HF Foods Group Inc.

Greetings and welcome to the HF Foods Group fourth quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Domenico with ICR. Thank you, John. You may begin.

Hello, everyone. Welcome to HF Food Group's 2025 Earnings Conference Call. Joining me on today's call are Felix Lin, the company's President and Chief Executive Officer, and Paul McGarry, 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 and non-GAAP diluted earnings per share. We believe that these measures provide investors with a useful perspective on the underlying growth trend 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 2025 earnings call. I'll provide a business update and Paul will speak to our 2025 financial results. Then we'll open up the line for Q&A. It's no secret that 2025 brought headwinds for the broader food service industry in terms of terror pressure and lower foot traffic. But against this backdrop, we drove meaningful continuous momentum for our business. Net revenue increased 2.2% year-over-year to $1.23 billion, and gross profit increased 1.2% to $207.6 million. Also notably, adjusted EBITDA increased 6.9% year-over-year. We made meaningful progress on our long-term transformation plan with respect to sales operations, digital infrastructure, and facilities upgrades. On sales operation, We have consolidated two sales call center operations into one as of late December, 2025. This consolidation provides us better control over the overall sales process and improve customer service while maintaining the distinct connection we have with our customers through our understanding of their business language and product needs. This will reduce costs while further strengthening our competitive positioning. On digital transformation, We completed the full ERP implementation across all of our distribution centers. The new system will enable us to achieve higher levels of purchasing and operational efficiencies over time. I would like to note that as part of this implementation, we recategorized many of our SKUs, which drives some variability in our year-over-year sales by category. You will see clean comparisons once we lap the implementation in second half of 2026. I'm also happy to announce that with the implementation of the new ERP system, we have fully remediated IT general controls related deficiencies as of year end 2025. This is a significant milestone. On facilities, the renovation of our Charlotte location is largely complete with final permits imminent. We expect Charlotte to be operational in Q2 of 2026, which will shorten our seafood distribution routes in the southeast. Phase 1 construction of our new state-of-the-art Atlanta, D.C. has been completed, becoming operational in January 2026. We plan to kick off Phase 2 cold storage capacity expansion in Atlanta to launch in the second half of 2026. Once complete, our cold storage capacity in Atlanta market will have almost doubled, expanding from 10,000 square feet to 20,000 square feet. We see cross-selling as a major organic growth playbook and expect the Atlanta facility to be a cornerstone of our cross-selling strategy in the Southeast in the future. Between Southeast and Midwest, there's several hundred million dollars worth of organic growth opportunity as we continue to invest and expand capacity. In September, we announced the acquisition of our Chicago warehouse. This strategic acquisition advances HFU's ongoing transformation plan to improve operational efficiency, reduce costs, and strengthen organic growth through cross-selling opportunities. Acquiring the facility enables us to exit the lease agreement early, improve operating expense, and invest to grow additional capacity and drive consolidation opportunities. These exciting infrastructure investments reflect an ongoing commitment to optimizing our distribution network and creating a stronger foundation for sustainable growth. Based on current trends, we expect 2026 to be like 2025, with low single-digit growth on the top line as well as the bottom line for both adjusted EBITDA and gross profit. This also reflects our strategy to ramp up cross-selling opportunities over time, focusing on increasing our share of customers' wallet size and combat competitive pricing pressure in the short term. While we continue to navigate macro headwinds, including tariff pressures and shift in consumer spending behaviors, our transformation initiatives are paving the way for continued growth and improvement. We remain extremely confident in our long-term growth strategy and are committed to our capital investment plans as we continue our growth momentum in 2026 and beyond. M&A remains a core pillar of our growth strategy. HF Foods is the only scale food service provider in Asian specialty market in the United States. And we believe we are the strategic acquired choice within our space. We're focused on expanding our geographic footprint in high potential markets, capturing operational synergy, broadening our customer base, and enhancing our product and service capabilities. We remain disciplined but optimistic about M&A opportunities in 2026 and beyond. and are actively evaluating opportunities for potential sellers who understand our unique position. We believe our proven abilities to successfully navigate the Terra landscape positions us uniquely to identify and execute attractive tuck-in acquisitions that will benefit from our operational expertise and scale. I want to emphasize the significant runway ahead of us. We operate in a $50 billion addressable market, and at just over $1 billion in net revenue, We're the largest player in the Asian specialty space. No one, whether larger or smaller competitors, is better positioned at HF Foods to capture this opportunity in the coming years.