized, we expect the new facility to be fully operational by early 2026. However, we will adopt a multi-phase approach to begin utilizing the new facility earlier. We'll continue to provide updates in the coming quarters. I am extremely pleased at the way our team has been diligently executing our transformation plan, setting the stage for sustainable long-term growth and delivering value to shareholders. Regarding our M&A growth strategy, we continue to explore M&A opportunities for geographic expansion of our business, particularly targets that will allow us to realize meaningful synergies. Now over to you, Cindy.

Thanks, Felix. For the second quarter ended June 30, 2024 versus the same period in 2023. Net revenue for the second quarter increased 3.4% to $302.3 million from $292.3 million in the prior year quarter. This increase was primarily driven by product cost inflation in the chicken category and improved pricing in seafood. partially offset by the 3.1 million loss in revenue resulting from the exit of our chicken processing businesses. Gross profit increased by 3.6% to 52.5 million for the quarter compared to 50.7 million in the prior year quarter. The gross profit margins increased slightly to 17.4% from 17.3%. It is important to note that gross margins on wholesale sales are generally lower than those on retail sales due to the large quantities purchased by the wholesalers. While we expect the wholesale sales to continue to make up less than 5% of our revenue, we do expect to see an uptick in wholesale mix in the short term as we scale our business. This will ultimately benefit the retail business in the long term as the retail volume increases. As a result, we expect the margin expansion to remain muted in the short term, despite improvement in the retail gross margins. Distribution, selling, and administrative expenses decreased approximately 4.6% to 49.8 million for the second quarter of 2024, from 52.2 million for the second quarter of 2023. The reduced expenses were due primarily to lower professional fees and were partially offset by higher payroll and the related labor costs. Distribution, selling, and administrative expenses as a percentage of net revenue decreased to 16.5% from 17.9% in the prior year period, primarily due to increase in net revenue and the lower professional fees, and it was partially offset by increased headcount. I'm pleased that since the matter related to the SEC settlement is fully behind us, our professional fees will now be significantly lower on a go-forward basis starting in the third quarter. Operating income from the second quarter of 2024 was $2.6 million compared to a loss of $1.6 million for the second quarter of 2023. The improvement was driven by a lower distribution, selling, and administrative expenses. Total interest expense slightly increased to $3.1 million for the second quarter compared to $2.8 million in the prior year quarter. Net income improved to $0.2 million for the second quarter compared to net loss of $1.6 million for the prior year quarter. The improvement was driven by a $4.2 million increase in operating income and the $5.3 million reversal of our lease guarantee liability. partially offset by the 3.9 million SEC segment and the 2.5 million change in the fair value of our interest rate swaps. Adjusted EBITDA increased approximately 26.4% to 10.6 million for the second quarter, compared to 8.4 million for the prior year quarter. The increase in adjusted EBITDA was primarily due to the increase in operating income. At the end of the second quarter, we had available capacity of $29.9 million in the additional funds through our line of credit. Back over to you, Felix.

We're diligently executing our ongoing initiatives, many of which are working well. We're focused on inventory and working capital management, reducing costs in transportation and logistics, and enhancing operational efficiencies in our distribution centers. Every decision we make is guided by our commitment to long-term growth and success of HF Foods. With favorable market trends and demographics driving the growing demand for Asian food, we're well-positioned to capitalize on this opportunity. Our robust infrastructure, industry expertise, and extensive experience equip us to support and sustain our growth. We look forward to speaking to you again on our next call. Thank you.