Q2 2024 HF Foods Group Inc Earnings Call - Pre-Recorded

Operator: 2024 Earnings Conference Call. Joining me on today's call are Peter Zhang, Chief Executive Officer; Felix Lin, President and Chief Operating Officer; and Cindy Yao, Chief Financial Officer.

Joining me on today's call are Peter Zhang Chief Executive Officer, Felix Flynn, President and Chief operating Officer, and Cindy Yao Chief Financial Officer by now everyone should have access to the earnings release for the period ended June 30th 2024 that went out Tuesday August six on approximately 400.

Peter Zhang: By now, everyone should have access to the earnings release for the period ended June 30th, 2024, that went out Tuesday, August 6th, at approximately 4 or 5 p.m. Eastern Time. The press release is accessible on the company's website at investors.hffoodsgroup.com. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as the company currently sees it, and as such If you refer to Hf Foods' earnings release, as well as the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially as a result of those forward-looking statements.

Speaker Change: Five P M. Eastern time, the press release is accessible on the company's website at investors Dot H S Foods group Dotcom before.

Peter Zhang: Please remember that the company undertakes no obligation to update or revise these forward-looking statements in the future. In these remarks, the company will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspectives on the underlying growth trends of the business and have included in the earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Now, I will turn the call over to Peter.

Speaker Change: Before we begin let me remind everyone that today's discussion contains forward looking statements.

Speaker Change: So on the environment at the company currently sees it and as such does not include risks and uncertainties.

If you refer to H F foods earnings release as well as the Companys. Most recent SEC filings you will see a discussion of factors that could cause the company's actual results to differ materially as a result of those forward looking statements.

Speaker Change: Please remember that the company undertakes no obligation to update or revise the forward looking statements in the future.

Speaker Change: In these remarks, the company will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in the earnings release, a full reconciliation of non-GAAP financial measures and the most to the most comparable GAAP measures.

Speaker Change: Now I will turn the call over to Peter.

Speaker Change: Hello, everyone.

Felix Lin: Welcome to HF Foods' second quarter earnings call. Our President and COO Felix will provide an operational update, and our CFO Cindy will speak to our second quarter financial results. Before I turn it over to them, I would like to share how pleased we are with the final settlement in the second quarter regarding our legacy SEC matters. Along with our board, the management team is a later focus in both our short-term and long-term plan to drive value for our shareholders. Now, over to you. Thank you.

Speaker Change: Welcome to <unk> Foods' second quarter's earnings call.

Speaker Change: Our president and CEO will sit as well Paul Whitehead.

Speaker Change: Abolition no update.

Speaker Change: And our CFO, Cindy will speak to our second quarter financial results.

Speaker Change: Before I turn over to them.

Speaker Change: I'd like to share how pleased we are with the final settlement in the second quarter regarding our legacy F E E Mail us.

Speaker Change: Along with our board the management team is laser focused.

Speaker Change: In both our short term and long term plan to drive value for our shareholders.

Speaker Change: Now over to you Dennis.

Speaker Change: Thank you <unk>.

Cindy Yao: Echoing Peter's comments, I'm incredibly excited about the future of HF Foods. Our team is fully aligned with the mission ahead of us, which is to transform our business so that we can deliver sustainable long-term growth for years to come. I'm pleased to be speaking with you after we have made meaningful progress on our key financial metrics, including year-over-year improvements in net revenue, gross profit, and adjusted EBITDA. It is notable that we achieve these results while undergoing major transformations in all areas of our business. The results also included the impact from our discontinued chicken processing businesses in 2023, which was a $3.1 million offset to revenue during the second quarter.

Speaker Change: Peter's comments.

Speaker Change: Excited about the future of HFF foods, our team is fully aligned and emission ahead of us which is to transform our business. So that we can deliver sustainable long term growth for years to come.

Speaker Change: I'm pleased to be speaking with you. After we have made meaningful progress on our key financial metrics.

Speaker Change: Including year over year improvements in net revenue gross profit and adjusted EBITDA.

Speaker Change: Is notable.

Speaker Change: That we achieved these results while undergoing major transformations in all areas of our business. The results also included the impact from our discontinued chicken processing businesses in 2023.

Speaker Change: Which was a $3 1 million dollar offset to revenue during the second quarter.

Felix Lin: Cindy will provide further details about these key financial metrics that underscore our progress. Our Comprehensive Operational Transformation Plan is well underway. With each of our initiatives having a significant growth or cost reduction impact on HF foods for years to come as we set the stage for success. Unknown Attendee, Xi Lin, Xiao Zhang, Cindy Yao, Hf Fds. We continue to make progress on our centralized purchasing program. As noted previously, we piloted the program with a handful of seafood products in 2023 and have now expanded the program to a majority of our seafood category buys.

Speaker Change: Cindy will provide further details about these key financial metrics that underscore our progress.

Speaker Change: Our comprehensive operational transformation plan is well underway.

Speaker Change: With each of our initiatives, having significant growth or cost reduction impact of <unk> for years to come as we set the stage for success.

Speaker Change: I'll offer some updates on our progress.

Speaker Change: We continue to make progress on our centralized purchasing program as noted previously we piloted the program with a handful of seafood products in 2023 and have now expanded the program to a majority of our seafood category buys in.

Felix Lin: In Q2 2024, we saw our seafood margin grow significantly versus the same period last year. The ongoing improvement in seafood margin helps offset margin impacts in other categories, such as chicken, which experienced significant cost volatility in the first half of 2024 compared to prior periods. In the first half of 2024, we expanded the purchasing program to include a portion of our chicken buys. Specifically, we shifted a significant volume of our chicken breasts and leg meat purchases from spot buys to contract commitments.

Speaker Change: In Q2, 'twenty 'twenty four we are seeing our seafood margin grow significantly versus same period last year.

Speaker Change: The ongoing improvement in seafood margin helps offset margin impacts in other categories, such as chicken, which experienced significant cost volatility in the first half of 'twenty 'twenty four compared to prior periods.

Speaker Change: In the first half of 'twenty 'twenty four we expanded the purchasing program to include a portion of our chicken buys specifically, we shifted a significant volume of our chicken breast and leg meat purchases from spot buy so contract commitments.

Felix Lin: Unknown Attendee, Xi Lin, Xiao Zhang, Cindy Yao, Hf Fds, Despite experiencing volatility and inflation in chicken prices, we have successfully expanded our margin on a per pound basis compared to the same period last year. This achievement is particularly challenging given our customers' price sensitivity to high volume items like chicken.

Speaker Change: With larger processing plants bypassing brokers.

Speaker Change: Despite experiencing volatility in inflation in chicken prices.

Speaker Change: We have successfully expanded our margin on a per pound basis compared to the same period last year. This achievement is particularly challenging given our customers price sensitivity to high volume items like chicken.

Felix Lin: Our focus remains on driving gross profit dollar growth, which will help us effectively neutralize major volatility in key categories. In the coming months and quarters, we're actively working on expanding the program to include other key product categories, such as grain and cooking oil. With our ongoing plan to implement a new ERP system across all of our distribution centers, we anticipate demonstrating more significant progress beyond 2020. We're also making progress on improvements to our fleet and transportation.

Speaker Change: Our focus remains on driving gross profit dollar growth.

Speaker Change: Which will help us effectively neutralized major volatilities in key categories.

Speaker Change: In the coming months and quarters, we're actively working on expanding the program to include other key product categories, such as grain and cooking oil with.

Speaker Change: With our ongoing plan to implement a new ERP system across all of our distribution centers, we anticipate demonstrating more significant progress beyond 2024.

Speaker Change: We're also making progress on improvements to our fleet and transportation.

Felix Lin: We have implemented a unified fleet telematic system across all of our trucks, enabling us to effectively track and monitor fleet performance on a common platform. This shift allows us to focus on driving operational efficiency. For example, we're actively working to reduce fleet idle times, which will significantly impact our fuel costs over time.

Speaker Change: We have implemented a unified fleet telematics system across all of our trucks, enabling us to effectively track and monitor fleet performance on a common platform.

Speaker Change: This shift allows us to focus on driving operational efficiencies for example.

Felix Lin: This will directly lower our distribution cost to customers. Another key focus area is centralizing our inbound freight program to improve margins from a total cost perspective. Alongside the centralized check-in purchasing program initiated in 2024, we have also consolidated our shipping lanes for those products. This initiative has yielded positive results, and we plan to expand it further. I'm excited to announce that we are making very good progress with our digital transformation, as we recently completed the implementation of our modern ERP solution at one of our California distribution centers. The implementation will help

Speaker Change: We're actively working to reduce fleet idle times, which will significantly impact our few costs overtime. This will directly lower our distribution cost to customers.

Speaker Change: Another key focus area is centralizing, our inbound freight program to improve margins from a total cost perspective.

Speaker Change: Alongside the centralized chicken purchasing program initiating 'twenty 'twenty four we have also consolidated our shipping lanes for those products. This initiative has yielded positive results and we plan to expand that further.

Speaker Change: I am excited to announce that we are making very good progress with our digital transformation as we recently completed implementation of our modern ERP solution at one of our California distribution centers the implementation will help to.

Felix Lin: Unknown Attendee, Xi Lin, Xiao Zhang, Cindy Yao, Hf Fds, This successful ERP rollout marks a milestone in our journey toward greater operational excellence and customer satisfaction. We look forward to applying the insights gained from this process to other distribution centers to ensure a smooth transition and minimize any disruption to operations. We expect to complete implementation at all of our distribution centers by the end of 2024. As I noted earlier, this initiative will yield significant dividends in our effort to expand the centralized purchasing program beyond 2020.

Speaker Change: To streamline our operations improve data accuracy, and hence overall efficiency.

Speaker Change: This successful ERP rollout marks a milestone in our journey toward greater operational excellence and customer satisfaction.

Speaker Change: We look forward to applying the insights gained from this process to other distribution centers to ensure a smooth transition and minimize any disruption to operations.

Speaker Change: We expect to complete implementation at all of our distribution centers by the end of 2024.

Speaker Change: As I noted earlier this initiative will yield significant dividends in our effort to expand our centralized purchasing program beyond 2024.

Felix Lin: Our facility upgrade plans are progressing well. We have recently begun renovating our Charlotte, North Carolina facility, which spans over 100,000 square feet and includes nearly 30,000 square feet of cold storage space. Once operational, this facility is expected to significantly enhance our distribution operations on the East Coast by reducing route links for nearly half our customers in the Southeast market. We anticipate completing the renovation by early 2025. Additionally, we're close to finalizing the lease for a new facility in Atlanta.

Speaker Change: Our facility upgrade plans are progressing well we.

Speaker Change: We have recently begun renovating our Charlotte North Carolina facility, which spans over 100000 square feet and includes nearly 30000 square feet of co storage space. Once operational this facility is expected to significantly enhance our distribution operations on the east coast by reducing route lanes for nearly half.

Speaker Change: Our customers in the southeast market.

Speaker Change: We anticipate completing the renovation by early 2025 <unk>.

Speaker Change: Additionally, we're close to finalizing the lease for our new facility in Atlanta.

Felix Lin: Unknown Attendee, Xi Lin, Xiao Zhang, Cindy Yao, Hf Fds Once the lease is finalized, we expect the new facility to be fully operational by early 2026. However, we will adopt a multi-phase approach to begin utilizing the new facility earlier. We will continue to provide updates in the coming quarters. I am extremely pleased at the way our team has been diligently executing our transformation plan, setting the stage for sustainable long-term growth and delivering value to shareholders. Regarding our M&A growth strategy, we continue to explore M&A opportunities for the geographic expansion of our business, particularly targets that will allow us to realize meaningful synergies.

Speaker Change: Will effectively double our capacity in that market. This added capacity will enable us to drive growth through cross selling and the southeast once the lease is finalized we expect the new facility to be fully operational by early 2026. However, we will adopt a multi phased approach they began utilizing the new facility earlier, we will continue to provide <unk>.

Speaker Change: Dates in the coming quarters.

Speaker Change: I am extremely pleased at the way our team has been diligently executing our transformation plan setting the stage for sustainable long term growth and delivering value to shareholders.

Cindy Yao: Now, over to you, Cindy.

Speaker Change: Regarding our M&A growth strategy, we continue to explore M&A opportunities for geographic expansion of our business, particularly targets that will allow us to realize meaningful synergies now over to you Sandy.

Cindy Yao: Thanks Felix. For the second quarter ended June 30, 2024 compared to the same period in 2023, Net revenue for the second quarter increased 3.4% to $302.3 million from $292.3 million in the prior year quarter. This increase was primarily driven by product cost inflation in the chicken category and improved pricing in seafood. Although partially upset by the $3.1 million loss in revenue resulting from the exit of our chicken processing businesses, gross profit increased by 3.6% to $52.5 million for the quarter, compared to $50.7 million in the prior year quarter.

Sandy: Thanks, Phoenix for the second quarter ended June 32024 versus the same period in 2023.

Speaker Change: Net revenue for the second quarter increased three 4% to $302 3 million from $292 3 million in the prior year quarter.

Sandy: This increase was primarily driven by product cost inflation in the chicken category and improved pricing in seafood, partially offset by the $3 1 million loss in revenue, resulting from the exit of our chicken processing businesses.

Speaker Change: Gross profit increased by three 6% to $52 5 million for the quarter compared to $50 7 million in the prior year quarter.

Cindy Yao: The gross profit margins increased slightly to 17.4% from 17.3%. However, it is important to note that growth margins on wholesale sales are generally lower than those on retail sales due to the large quantities purchased by wholesalers. While we expect wholesale sales to continue to make up less than 5% of our revenue, we do expect to see an uptick in wholesale mix in the short term as we scale our business. This will ultimately benefit the retail business in the long term as retail volume increases. As a result, we expect margin expansion to remain muted in the short term despite improvement in the retail growth margin.

Speaker Change: The gross profit margins increased slightly to 17, 4% from 17, 3%.

Speaker Change: It is important to note that gross margins our wholesale sales are generally lower than those on retail sales due to the large quantities purchased by the wholesalers.

Speaker Change: While we expect our wholesale sales to continue to make up less than 5% of our revenue. We do expect to see an uptick in wholesale mix in the short term as we scale our business.

Speaker Change: This will ultimately benefit the retail business in the long term as the retail volume increases.

Speaker Change: As a result, we.

Speaker Change: Expect margin expansion to remain muted in the short term.

Speaker Change: Despite improvement in retail gross margins.

Cindy Yao: Distribution, selling, and administrative expenses decreased approximately 4.6% to $49.8 million for the second quarter of 2024 from $52.2 million for the second quarter of 2023. The reduced expenses were due primarily to lower professional fees and were partially offset by higher payroll and related labor costs. Distribution, selling, and administrative expenses as a percentage of net revenue decreased to 16.5% from 17.9% in the prior year period, primarily due to increased net revenue and lower professional fees, and was partially offset by increased headcount. I'm pleased that since the matter related to the SEC settlement is fully behind us, our professional fees will now be significantly lower on a go-forward basis, starting in the third quarter.

Speaker Change: Distribution selling and administrative expenses decreased approximately four 6% to 49 8 million for the second quarter of 2024 from $52 2 million for the second quarter of 2023.

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

Speaker Change: Distribution, selling and administrative expenses as a percentage of net revenue decreased to 16, 5% from 17, 9% in the prior year period, primarily due to increase in net revenue and the lower professional fees and it was partially offset by increased the head count.

Speaker Change: <unk>.

Speaker Change: I'm pleased that since the matter related to the SEC settlement is fully behind us our professional fees will now be significantly lower on a go forward basis, starting in the third quarter.

Felix Lin: Operating income for the second quarter of 2024 was $2.6 million, compared to a loss of $1.6 million for the second quarter of 2023. The improvement was driven by lower distribution, selling, and administrative expenses. Total interest expense slightly increased to $3.1 million for the second quarter, compared to $2.8 million in the prior year quarter. Net income improved to $0.2 million for the second quarter compared to a net loss of $1.6 million for the prior year quarter.

Speaker Change: Operating income from the second quarter of 2022.

Speaker Change: $2 6 million compared to a loss of $1 6 million for the second quarter up to 22003.

Speaker Change: The improvement was driven by a lower distribution selling and administrative expenses.

Speaker Change: Total interest expense slightly increased to $3 1 million for the second quarter compared to $2 8 million in the prior year quarter.

Speaker Change: Net income improved to two $0 2 million for the second quarter compared to net loss of $1 6 million for the prior year quarter.

Felix Lin: The improvement was driven by a $4.2 million increase in operating income and the $5.3 million reversal of our lease guarantee liability, partially offset by the $3.9 million SEC settlement and the $2.5 million change in the fair value of our interest rate swap. Adjusted EBITDA increased approximately 26.4% to $10.6 million for the second quarter, compared to $8.4 million for the prior year quarter. The increase in adjusted EBITDA was primarily due to an increase in operating income. At the end of the second quarter, we had available capacity of $29.9 million in additional funds through our line of credit. Back over to you, Felix.

Speaker Change: The improvement was driven by a $4 2 million increase in operating income and the $5 3 million reversal of our <unk> guarantee liability.

Speaker Change: Partially offset by the $3 9 million SEC settlement and the $2 5 million change in the fair value of our interest rate swaps.

Speaker Change: Adjusted EBITDA increased approximately 26, 4% to $10 6 million for the second quarter.

Speaker Change: Compared to $8 4 million for the prior year quarter.

Speaker Change: The increase in adjusted EBITDA was primarily due to the increase in operating income.

Speaker Change: At the end of the second quarter, we had available capacity of $29 9 million in the additional funds through our line of credit.

Speaker Change: Back over to you Felix.

Felix Lin: We're diligently executing our ongoing initiatives, many of which are working well. We're focused on inventory and working capital management, reducing costs in transportation and logistics, and enhancing operational efficiencies in our distribution centers. Every decision we make is guided by our commitment to the long-term growth and success of HF Foods. We're looking at favorable market trends and demographics. Driving the growing demand for Asians, Unknown Attendee, Xi Lin, Xiao Zhang, Cindy Yao, Hf Fds We look forward to speaking to you again on our next call. Thank you.

We are diligently executing our ongoing initiatives many of which are working well, we're focus on inventory and working capital management, reducing costs and transportation and logistics and enhancing operational efficiencies in our distribution centers. Every decision. We made is guided by our commitment to long term growth and success of <unk>.

Speaker Change: <unk>, where favorable market trends and demographics driving.

Speaker Change: Driving the growing demand for Asian, food, we're well positioned to capitalize on this opportunity our robust infrastructure industry expertise.

Speaker Change: And extensive experience equipped buses support and sustainable growth.

Speaker Change: Look forward to speaking to you again on our next call. Thank you.