Q3 2023 HF Foods Group Inc Earnings Call - Pre Recorded

quarter 2023 earnings conference call. Joining me on today's call are Peter Zhang, HSB's chief executive officer, Felix Lin, the company's chief operating officer, and Carlos Rodriguez, chief financial officer. In a moment, we'll hear the.

Joining me on today's call are Peter Zhang HSE, Chief Executive Officer, <unk>, The company's Chief operating Officer, and Carlos Rodriguez, Chief Financial Officer in a moment, we will hear the prepared remarks by now everyone should have access to the earnings release for the period ended September 30th 2023 that went out there.

By now everyone should have access to the earnings release for the period ended September 30th, 2023, that went out Thursday, November 9th at approximately 4.15 pm Eastern Time. The press release is accessible on the company's website at investors.hfcgroup.com.

November 9th at approximately 415 P. M. Eastern time, the press release is accessible on the company's web site at investors thought HFC group Dotcom.

Before we begin, let me remind everyone that today's discussion contains four business statements based on the environment as the company currently sees it and as such does include risks and uncertainty.

Before we begin let me remind everyone that today's discussion contains forward looking statements based on the environment as the company currently see that and as such does include risks and uncertainties. If you refer to Asia foods earnings release as well as the company's most recent SEC filings you will see a discussion of factors that could cause the companys actual results.

If you refer to HFC's earnings release, as well as the company's most recent SDC filings, you'll see discussion of factors that could cause the company's actual results to differ materially as a result of these four mistakes.

Could differ materially as a result of these forward looking statements. Please remember the company undertakes no obligation to update or revise these forward looking statements in the future in his remarks, the company will make a number of references to non-GAAP financial measures. We believe that these measures will provide investors with useful perspective on the underlying growth trends of the business and have included in the earnings.

Please remember the company undertakes no obligation to update or revise these four 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 will 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.

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. I'm excited to be speaking to you on our first HFO Group earnings call.

Hello, everyone I'm excited to be speaking to you on our first.

If we do any.

This call.

I will start by providing an overview of HfU business model. Sam Phillips will talk to you about our competitive advantage and our transformational plan. And Carla will review our third quarter financial results and discuss key opportunities to grow.

I will start by providing an overview.

<unk> business model.

We'll talk to you about our competitive advantage.

Sure.

No Frank.

And Carlo will review, our third quarter financial results and discuss key opportunity to grow.

HfU was founded in 1997, and the company merged with DNR Global in 2019.

That's helpful with the $19 97, and the company merger with DNR Global in 2019.

and leading national players in Asian food service distribution market.

All in leading national player in Asia Foodservice distribution market.

Our mission is to help local and regional

Our mission is to help local and regional.

Asian business owners fulfill their dream by partnering with domestic and international suppliers, bringing the most quality, high-quality selection of Asian ingredients.

Asian business only a few that dream by partnering.

Domestic and international supplier.

<unk> done most of quality high quality solution.

<unk> and <unk>.

Then create a one-stop shop for our customer needs.

And create a one.

One stop shop for our customer needs.

With the issue of strategic acquisition, today we are leading food distributors for Asian restaurants in the country with a wide distribution network that covers 95% of the United States.

Tissue or a strategic acquisition today, we are leading for disputed.

Asian restaurant in the country.

<unk> distribution network and cover 95% of the United States.

98% of our customers are independent restaurants. And our unique competitive advantage in this niche sector is our ability to foster the long-term relationship with our diversified customers and supplier base.

98%, our customer independent restaurants.

I would.

Unique competitive advantage in this niche sector.

Our ability to foster the long term relationship with our diversified customer and supplier base.

Our diverse management team and workforce relate to the Asian community and has the unique ability to understand their language and define the culture needs.

Our diverse management team and workforce related to the Asian community and has the unique ability to understand the language and define the culture needs.

This allows us to provide solution and offer solutions and fit to each customer. Now over to you, please.

This will allow us to provide volition and offer a solution to each customer now over to you David.

Thanks Peter. I'll first spend a few minutes on the Asian restaurant market and our competitive advantages and then we'll share some details of our operational transformation.

Thanks Peter.

I'll first spend a few minutes on the Asian restaurant market and our competitive advantages and then we will share some details of our operational transformation plan.

HFO's offering is critical and highly difficult for a competitor to replicate at scale.

<unk> foods offering is critical and highly difficult for competitors to replicate at scale.

In the U.S. today, there are about 94,000 Asian restaurants. These are largely small mom-and-pop businesses, and our customers rely on our large-scale and distribution capabilities to provide affordable, consistently high-quality food.

In the U S. Today.

There are about 94000 Asian restaurants, these are largely small mom and pop businesses and our customers rely on our large scale and distribution capabilities to provide affordable consistently high quality food.

Our offerings include products from all key categories, including frozen seafood, Asian specialty, meat and poultry, fresh produce, packaging, and commodities.

Our offerings include products from all key categories, including frozen seafood Asia specialty meat and poultry fresh.

Fresh produce packaging and commodity.

Asia Specialty includes for example, specialty Asia noodles.

Asian specialty includes, for example, specialty Asian noodles.

vegetables, and spices, and commodity includes products like rice, rice flour, cooking oil, and sugar.

Festivals and spices and commodity includes private flight rice, rice flower cooking oil and sugar.

Each individual category makes up between 6% and 31% of net revenue, so we are well diversified in our product offerings.

Each individual category makes up between 6% and 31% of net revenue. So we are well diversified in our product offerings.

In addition to the cultural understanding and ease of communication that we offer to restaurant owners, our infrastructure is deeply established and uniquely able to serve them. We are a true one-stop shop and have region-specific brands and operations supported by our extensive distribution network and multilingual sales force.

In addition to the cultural understanding and ease of communication that we offer to restaurant owners are infrastructure is deeply established and uniquely able to serve.

We are a true one stop shop, and how region specific brands and operations supported by our extensive distribution network.

Multilingual salesforce.

The Asian food service market is projected to grow over the next five years, and I'm confident that we are well positioned to capitalize on this growth in the near and long term.

The Asian Foodservice market is projected to grow over the next five years and I am confident that we are well positioned to capitalize on this growth and our near and long term.

Regarding our competitors.

The Asian food service distribution industry is made up of fragmented regional players.

The Asian Foodservice distribution industry is made up of fragmented regional players HSV.

HF Foods is one of the only service providers in the industry with national wheat.

<unk> is one of the only service providers.

The industry with national reach.

and we offer a complete package that our competitors cannot.

We offer a complete package that our competitors cannot.

Our deep cultural connection makes our customer sticky and engrange educated foods in local communities.

Our deep cultural connection makes a customer sticky and <unk> issued foods in local communities.

Small regional players lack the national reach, extensive product offering, and strong supplier.

Small regional players lack the national reach extensive product offering.

And strong supplier relationships that we have.

are focused on independent Asian restaurants who are frequently underserved by other large food distributors.

Our focus on independent Asian, restaurants, who are frequently underserved by other large through distributors.

and our strong ten-year relationships with customers nationally allow for an effective word-of-mouth referral system and offers an innovative way to communicate with our customers.

And our strong tenured relationships with customers nationally allow for an effective word of mouth referral system.

And offers an integrated value proposition.

The fact that 98% of our customers are independent restaurants presents a promising opportunity for us on the market.

The fact that 98% of our customers are independent restaurants presents a promising opportunity for us on the margin side as independent restaurants offer a pathway to achieving significantly higher profitability when compared to large chains.

as independent restaurants offer a pathway to achieving significantly higher probability when compared to large chains.

Another lever is our strategy of engaging in spot transactions.

Another lever is our strategy of engaging in spot transactions.

By conducting transactions at the current market rate, we position ourselves to capitalize on immediate opportunity.

By conducting transactions at the current market rate, we position ourselves to capitalize on immediate opportunities.

respond swiftly to market dynamics, and effectively manage risks associated with price fluctuations to maintain a competitive edge.

Respond swiftly to market dynamics.

And effectively manage risk associated with price fluctuations to maintain a competitive edge.

Before I get into the details of our transformation plan, I want to highlight a few key accomplishments of our transformation plan in 2020.

Before I get into the details of our transformation plan I want to highlight a few key accomplishments of our transformation plan in 2023.

First, note that historically most of our procurement activities have been conducted at the local distribution center level.

First note that historically most of our procurement activities.

<unk> been conducted at a local distribution Senate level.

Independent of aggregated purchase volume.

However, we successfully piloted a centralized purchasing program for our seafood acquisitions in order to fully harness our collective purchasing power, a standard practice throughout the industry.

However, we successfully piloted a centralized purchasing program.

Our seafood acquisition in order to fully harness our collective purchasing power a standard practice throughout the industry.

We have already seen significant margin gains on certain SKUs as a result.

We have already seen significant margin gains on certain skus as a result.

We also made the decision to divest our poultry processing business.

We also made the decision to divest our poultry processing businesses.

which we completed this year as part of a commitment to refocusing on our core business and exiting low-margin businesses.

Which we completed this year as part of our commitment to refocusing on our core business and exiting low margin businesses.

We have spent a lot of time over the last year. It meticulously analyzing the ways. We can improve every aspect of our operations and I am excited to discuss with you today. The details of our operational transformation plan that we will continue to uptick.

We have spent a lot of time over the last year meticulously analyzing the ways we can improve every aspect of our operations. And I'm excited to discuss with you today the details of our operational transformation plan that we will continue to update on in the coming quarter.

In the coming quarters.

To achieve our growth target and ensure our business is prime for success. We've developed a comprehensive operational transformation plan that we have already begun implementing.

To achieve our growth target and ensure our business is primed for success, we've developed a comprehensive operational transformation plan that we have already begun implementing.

Our transformation programs is focused on four key areas. One, centralized purchasing. Two, fleet and transportation.

Our transformation programs is focused on four key areas.

One.

Centralized purchasing too.

<unk>.

Fleet and transportation.

<unk> digital transformation.

And for facility upgrades all.

All of these key focus areas will have significant growth or cost reduction impact to our business for years to come.

All of these key focus areas will have significant growth or cost reduction impact to our business for years to come.

Starting with centralized purchasing, we are formalizing national category purchases, welcoming new vendors into our ecosystem.

Starting with centralized purchasing we are formalizing national category purchases welcoming new vendors into our ecosystem. This will allow us to maximize purchasing synergies from the acquisitions. We have made we aim to deliver savings primarily in key categories, such as seafood and poultry.

This will allow us to maximize purchasing synergies from the acquisitions we have made. We aim to deliver savings primarily in key categories such as seafood, bee and poultry, and fresh produce, a testament to our commitment to financial prudence and value maximization. We're also making substantial improvements to our transportation system.

And fresh produce a testament to our commitment to financial Prudence and value maximization.

We're also making substantial improvements to our transportation system as.

We are establishing a national fleet maintenance program.

We're defining and finalizing new truck specifications and initiating a replacement program for 50% of our existing fleet over the next several years.

We're defining and finalizing new trucks specifications and initiating a replacement program for 50% of our existing fleet over the next several years.

And we're implementing a national fuel savings program to maximize efficiency in 2020.

And we're implementing a national fuel savings program to maximize efficiency in 2024.

Our current inbound logistics operation is highly fragmented and we are working to consolidate our domestic inbound freight management by partnering with strategic integrated third party providers.

Our current inbound logistics operation is highly fragmented and we are working to consolidate our domestic inbound freight management by partnering with strategic integrated third party providers.

This initiative aims to establish a unified approach.

This initiative aims to establish a unified approach.

further optimizing and fortifying our supply chain and total cost.

Further optimizing and fortifying our supply chain and total cost structure.

As for digital transformation, we are piloting and implementing a modern ERP solution across all of our sites to complement our recent GoLive workday, which Carlos will discuss in more detail.

As for digital transformation, we are piloting in implementing a modern ERP solution across all of our sites to complement our recent go live with workday, which Carlos will discuss in more detail.

These upgrades will enhance our operation efficiency and responsiveness, setting the stage for streamlined processes, and greater data-driven decisions.

These upgrades will enhance our operational efficiency and responsiveness setting the stage for streamline processes and greater data driven decision making.

Finally, we've recently kicked off a network and facility study to optimize our distribution network with the goal of reorganizing and upgrading our facilities and distribution centers. We're working to streamline costs more efficiently and to capitalize on cross-selling opportunities.

Finally, we recently kicked off a network and facility study to optimize our distribution network with the goal of reorganizing and upgrading our facilities and distribution centers, we are working to streamline costs more efficiently and to capitalize on cross selling opportunities we.

We are converting our distribution centers to maximize usage most efficiently and to allow them to serve as full broad line facilities that supply the products that are strongest in demand in the area.

We are converting our distribution centers to maximize usage.

Most efficiently and to allow them to serve as full broadline facilities that supply the products there are strongest and demand in the area.

For example, some customers are primarily seafood-only customers because the distribution center in their area does not provide an opportunity for them to purchase Asian specialty items from us, and vice versa. With these changes...

For example, some customers are primarily seafood only customers because the distribution center in their area does not provide an opportunity for them to purchase agent specialty items from us and vice versa.

With these changes.

They will be able to buy both.

These improvements will help us to optimize operation, as well as increase wallet share with existing customers through cross-selling, as well as more easily serve new customers.

These improvements will help us to optimize operation as well as increased wallet share with existing customers through cross selling as well as more easily serve new customers.

This will also provide the opportunity to expand geographically in order to capitalize on the significant white space.

This will also provide the opportunity to expand our print geographically in order to capitalize on the significant white space for growth. These.

These initiatives collectively form the roadmap of our transformation.

These initiatives collectively formed a roadmap of our transformation plan, which we're fully committed to executing diligently setting the stage for sustainable long term growth.

which were fully committed to executing diligently, setting the stage for sustainable long-term growth and delivering value.

And delivering value to shareholders Carlos.

Thanks, Felix. Before I discuss our third quarter results, I'd like to emphasize some key achievements in 2023.

Before I discuss our third quarter results I'd like to emphasize some key achievements in 2023 and.

In addition to clearing our various compliance hurdles, we professionalize our workforce

In addition to clearing our various compliance hurdles, we professionalize our workforce.

gone live with Workday financials and human capital management applications.

Non live with workday financials, and human capital management applications.

and enhance our finance team's capabilities while streamlining our financial reporting and accounting.

And enhanced our finance team's capabilities, while streamlining our financial reporting and accounting systems.

With these accomplishments, we now have the corporate infrastructure in place to set the stage for efficiencies and success.

These accomplishments, we now have the corporate infrastructure in place to set the stage for efficiencies and success.

I'll now talk about the results for our third quarter ended September 30, 2023, versus the same period in 2022, and then I'll talk about additional opportunities for growth.

I'll now talk about our results for our third quarter ended September 32023.

As the same period in 2022, and then I'll talk about additional opportunities for growth.

Net revenue for the third quarter decreased 6.4% to $281.5 million from $300.7 million in the prior year quarter.

Net revenue for the third quarter decreased six 4% to $281 5 million from $307 million in the prior year quarter.

The decrease in net revenue is primarily attributable to declines in the meat and poultry and seafood product category, driven by deflationary pricing.

The decrease in net revenue was primarily attributable to declines in the meat and poultry and seafood product category.

Driven by a deflationary pricing of poultry and shrimp.

Gross profit decreased by 1.1 percent to 50.9 million for the quarter compared to 51.5 million for the prior quarter.

Gross profit decreased by one 1% to $50 9 million for the quarter compared to $51 5 million for the prior quarter.

Gross profit margins increased approximately 100 basis points to 18, 1%.

Gross profit margins increased approximately 100 basis points to 18.1%.

Gross profit margin expansion was primarily the result of a mixed shift of higher gross margin shrimp and other frozen food sales that were realized in part by our pilot centralized purchasing program, in addition to the impact of exiting HF Foods Industrial, or HFFI, one of our lower margin poultry processing businesses.

Gross profit margin expansion was primarily the result of a mix shift of higher gross margin shrimp and other frozen fruit sales that were realized in part by our pilot centralized purchasing program. In addition to the impact of exiting HFF foods industrial or <unk>, one of our lower margin poultry processing businesses.

partially offset by the depletionary pressure in meat and poultry, which dropped from the height of 2020.

Partially offset by the deflationary pressure in meat and poultry, which dropped from the highs of 2022.

During 2022, we benefited from the significant inflation experience in poultry pricing, which created a tough.

Turning to our enterprise here, we benefited from a significant inflation experienced appropriate pricing.

Which created a tough year over year compare.

Distribution, selling and administrative expenses decreased approximately nine 8% to $48 8 million for the third quarter of 2023.

This recent selling and administrative expenses decreased approximately 9.8% to $48.8 million for the third quarter of 2023 from $54.6 million for the third quarter of 2022.

From $54 6 million for the third quarter of 2022.

The reduced expenses were due primarily to lower professional fees, partially offset by higher payroll and related labor costs.

The reduced expenses were due primarily to lower professional fees, partially offset by higher payroll and related labor costs.

Operating income for the third quarter of 2023 was $2.1 million compared to a loss of $3.1 million for the third quarter of 2022. The increase was driven by the lower...

Operating income for the third quarter of 2023 was $2 1 million compared to a loss of $3 1 million for the third quarter of 2022.

The increase was driven by the lower distribution selling and administrative expenses.

Total interest expense increased to $2.7 million for the third quarter compared to $2.3 million for the prior quarter. Net income increased to $2 million for the third quarter compared to net loss of $3.9 million for the prior quarter. Improved net income was driven by lower distribution, selling, and administrative costs.

Total interest expense increased to $2 7 million for the third quarter compared to $2 3 million for the prior year quarter.

Net income increased to $2 million for the third quarter compared to net loss of $3 9 million for the prior year quarter.

Improved net income was driven by lower distribution selling and administrative costs.

and the 1.7 million change in fair value of interest rate swaps, partially offset by the increased interest.

And the $1 7 million change in fair value of interest rate swaps, partially offset by the increased interest expense.

Adjusted EBITDA increased approximately 150% to $10 million for the third quarter compared to $4 million for the prior year quarter.

Adjusted EBITDA increased approximately 150% to 10 million for the third quarter compared to $4 million for the prior year quarter.

Turning to the balance sheet and an update on the liquidity. At the end of the third quarter, we had available capacity of $48.6 million in additional funds through our line of credit. We feel very comfortable with our current liquidity.

Turning to the balance sheet and an update on our liquidity.

At the end of the third quarter, we had available capacity of $48 6 million in additional funds through our line of credit.

We feel very comfortable with our current liquidity.

Drifting gears to our M&A growth strategy, our M&A playbook has allowed us to identify opportunities with significant synergies and expand geographically, increase distribution capabilities, and increase our product selection.

Shifting gears to our M&A growth strategy.

Alright, M&A playbook has allowed us to identify opportunities with significant synergies and expand geographically increased distribution capabilities and.

And increase our product selection.

We recently acquired Great Wall Group and SeaLend Food in 2022, both of which were leaders in the Asian food service frozen seafood market, and we're realizing the purchasing synergies in 2023 from those acquisitions.

We recently acquired Great Wall group in sealing food in 2022, both of which are leaders in the Asia foodservice frozen seafood market and we're realizing the purchasing synergies in 2023 for those acquisitions.

We see substantial opportunity for the continued strategic M&A, and a strong track record of an acquirer of choice for most Asian food distributors means that most of our targets come to us first to initiate the conversation.

We see substantial opportunity for the contingent strategic M&A and a strong track record of an acquirer of choice for most Asian for distributors means the most of our targets come to us first to initiate the conversation.

Our industry relationships run deep across the U.S., and we have opportunities for touchpoints with tangible targets in the sector.

Our industry relationships run the across the U S and.

And we have opportunities for touch points with tangible targets in this sector.

Let me leave you with a few key reasons we believe we're well-positioned for long-term.

Let me leave you with a few key reasons, we believe we are well positioned for long term growth.

One, we are a leading, scaled, nationwide operator serving the Asian food service market.

One we are a leading scale nationwide operator, serving the Asian foodservice market.

We offer restaurant owners a one-stop shop for both a friendly cultural connection and the national scale in order to help them reliably serve customers the products they love at an affordable price. Two. One. Two. One.

We offer restaurant owners, a one stop shop for both a friendly cultural connection and.

And the national scale in order to help them reliably serve customers the products they love at an affordable price.

<unk>.

Favorable market trends and demographics indicate that demand for Asian food will continue to grow at a robust pace, and we have the infrastructure and industry knowledge and experience in place to capitalize on this.

Favorable market trends and demographics indicate that demand for Asian food will continue to grow at a robust pace and we have the infrastructure of industry knowledge and experience in place to capitalize on this growth.

And three, our positioning and scale in our niche sector is very difficult to replicate. Our deep understanding of Chinese language and cultural background.

And three our positioning and scale in a niche sector is very difficult to replicate.

Our deep understanding of Chinese language and cultural backgrounds.

As well as the long-term relationships we form with customers make it extremely hard for large national players to enter the service.

As well as the long term relationships, we formed with customers make it extremely hard for large national players to enter the space.

At the management level, our diverse best-in-class team is professional, highly experienced, motivated, and culturally connected to the mission of HF food.

At the management level, our diverse best in class team as professional highly experienced motivated and culturally connected submission of HFF.

To sum it up.

We have an attractive long-term financial profile with a margin expansion and revenue growth strategy that we're laser focused on.

We have an attractive long term financial profile with a margin expansion and revenue growth strategy that we're laser focused on executing well.

We are pleased with the progress we've made so far and look forward to our financial metrics continue to reflect the success of our transformational initiatives in the upcoming quarters. I would now like to turn the call over to Peter for closing remarks.

We are pleased with the progress we've made so far and look forward to our financial metrics continue to reflect the success of our transformational initiatives in upcoming quarters I would now like to turn the call over to Peter for closing remarks. Thank you Carlos.

Thank you, Carlos. We have a very strong value offer as a leader in Asian food distribution and have transformed.

We have a very strong while they offer us a needles in Asia for distribution and half transport and.

a market in which we operate by serving as a trusted partner to thousands of restaurants across the United States.

The market in which we all believe by serving US at Chubb Hondo 2000 of the restaurant cost day, a nice day.

We are focused on executing our transformation plan to improve operation and expand margin.

We are focused on executing our transformation brain lean pool ablation.

And as Ben margin.

Also we continue to pursue growth.

We have to correct ourselves as a critical partner in providing high quality specialty products necessary to deliver authentic experience.

We have to convey our self as a critical partner in providing high quality specialty palace necessary to deliver authentic experience.

and have been able to build HFO into an enterprise.

And have been able to build <unk> into enterprise.

then generate over 1.1 billion dollars of lead avenue annually.

Then generate over $1 $1 billion of Avenue and unique.

Thanks to our deep understanding customer needs, they loyalty in return and our journey.

Thanks to our deep understanding customer needs.

The loyalty in return.

And our journey is just getting started.

We look forward to speak with you again on our fourth quarter earnings call and update you on progress of our operational transformation plan. Thank you everyone. Have a great day.

With low fall to speak with you again.

Our fourth quarter earnings call and update you on progress of our operational.

Since foundation frame.

Everyone have a great day.