HF Foods Group Inc.

is now my pleasure to introduce your host, John DiDomenico, Vice President, Investor Relations. Please go ahead.

Hello, everyone. Welcome to HF Foods Group's second quarter 2025 earnings conference call. Joining me on today's call are Felix Lin, the company's President and Chief Executive Officer, and Cindy Yao, the company's Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on management's current beliefs and expectations about future events, which are subject to several known and unknown risks and uncertainties. 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 from those expressed or implied by these forward-looking statements. The company undertakes no obligation to update or revise these forward-looking statements in the future. In these remarks, the company will make several references to non-GAAP financial measures, including adjusted EBITDA. We believe that these measures provide investors with a useful perspective 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 Felix.

Hello, everyone. Welcome to HF Foods' second quarter 2025 earnings call. I'll provide a business update, and Cindy will speak to our second quarter financial results. Then we will open up the line for Q&A. I am pleased to announce that we continue our momentum in the second quarter of 2025 and are reporting the highest net revenue and gross profit ever recorded at HF. Net revenue increased 4.1% year-over-year to $314.9 million, and gross profit increased 5.1% to $55.1 million. Also, notably, adjusted EBITDA increased 31.1% year-over-year to $13.8 million. Our results reflect our continued disciplined execution against our strategic initiatives, even amid a dynamic and uncertain macro environment characterized by tears, persistent inflationary pressures, and shifts in consumer spending behaviors. These results are a testament to the resilience of our business model and the strength of our operational focus. Our results have been impressive despite the current business environment including the implications of tariffs and the impact of immigration concerns creating continued economic headwinds. In response to the evolving tariff landscape, we have been actively diversifying our supplier base and exploring alternative sourcing strategies to ensure continuity and cost effectiveness in our supply chain. Our strategic inventory management and proactive price increases allow us to effectively navigate the changing environment. delivering solid net revenue growth and significant adjusted EBITDA growth. We're encouraged by our strong performance in the second quarter and the solid foundation we built. Consistent with what the broader industry has been experiencing, we have seen lower exit velocity and foot traffic toward the end of Q2 and continue into the beginning of Q3 as consumers pull back from spending amid economic uncertainty. There will also be natural seasonality pullback associated with Q3 as compared to Q2. That said, we remain extremely confident in our long-term growth strategy. Hence, we are committed to our capital investment and growing our capacity. We aim to continue the momentum we build for the rest of the year. As discussed on our last call, our digital transformation initiative reached a major milestone on May 1st with successful deployment of a new modern ERP application across our entire network. All of our locations are now operating on a single unified ERP platform that will help us to achieve breakthrough levels of efficiency, visibility, and control across our operations, unlocking the full potential of our centralized purchasing capabilities over time. I am pleased to report that the ERP system has been running as planned and without issue. The next phase of this program is focused on rationalizing our sales force. With our operations unified on a single system, we now plan to restructure our sales operation, which will reduce costs over time and further strengthen our competitive positioning. Our strategic facility enhancement initiatives continue to advance across multiple regions. We're nearing completion of renovations at our Charlotte Distribution Center and continue to make steady progress on our Atlanta State-to-Art Facility project, which we expect will create meaningful organic growth opportunities through expanded cross-sailing capabilities. The cold storage capacity expansion in Atlanta will double our capacity in the region and enable us to significantly increase frozen seafood sales to our existing customer base along the eastern seaboard, significantly expanding our southeast presence. These exciting infrastructure investments reflect our ongoing commitment to optimizing our distribution network and creating a stronger foundation for sustainable growth. M&A remains a core pillar of our growth strategy. HF Foods is the only scale food service provider in the Asian specialty market in the United States, and we believe we are the strategic acquirer of choice within our space. We are focused on expanding our geographic footprint in high potential markets, capturing operational synergies, broadening our customer base, and enhancing our product and service capabilities. We remain disciplined but optimistic about M&A opportunities in 2025 and beyond. We're actively evaluating opportunities in our proven ability to successfully navigate a terrier landscape, positions us uniquely to identify and execute attractive tuck-in acquisitions that will benefit from our operational expertise and skill. Now over to you, Cindy.

Thanks, Felix. I will now review our results for the second quarter ended June 30th, 2025 versus the same period in 2024. Net revenue for the second quarter increased 4.1% to $314.9 million from $302.3 million in the prior year quarter. The increase was primarily attributable to volume increases and improved pricing in our meat and portrait and seafood categories. Gross profit increased by 5.1% to $55.1 million for the quarter compared to $52.5 million in the prior year quarter. The gross profit margin increased 13 basis points to 17.5%. The increase was primarily attributable to an increase in volume and improved pricing during the quarter. Distribution, selling, and administrative expenses increased by $1.2 million to $51 million for the second quarter, driven by volume growth. DSA expenses as a percentage of net revenue decreased from 16.5% in the prior year to 16.2% for the three months ended June 30, 2025, primarily due to increased net revenue and lower professional fees partially offset by increased payroll, rental, and other expenses. Operating income for the second quarter of 2025 was $4.1 million, up 56.9% compared with the prior year quarter. The increase in income was driven by the increase in net revenue and gross profit. partially offset by the increase in distribution, selling, and administrative expense. Adjusted EBITDA increases 31.1% to 13.8 million for the second quarter of 2025, compared to 10.6 million in the prior year quarter. Total interest expense decreased slightly to $2.8 million for the second quarter of 2025 compared to $3.1 million in the prior year quarter. Net income increased 117% to $0.5 million compared to the second quarter of 2024. The increase in the net income was primarily driven by the increase in net revenue and managing certain DSA costs. Gaps diluted EPS increased to 0.02 compared to 0.0 in the prior year period. Non-gaps diluted EPS increased to 0.12 compared to 0.04 in the prior year period. The record in net revenue and gross profit results demonstrate the effectiveness of our strategic initiative and operational discipline. These results provide a solid foundation as we continue executing our growth strategy for the remainder of 2025. I will now hand it back over to Felix for closing remarks.

As we look ahead to the balance of 2025 and beyond, I want to emphasize our commitment to executing the comprehensive transformation initiatives that are reshaping HF foods. 2025 is a year of strategic investment for HF. and the investments we're making in our facilities, digital infrastructure, and operations will establish a strong foundation for our next phase of growth. While short-term uncertainties persist, we remain focused on our long-term strategic objectives. Our investments in digital transformation and infrastructure are strategically designed to drive organic growth through cross-selling opportunities while positioning us to complement this expansion with target M&A initiatives. Our key Competitive advantages stem from the growing demand for authentic Asian cuisine and our unmatched position as a leading nationwide Asian specialty distributor. We are methodically building the infrastructure, systems, and capabilities needed to fully capitalize on these strategic advantages. As we move forward, we'll continue to identify and implement additional efficiency measures while maintaining our commitment to service excellence and sustainable growth. Thank you for your continued support as we execute our strategic transformation. We look forward to sharing our progress with you on our next call. I'll now hand it over to the operator for a live Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, you may press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from Bill Kirk with Roth Capital Partners. Please go ahead.

Hey, good afternoon, everybody. Felix, you talked a little bit about lower exit velocity and foot traffic at the end of 2Q and into 3Q. Those sound like industry-wide comments to me. So maybe can you give us a sense for how you think Asian specialty as a subsegment fared in that tougher backdrop? And more specifically, how do you think your market share is faring in today's environment?

Hey, Bill, appreciate the question. Yeah. I think one aspect of our industry that's a little bit unique, and I mentioned it on the earnings, is that we've seen a little bit of lower foot traffic here, specifically toward the end of Q2 and into the Q3. It's probably market specific to some of our territories that's got a heavy you know, agricultural presence. If you look at our book of business, you know, 99% of our customers are all independently run restaurants. And there's a healthy mix of takeouts, you know, dine-ins and buffet type restaurants. So in markets where we've seen there's perhaps been foot traffic impacted by some of the recent changes in immigration policy, we've seen a little bit of lower kind of buffet traffic, you know, specifically. So it's impacting some of the buffet restaurants specifically that use a lot of products from a seafood, frozen seafood category standpoint. So I think that has perhaps the larger impact from a traffic standpoint versus any sort of carrot related impact that the broader industry might have seen recently.

Does that make sense?

Bill, does that answer your question? It does, and yes, thank you. I was going to follow up. There's a handful of strategic investment projects that you're targeting for growth, including the possibility of M&A. How would you prioritize those projects, and maybe which can be funded through cash generation versus needing to raise outside capital for the project?

Yeah, look, I mean, we have a – you know, parallel strategy going on, right? One, from an organic growth standpoint, you know, all the investment that's going in, it's about addressing our capacity constraints. So the investment that's going in Charlotte, that's going on in Atlanta, and then beyond that in other territories, because we see there's tremendous amount of cross on the opportunity for us. It's related to the existing accounts that we currently service, but where our customers They don't have access to a full book of products, just given some of the capacity constraints. So we think there's a significant opportunity over the next three to five years, probably in the range of $200 to $300 million organic growth opportunity ahead of us. From an M&A standpoint, we're really prioritizing these first-generation operators that's looking to exit. They're much smaller businesses, and perhaps it's in markets where we already have a significant presence. So tuck in M&A, very minimal integration effort that can help us from a share of the wallet expansion standpoint and also add to the margin expansion initiative that we have going on. So I think both of this is going to require significant amount of capital. For the most part, I think we'll be able to fund the majority of it through our own cash flow. But as we look at larger M&A targets. I think this is where we had to think about a different capital structure and perhaps get a little bit more active. So we're kind of working through and thinking about the various alternatives here from a capital standpoint.

Thank you.

Our next question comes from Daniel Harriman with Sidoti and Company. Please go ahead.

Hey, good afternoon, Felix and Cindy. Congrats on the quarter. All the more impressive considering the backdrop. I just had two questions this afternoon. First, understanding that you guys don't guide, you know, for the full year looking out through 2025 and then into 26, can you just help us think about, you know, your growth expectations for 25 considering what you said earlier about foot traffic and then, Similarly, you know, as you think about organic growth and we think about the long-term potential of the company, you know, what do you think a good growth rate organically is for you guys for the next three to five years? And maybe compare that a little bit to your M&A strategy.

Hi, Daniel. Yes, thanks for the question. Yeah, if you look at 2025, I think, you know, we're coming off of a a record quarter in Q4 2024, where we also continue the momentum into the first quarter and now starting the second quarter, despite, you know, to your point, some of the, you know, uncertainties and noises that we've seen from a macro standpoint, whether it's the tariff impact, you know, potentially, and then the lower foot traffic. So again, I think Q1, it was just about 1% top line revenue growth, and then Q2 here, a little bit over 4%. So we do expect on a full year basis, we're probably still going to be trending toward that lower single digit, maybe in that 2%, 2.5% in line with what industry average is going to be for the rest of, for the full year 2025. But again, as we look in the second half of 2025, I think there's going to be more uncertainties here. You know, everyone's been talking about it from a broader industry standpoint and that there's a pullback from overall consumer spending. But as I mentioned earlier, you know, we're not letting any sort of potential short-term noises deter us from what our long-term strategic plan is, which is investing into our business, growing capacity, and then over time we can drive, you know, from a cross-selling standpoint. And I know that earlier, I think over the next three to five years specifically, just within our existing accounts, as long as the investment goes in, And there's enough capacity, there's probably $200 million, $300 million worth of organic growth opportunity for us over this period of time. And then if we add on top of it, you know, M&A opportunities, you know, that the future looks really, really good here for HF.

That's really helpful. Thanks so much, and congrats again.

Thank you.

Thank you. Ladies and gentlemen, a reminder to all the participants, if you would like to ask a question, please press star and one on your telephone keypad. Our next question comes from Todd Brooks with Benchmark Company. Please go ahead.

Hey, thanks for taking my questions and congrats on a record quarter. I wanted to lead off. Felix, you've touched on tariffs a couple times in the discussion. I know it's been a very fluid situation. Are you getting any better sense of what the tariff impacts might look like that are having to be passed through to customers. So trying to marry maybe potential cost pressure that they're facing and a slight decline in traffic, especially for those buffet customers to understand what sort of pressure the base might be under.

Yeah, I mean, what we've seen in second quarter, it's really this kind of initial reaction, right? A lot of our customers are seeing, and I think, you know, previously I talked about, you know, we do a really good job in terms of proactively having dialogues with our suppliers and with our customers, educating them on both fronts in terms of what's happening here from a market standpoint. One of the advantages that we have as a business, and certainly what differentiates us from a broader industry, do not have a significant amount of commitments with our suppliers. So everything happens, you know, from a spot market standpoint. So we buy and sell product at a spot. So we spend a lot of, you know, resources trying to make sure we have the right inventory level and the right type of inventory as well as we go through knowing that, you know, tariff policy is going to change given this administration's kind of preview. So second quarter, we saw a lot of strategic pricing that have flowed through, which significantly picked up on the volume side and adds to the performance. As we kind of look ahead here a little bit, I think this is where you're going to see some of these, you know, tariff impact start coming in. But as a business, we're not necessarily too concerned about tariff because, again, just given the specialty business that we're in, some of these products that we're looking at, there's not a whole lot of alternatives to it. But foot traffic is one that probably impacts our business more than anything else. Because if people are not going out to restaurants and spending the money in terms of dining out, then regardless of what the cost is, that's going to have a bigger impact in terms of volume in the business. So we're seeing a little bit of that, again, toward the end of Q2 and the beginning of Q3. And perhaps things are going to change here a little bit as we get into the rest of Q3. There is still a bit of uncertainty. You know, if you look at the amount of frozen seafood business that we do, you know, there's still the question mark in terms of what a tariff is going to be for India. You know, we do buy a good bit of frozen seafood, shrimp specifically from India. So it's currently set at 25%, potentially going to 50%, but it's subject to change. So we're still monitoring that situation very closely. But again, we're doing a fairly good job in terms of managing our inventory. I think at the end of Q2, Our inventory level is probably at its highest level in a very, very long time, and it's all due to strategic planning in terms of what might happen in the second half of the year.

That's great. And you talked about some strategic pricing actions. Can you decompose the 4% revenue growth between price and volume growth?

You know, we just implemented a brand new system. You know, ERP started, you know, complete wrap up here in May 1. So it's going to take a little bit of time, you know, at least a year or so to kind of digest everyone getting the same platform. But I will say majority of the increase is perhaps, you know, due to better pricing, which also drove some volume increases. Because naturally, if people are concerned about, tariff impact, there's probably a good bit of pull-forward pre-buys here. But again, we're not talking about significant amount that's going to change quarter to quarter, just given most of our restaurant customers have very limited real estate spaces. So at most, it's probably a week or two pull-forward. But again, I think a good bit of it is tied down to pricing itself.

Okay, great. And the last one, if I can. You talked about the ERP implementations. Congrats on getting that in the rear view, obviously. Wondering what the lag is between implementation and efficiency as you're starting to think about margin planning into 26. And I know you talked about the first step being maybe some Salesforce consolidation, but kind of what's the path now to start extracting efficiencies and have you sized what the margin benefit from ERP could be for 26? Thanks, Felix.

Yeah, you know, If we look at what happened in the last 12, 18 months or so, right, I talk about we spend a lot of time on the frozen seafood category, and certainly this year we're expanding into other major, you know, big volume categories such as sugar, rice, maybe some other specialty products. So I do think there's some opportunity there. But it's really hard to gauge exactly what the margin expansion opportunity is going to be for us from a percentage standpoint. Because, again, the uniqueness about our business is that we buy and sell everything at a spot market versus some of the larger broadliners where they have significant contracts in place, whether it's with their suppliers or with their chain customers, and things – it's a lot more consistent and stable. So I think going through our results here in the last six or seven quarters, one, the key – metrics that we focus on is expansion of the gross profit dollar itself, which I think we've seen a pretty good improvement. But overall, I think one of the focus that we want to do is, again, whether it's cross-selling, expanding the organic self-opportunity, or M&A, is getting to the point that we can hit a 5% even margin. That's what our ultimate goal is over the next three to five years.

Perfect. Thanks for the call, Eric.

Thank you. Ladies and gentlemen, as there are no further questions, I would now like to end the conference over to Felix Lin for closing comments.

Thanks, everyone, for joining us today. We're obviously very pleased with our latest quarterly results as we continue to build positive momentum. We're absolutely laser focused on executing our long-term strategic plan and continue to deliver value to our shareholders over time. If you have any follow-up questions, please feel free to reach out to our investor relations team. And thank you very much for your time today. We look forward to talking to you guys again at our next quarterly call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.