HF Foods Group Inc. (HFFG) Earnings Call Transcript & Summary

Everybody, welcome. Thank you for tuning in for our next presentation.. I have the pleasure of welcoming HF Foods. With us today, we have President and CEO, Felix Lin as well as CFO, Cindy Yao. Felix, Cindy, thanks so much for joining me today.

Thanks for having us.

Absolutely. So to start off, would love to have you give us an overview of the HF Foods' story as some of the listeners here today may be new to the name.

Yes. So HF, we've been in business for almost 3 decades. We are the market leader, specifically in the Asian specialty food surface space, which is projected to be the fastest-growing segment of the broader space itself. Again, about -- roughly about a $15 billion top line business. And today, HF had roughly a 16% market share within the space. It's a space that is extremely tough to get into. So over 3 decades of great business performance, we're kind of able to get at this point. So certainly, if you could evolve where we're at today and there's a lot of growth opportunity ahead of us that we're excited about as well.

Okay. Fantastic. Thank you for that, Felix. So I'd love to start off maybe talk about where you just left off in terms of the broader Asian specialty cuisine category. You mentioned how you're a leader within that. Maybe talk about -- tell us more about the size and growth of the category. How fragmented is it today? How has it evolved over the years just to help give us a better sense of the broader category?

Yes. Great question. I mean I think if you look at the broader food industry, it's roughly about 780,000 restaurants and Asian specifically, it's about 12%, 13% of the entire segment, so 94,000 restaurants or so. And over the years, if you look at from a macro standpoint, especially with the introduction of social media, people are more open to trying new cuisines. So everyone having consensus that, again, Asian specialty itself is probably the fastest growing within the space. And certainly, we've seen it with our customer retention. It's in the high -- in the 90% versus industry, probably 65% or so. But again, it's a $50 billion addressable market. And today, HF is at roughly about $1.2 billion. So we're still at the tip the iceberg, but we're the one that's in the best position to further capitalize on the space itself just given our scale within Asian specialty.

Okay. No, I appreciate that. And let's talk a bit about how your model might be a bit differentiated from mainstream distribution companies such as Sysco or US Foods? Why do you see yourself as having a competitive advantage when it comes to sourcing and customer relationships there?

Yes. There's a couple of things, right. One, again, going back to the industry, the space itself for a second, 94,000 restaurants, 98%, 99% of our customers are all independently run business. So there are not these large chain restaurants that perhaps Sysco or US Foods are used doing business with. So brands like Panda Express or P. F. Chang's, which a lot of the general consumers are pretty aware of make up a very, very small portion of the Asian restaurant industry itself. So our ability to historically service what I consider underserved customers in the specialty space is what help us win. Certainly, there's a language side of it as well, a connection we have with our customers. And then from a pure product SKU offering, from that standpoint as well. We offer over 20,000 SKUs and 50%, over 10,000 is specifically in agent specialty. So our ability to source these highly specialized product globally for our customers, it's one of the advantages that we have. And the reason why, again, companies like Sysco and US Foods, while they find this space very attractive, historically have a very tough time competing with us in our space.

Okay. No, that's helpful there. When you talk about some of the more independent versus changes that make it more difficult to get the economies of scale? And is that why some of them shy away from that. So can you maybe just talk about some of those dynamics maybe increase a manpower that you need to kind of service all the independent changes that might not be needed for some of the larger distributors that are servicing the larger chains?

Yes. Look, I mean there's obviously pros and cons with every model, right? But I think broader industry-wise, people, businesses generally see that there's a higher opportunity from a margin standpoint if you deal with independent restaurants. That's why again, going back to some of the larger companies like Sysco and US Foods, especially in e last few years, they tried to pivot themselves and start servicing more independent restaurants versus these national or regional accounts that they have because if you're the customer, you have a larger scale, especially if you're willing to give commitment as well, and they're pushing margin down for food service companies like ours, right, trying to get a a better deal. So our advantage is that, again, 99% of our customers are independently run businesses. We're able to have very strong relationship with them. and our ability to buy and sell at spot market as well with our commitment, give us the advantage to react to the market, especially when things are going through higher levels of uncertainty or very rapid macro changes that we're seeing today in 2025.

That's helpful. Felix, you became permanent CEO in January of this year, but he's been with the company for a number of years. First, as Board of Directors since 2019 and then as COO. HF Foods recently, you went through a transformation. So can you speak to the evolution of the company since you've been there and maybe what you see as the next steps now as CEO.

Yes. Look, I mean, I -- from day one in terms of joining the company, being a Board member, I've seen a tremendous amount of opportunity here with HF, not just in terms of how much the business has grown over the last 2 to 3 decades, but where the business could go, right? As I mentioned earlier, even though we're at $1.2 billion business today with decent size, but the growth trajectory is tremendous ahead of us because, again, it's a $50 billion adjustable market and yet we're the largest within the space. It's great to kind of see the transition in terms of being privately family-owned to public and now doing things very differently. So in the last few years, we focus on, again, system upgrade, facility upgrades, fleet and even from a purchasing standpoint. But I will say we're still in the very early beginning phase of that, probably the first and second inning. So there's still a lot of runway for us to go. And despite all of this, we're still able to deliver quarter-over-quarter, year-over-year growth here recently. So I think, again, the story is still to be written about HF. Now longer term here, even looking at 2026 and beyond, it's all about deploying the capital in the right place, addressing our capacity constraint, upgrading our capability so that we can go out there and execute and tackle this highly attractive market that we got here. And again, we're in the best position to do it because no one can do it better than we can within our space.

All right. So yes, let's dive a little bit into that in terms of potential deployment of capital, specifically referencing M&A. Can you speak to the role that M&A has played historically and how it could be utilized going forward for HF.

Look, it's no secret that in the foodservice space, you grow through M&A, right? Everyone have been through that. That's why there's always a lot of consolidation, again, in the broader space. So within agent specialty, it's no different. And given our size, given our reputation, the people that we deal with, we know most of the players within our space in every single market. So I think over time, this is where HF -- I want to send a message low and clear, right? We're open for business in terms of looking at M&A targets. We're actively evaluating, especially a lot of these first generation operators that as they look to monetize and exit we are the strategic acquirer for them versus anyone else because we understand their business, and we see the opportunity in terms of how do we pull demand and get synergy out here fairly quickly. So I think stay tuned in terms of the M&A front here for the foreseeable future in terms of news for HF.

And what are some of the core things that you look for in terms of acquisition targets, whether it be synergistic top line, bottom line, extending to new geographies, product categories. Could you maybe touch on just some things that make an acquisition target attractive for you?

Yes. It's -- short answer, it's all of it, right? But you had to prioritize things. So again, I think for us, in the short term, it's looking at businesses that operate within our existing market, where we know their business very well. There's probably some synergy from a customer standpoint and margin where we can buy better and sell better just given our scale and expand our share of the wallet within existing territories. But over time, as we do move more and more of this and get better, better at integration and acquisition, there's a lot of geographic expansion opportunities as well. Today, we don't have a meaningful presence in the Mid-Atlantic in the New England area. So those are geographic expansion down the line. But again, we won it all, but you just got to take a little bite to the apple here, for sure.

And being efficient in the use of capital, maybe touch a bit in terms of how you're looking to make these acquisitions, but multiples that generally are out there, I know it can vary and then how you look to utilize cash versus paper within -- with these acquisitions?

Yes. Look, if it's smaller acquisitions, our intention is that -- our balance sheet cash flow is still fairly strong, so utilize our internal capability to do it. I think over time, as we look at a higher volume of acquisition or larger acquisition targets. This is where I think we're going to have to get a little bit active and look at alternative sourcing if speed is a factor in order to kind of consolidate and have more tuck-in M&As fairly quickly. We fundamentally believe, again, we have a great business here, high barrier of entrance there's a unique moat about the way we do business with our suppliers and our customers. But over time, in the last few years, we believe that we're somewhat undervalued here. So there's an opportunity from a capital market standpoint. But again, all the conditions have to be met for us to really kind of think about that alternative.

You mentioned that for M&A you've got a new strategy for the company. Maybe talk about some of your past M&A success, learnings that you've had that you believe make you better positioned for the strategy going forward.

Yes. Our most recent acquisition was actually back in 2022 where we bought a couple of frozen seafood businesses, one out of Richmond, Virginia, Chicago, Illinois and Dallas, Texas. And I will say by introducing it serves multiple purposes of one, we weren't in those territory previously. So it was a geographic expansion opportunity for us. Second, it really opened the door in terms of from a volume expansion standpoint, being able to sell a lot more frozen seafood because of the scale. So we grew that business at a time of acquisition from a $300 million product category to now over $400 million product category within just a couple of years. So that's a great example of being able to achieve multiple objectives to do an acquisition and how volume and scale can help benefit both the top line and the bottom line in terms of expansion. So we're looking to do more of that here in the future.

Okay. Thanks for that, Felix. And a quick reminder to everybody. If you guys have any questions for Felix or Cindy, go and tap them into the questions, chat below and we'll go and get to that Q&A towards the end of the session. Felix, Cindy, turning now to organic growth opportunities outside acquisitions. You've talked about other growth avenues such as cross-selling maybe speak about some of those organic growth opportunities you guys have available?

Yes. Organic growth is going to be important for us as well. So we effectively have a parallel dual growth pathway. One side is actively evaluate tuck-in M&A opportunities. The other side of it is focused on investing into our capacity and our capability. That's why regardless of what short-term noise might be from a macro environment standpoint, we're staying the course in terms of our investment. So we have a brand-new land facility that's coming up here hopefully, by the end of 2025. We're retrofitting an older facility in Charlotte as well. So in those markets, we're trying to sell more frozen seafood because we're not doing much of that today in the Southeast. And then beyond that, we're going to pivot to other markets where, again, today, we're selling mostly frozen seafood, but I'm driving more Indian space capacity to sell everything else. So over a 3- to 5-year period, we think there's probably at least a $300 million organic growth opportunity just within my existing customer accounts. So we're not talking about getting outside of that, increasing my share of the wallet. So that's what our priority is going to be here in the next 12 to 18 months is execute on those investments and expansion plan.

Were the core KPIs that we should be looking for and thinking about as you look to execute on this initiative.

I think over time, it's going to be gross profit dollar. Are we generating incremental dollars to come into the business rate. For HF Foods, one of the things, I think, that's very, very different than the broader food services that because we don't do commitments with our suppliers or with our customers, you can't look at us through the lenses of kind of every single quarter gross profit margin should be X and Y, because again, if the market fluctuates quite a bit, right? So I think gross profit dollar is probably the best metric for us over time as we expand and whether it's organically or inorganically is are we truly winning from a top line standpoint, converting that to dollars, which ultimately kind of translate to trying to deliver this 5% EBITDA margin target that we have over this 3- to 5-year period.

One of your initiatives you guys have is the expanded cold storage. So maybe talk a little bit more and drill down in terms of the opportunity there, and how it further strengthens your business model?

Yes. I mean I touched on a little bit about Atlanta here previously, expanding co-source capacity is specific to Atlanta and Charlotte, where today, we only do about 1% to 2% frozen seafood business in those markets. in the entire Southeast market, where normally, it should be probably 10% to 15% of your mix, right? So with the construction that's done, new facilities up and running, I will literally double my co-source capacity in the market. So that's going to give me the tools and everything I need to go after again existing customer accounts. Well, I don't have to go acquire new accounts just by selling them what they typically buy from others. But again, today, I'm selling them everything for the season.

Okay. No, I appreciate that. That's of color. And maybe talk about the broader consumer environment, looking at the state of the consumer today, how has that constrained wallet had an impact on the business via foot traffic spending or otherwise?

Yes. Look, I mean, even if you go all the way back to the pandemic, 2020 to now, it's been a very call it, volatile 3, 4 years, right? Hybrid inflation environment and a deflation environment, coming out of pandemic, things kind of recover quite a bit. And then 2025, it's obviously new administration came in, policies from a tariff standpoint, immigration enforcement, all of that have an impact in terms of consumer sentiment, right, foot traffic. So across the board, I think it's not unusual to see that foot traffic that has been down, especially probably going to be in the second half of the year. So all of the businesses, restaurants, food service, everyone is kind of responding to it as well. So there's quite -- still quite a bit of uncertainty here, I think, for the rest of the year. But again, for HF, we're not letting any sort of short-term voices kind of deter us or change our direction because fundamentally, we think we just kind of, again, scratched the tip of the iceberg here, being able to position ourselves to continue to get bigger over time. This is where, again, we're kind of staying the course from an investment standpoint and still very actively having conversations on the M&A front. So not much of that has changed for us since we're kind of playing the long game here.

And thinking about -- can you just maybe help contextualize the impact for your guys' business as distributors even though, right, you're in consumer and maybe a slowdown in the consumer for your end customer? Is it -- how does it change for you guys in? Is it that they're not working through their inventory? Are they making smaller purchases, changing the frequency. Maybe talk about how that flows through to have an impact on your business?

Yes. So again, there's been a lot of conversations about tariff impact on businesses in 2025, right? And again, for us, we're actually not very concerned about the tariff impact because, again, we've done some very strategic inventory management, leverage our long-term strategic relationship with partners, with our customers, provide a lot of proactive education in terms of pricing inventory purchase and storage. The bigger concern, it's always about the foot traffic. When people are not going out and dining out, then people are going to be spending less, and it's going to be a drag on the volume itself. So when volume overall is going to be down, this is where you can see an even higher level of competition, right? People are going to be again, trying to protect their share of the wallet, really compete on price, compete on every single front. So there's going to be a lot of short-term pressure that's kind of good bit of unhealthy practice, I'll say, within the space because of the lower foot traffic. But I still believe that perhaps this is just going to be temporary. And over time, agents specifically from a restaurant standpoint, is going to grow very quickly. And most of our customers are going to fare much better even if we're ever going to be a recessionary kind of environment as well.

So what is the best way to think about the margin profile for the business? And how do you plan to drive that margin expansion over time?

Yes. Again, I think if you look at EBITDA margin, right, I think our goal is next 3, 5 years, get to north of 5% EBITDA margin. Again, gross profit, I think it's going to fluctuate quite a bit here and there, given some of the macro uncertainties, commodity uncertainties as well as new businesses and territories that we want to get into in terms of our kind of strategy to go conquer beyond kind of the -- our share of the wallet. So again, I won't look at gross profit margin as probably the #1 metric. But even the margin over time is probably one that we're focused very, very heavily on which, of course, we're trying to limit our cost structure during this period of time as well.

Right. So now it's concern on the gross margin, but yes, on EBITDA. So then do you have additional levers either within the SG&A event to maybe offset some volatility on the gross margin to still meet that EBITDA margin target?

Yes. I think so. Again, if you just look at the last several quarters of results that we published so far, right, every single quarter, we have made some incremental improvement versus the prior quarter versus prior year. Even in the second quarter, we just came off -- it was a 31.1% year-over-year improvement on our adjusted EBITDA going back to Q1, Q4, even last year, we've made kind of improvement as well. In fact, we've had -- on the top line, specifically, we've had 6 consecutive quarters where we have year-over-year growth here within the business. But again, to get to a level where we have sustainable, predictable growth, we had to put in the investment now to drive capacity so that we can bring in incremental volume here to the business. But our objective is going to be, again, north for this 5% EBITDA margin for us over time.

Okay. Great. On that topic. You recently implemented a new ERP system. How has that helped you to identify efficiencies in running the business?

Yes. So again, the ERP just got implemented here May of this year. So it was a massive sprint debt that we've done here internally. We have sites across the country. So over a 9-month period, we've got everyone on the same platform. So I think it's still going to take a little bit of time. We're kind of in this hypercare period of making sure that there's no disruption. And so far, it's been running pretty smoothly. So I think it's going to take us at least a couple of quarters to collect and rationalize and look at the data from this new platform and see where some of the opportunity. But one thing I'd say is they certainly give us better tools to have proper controls in place, right? So you touched on a little bit about the G&A cost here. historically, we're probably a little bit heavier on the G&A side because we have outdated system, and there's some inefficiencies. So I do expect there's going to be some savings here down the line perhaps in 2026. But right now, we're not necessarily kind of quantifying exactly what that amount is going to be.

Okay. That's helpful. You touched on tariffs earlier. I just want to make sure that we understand that correctly. So it sounds like you're not overly concerned about the tariff, maybe just talk about what exposure you do or don't have your ability to potentially pass through any tariff impact and how we should think about that having an impact on the margins or overall business.

Yes. I think the good thing what we're seeing just in the last couple of weeks that it seems that things have kind of settled down here a moment. So the goal post is not continuously moving. The toughest thing, I think, for all business leader is not knowing what the actual goal post is, right? So we've been very, very proactive in terms of managing the tariffs on even before the new administration roll out the policy. Again, keep in mind, President Trump campaign on tariffs. So it shouldn't be a whole lot I think the biggest surprise for a business leader globally, is the level and the extent that probably they went with the tariffs policy, right? So we have this conversation back in Q4 and even in Q1 with a lot of our global suppliers and a vast majority of them were rural [indiscernible] probably absorb anywhere from 70% to 80% of the tariff and then also proactively having these compensation and education sessions with our customers, every single one of them. Hey, things are going to be short. You need to change your menu offerings, you need to change your ingredient or selectively you need to start thinking about increasing your menu prices as well. So on both ends of it, we're able to get our partners, customers and suppliers are going to absorb that not 100% of the tariff that came through here in the first half of the year. Now in the second half, I think the biggest concern industry-wise is probably with respect to seafood, right, specifically shrimp and frozen product come from India because again, currently at 25%, it might get to 50% here on the '27. So it just depends on whether or not, again, India and the U.S. can make a deal happen here. So there's a little bit of a question mark and uncertainty out there. And given the volume and the size of our frozen seafood business, that's one thing I think we got monitored here fairly closely. But short term, I think we're okay from an inventory standpoint, again, we'll make some very, very strategic bias here.

I appreciate that. Can we touch quickly maybe on product mix today and then also sourcing partners, so product mix and maybe how that ties into how diversified you are in terms of your domestic partners, you touched on that a bit now and tariffs. So maybe if we could kind of tie that all in together, that would be helpful.

Yes. So pretty significant. The vast majority of our buy is actually all domestic, right? So you think about food service, what do you sell to make a typical restaurant customer all the protein, your chicken, pork and beef, all that, this domestic, your produce, mostly domestic. What we source internationally, again, it's a majority of our frozen seafood and then you have 10 goods or packaging type material that's coming from Asia, Southeast Asia, China, for example. But again, those -- most of these things, we've done some very, very strategic inventory management. So we weathered their store quite nicely here in the first half of the year. I don't expect a significant impact here into the second half of the year. More so on if the economy is not good, you kind of have this stagnation that's kind of happening and the foot traffic continue to be lower for different reasons, right? Then it's going to be challenging in terms of just overall volume. But other than that, we don't see any sort of significant risk here from a tariff standpoint.

Okay. Fantastic. Before we dive into Q&A, just one last one here. So you guys have your e-commerce platform. That's another new initiative in revenue stream. Could you talk to us a bit about that and some of the benefits that could come from there?

Yes. E-commerce, I see a tremendous amount of opportunity in e-commerce. I think, again, especially with new technology platform or that is still very much in a pilot phase today. I'll say the 2 sites that we have implemented e-commerce so far. Now we're just limiting the platform to our existing restaurant customers where they can order selective specialty goods from us for their own consumption, right? Again, it's going well. We have a pretty large adoption high-margin business, you're looking at anywhere between 25%, 30% margin on some of the specialty goods. So can we build on that over time and maybe roll it out across my entire network and that eventually maybe even service the general public. Because again, our specialty, one of the core competency is being able to source the type of specialty product as well. If you look at 20,000 SKUs, over 50%, so 10,000-plus or in this Asian specialty specifically. So having this kind of new product, hard to find products available, it's a pretty significant part of it. But it's going to take time in terms of the platform from an adoption standpoint. But this is where we're going to put some investment in as well, continue to put investment in.

Okay. Great. Thank you for that, Felix. Let's start into some Q&A. A couple of questions have been coming in. All right. So this is another question that I had as well. So just thinking about CapEx moving forward, can you touch on that a bit? How you plan to fund things? Maybe also then just touching on the balance sheet as well. So CapEx and balance sheet, how to think about that in the near term?

Yes. So again, short term, I think 2025, our CapEx, I don't have the exact number, probably in that $15 million to $20 million range, right, specifically, it's tied to facility upgrades, facility expansion. I think for the foreseeable future, as I mentioned, next couple of years, we're going to have additional CapEx needs associated with capacity expansion, but the range could vary. It depends on if you're leasing versus buying warehouses. If it's going to be buying, then it's probably going to be higher end of that. But for the most part, I think we can support our organic CapEx requirements with our cash flow. If you're trying to do organic expansion and you got -- you want to do M&A, this is where we're going to have a different conversation and think about a different capital strategy. from a foundation standpoint. So we're having active conversations, kind of evaluating our options here. So more to come on that front.

Okay. Great. Talking about some of the relationships that you have with your restaurants or clients. Do they have multiple suppliers and distributors? Or do they have one that they prefer versus the other? Can you talk about how that relationship works and evolves and how you potentially look to kind of increase share of wallet with the respective customer?

Yes. Yes. So again, when you deal with independent restaurants, right, most of the customers are price-sensitive for sure. So it's a general practice that a source from multiple food servicing provider. You will never get 100% share of the wallet. Now because of our scale, we differentiate ourselves, both in terms of price, quality, service so forth and so forth. We generally have a larger share of wallet with our customers, probably anywhere from 25%, in some cases, maybe 50%, 60%, depending on the market and the competition, right? Going back to what we talked about cross-selling earlier, in selected markets where today, I know what the customers should be buying, what they would buy in the price that they perhaps are paying for things but I don't have the capacity for a warehousing set of standpoint to service them, right? So just by introducing freezer space capacity or Indian space providing market to market, we can easily increase our share of wallet in those markets. So again, feel very good about those opportunities.

Okay. Great. That's helpful. Kind of before we leave things off here now. So as we look ahead coming to the end of 2025 and 2026, what are you most excited about and seeing as the greatest opportunities? We've talked about a couple of them today. So if you can close things out and talk about what you're most excited about, that would be helpful.

Yes. Look, I mean, the most exciting part, it's about keeping up the momentum. It's about execution. Again, been involved with the company for a little bit over 5 years now. For various reasons, right, we've been kind of sitting on the sideline here a little bit, both in terms of telling the HF story, getting people to recognize, understand our industry, understand our business, how unique it is, how tough it is to get into the space and the advantages that we have as an organization. So where we can take this company, whether it's doubling, tripling the business over time by organic growth by M&A as we kind of make progress, it's going to be -- that's what I'm excited about. So even if you look at our most recent results, right, despite the lack of investment that we kind of put into the business over the last 4 or 5 years, we're able to achieve some level of growth, whether it's at industry or above industry pace. So think about what we can do now that we're fully aligned as an organization and we're putting the resource where it's required, right? So the future is bright. I'm very, very fortunate that I'm sitting in this position, being able to lead and drive this organization here.

Fantastic. I think that's a great way to close things out. Felix, Cindy, thanks so much for joining us. Again, I'll leave it up to you. If you do have any additional closing remarks, but that was great before I end things. So Felix, Cindy I pass it back over to you one last time if you have any closing remarks.

No. Again, for [indiscernible] parties. I just asked that you guys continue to follow us. I think it's an evolving story. But again, we're in a very, very good position in an industry that's hard to get into. So we're definitely, again, playing the long game here in terms of investment. So looking forward to speaking with you guys again.

Thank you very much. Again, Felix Lin, President and CEO, Cindy Yao, CFO; HF Foods traded on the NASDAQ ticker HFFG. Felix, Cindy, thanks so much for joining me. Thank you, everyone who tuned in, hopefully, founded value-add and helpful. Have a great day.

Thank you.

Thanks, Aaron. Appreciate it.