HF Foods Group Inc. Common Stock 2026 Q2 Earnings Call

Please proceed. Hello, everyone. Welcome to HF Foods Group's second quarter 2026 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 a number of known and unknown risks and uncertainties, including statements regarding our previously announced agreement to acquire Searay Foods and the timing, terms, and anticipated benefits of that transaction. If you refer to HF Foods' earnings release, the Searay acquisition press 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 trends of the business and have included in the earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. Now, I will turn the call over to Felix.

Hello, everyone. Welcome to HF Foods' second quarter 2026 earnings call. I'll provide a business update, and Paul will speak to our second quarter financial results. Then we will open up the line for Q&A. We continued to build momentum in the second quarter, even as tariff pressure, softer foot traffic, and rising fuel costs continued to weigh on the industry. Net revenue increased 2.8% year-over-year to $323.8 million, our highest-ever quarterly revenue. Gross profit was essentially flat at $55 million for the quarter. Adjusted EBITDA was $13.6 million, down 2% year-over-year, representing a 4.2% margin compared to 4.4% in the prior year quarter.

These results are especially impressive on a year-over-year basis, given that last year's second quarter benefited from low-cost inventory positions and better pricing, which lifted margins in the second quarter of 2025. We continued to make progress on our long-term transformation plan this quarter, including our sales operations, digital infrastructure, and facilities upgrades. We remain confident these investments are building a stronger foundation for sustainable growth, even as we continue to navigate some near-term pressure from rising fuel costs, which we are actively managing. The clearest proof point of our strategy came on July 17th, when we entered into a definitive agreement to acquire Searay Foods, a leading Canadian importer and distributor of ethnic and specialty frozen seafood based in Richmond, British Columbia. It's our first transaction outside the U.S. and extends our M&A playbook into a new geography.

Searay brings six proprietary brands, including Searay Foods, Thai Best, Pinoy's Best, Smart Fish, Diamond Shrimp, and Gold Label into our seafood category, which already makes up about 36% of our net revenue. Searay has grown revenue at roughly 15% a year since 2019, with EBITDA margins in the mid-teens and approximately 5x Searay's 2025 adjusted EBITDA. We expect the transaction to be accretive to both margins and EPS from close, supporting the consolidated adjusted EBITDA margin target of 4.5% to 5% plus we've laid out for the next three to five years. We expect to close in the third quarter, subject to customary conditions and regulatory approval, and Searay's existing management team, led by incoming CEO Derek Na, will continue running the business day-to-day. Consideration is a mix of cash and HF Foods stock and will disclose the final split at closing.

Once closed, Searay gives us a platform to grow in Canada. Searay's business carries a margin profile well above our current company, and it becomes a meaningful part of our growth story in the market for years to come. Beyond Searay, M&A remains a core pillar of our growth strategy. HF Foods is the only scaled food service provider in the Asian specialty market in the U.S., and we believe we are the strategic acquirer of choice within our space. We are focused on expanding our geographic footprint in high-potential markets, capturing operational synergies, broadening our customer base, and enhancing our product and service capabilities. We remain disciplined but optimistic about additional M&A opportunities in 2026 and beyond and are actively evaluating opportunities from potential sellers who understand our unique position.

We believe our proven ability to successfully navigate the tariff 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. The $50 billion addressable market we've talked about historically reflects the U.S. alone, and with Searay now giving us a foothold in Canada our total opportunity is even larger. 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 than HF Foods to capture this opportunity in the coming years. Now, Paul, our CFO, will walk you through more details of our financial performance for the quarter.

Thanks, Felix. I will now review our results for the quarter ended June 30, 2026 versus the same period in 2025. Net revenue for the quarter increased 2.8%, or $8.9 million, to $323.8 million from $314.9 million in the prior year quarter. The increase was primarily due to volume growth and improved pricing in seafood, followed by volume growth in commodity, partially offset by price decrease in meat poultry. Gross profit was $55 million for the quarter, essentially flat compared to $55.1 million in the prior year quarter. Gross profit margin decreased to 17% for the quarter, compared to 17.5% in the prior year quarter. Margin was impacted by incremental tariffs that took effect beginning Q3 of 2025, partially offset by some IEEPA tariff refunds received during the quarter. Distribution, selling, and administrative expense, or DS&A, increased $1.2 million or 2.4% to $52.2 million for the quarter.

The increase was driven primarily by higher auto and truck expense, reflecting elevated incremental fuel costs of approximately $1.4 million year-over-year, together with higher insurance and professional service expense, partially offset by lower personnel expense as a result of our transformation initiatives. DS&A as a percentage of net revenue was 16.1% for the quarter compared to 16.2% in the prior year quarter. Adjusted EBITDA decreased 2% to $13.6 million for the quarter, compared to $13.8 million in the prior year quarter. Adjusted EBITDA margin was 4.2% compared to 4.4% in the prior year quarter. Total interest expense was $2.9 million for the quarter compared to $2.8 million in the prior year quarter. The increase reflects a higher average daily line of credit balance of $12.1 million to $65.7 million, partially offset by lower average term loan balance and modestly lower floating rates.

Net income attributable to HF Foods was $2.6 million for the quarter compared to $1.2 million in the prior year quarter. The improvement was primarily driven by an employee retention credit of $1.8 million, which includes interest, IEEPA tariff refund of approximately $1.1 million, and a $1.4 million favorable year-over-year change in the fair value of our interest rate swap contracts. These items were partially offset by a $1.3 million decrease in income from operations and a $0.7 million year-over-year change in net income attributable to non-controlling interests. Adjusted net income attributable to HF Foods was $6.4 million for the quarter and essentially flat compared to the prior year quarter. Earnings per share improved to $0.05 compared to $0.02 in the prior year quarter. Adjusted earnings per share was $0.12 for the quarter and flat compared to the prior year quarter. Now on CapEx. We spent approximately $20.3 million for the first six months into June 30, 2026, and I want to give a little color on that.

The spend is driven principally by the $12.4 million purchase of our previously leased Chicago distribution center, along with $2.8 million of solar investment, which is expected to lower operating costs, $2.1 million of capacity expansion, and $1.4 million of fleet upgrades. Recurring maintenance expenditures were approximately $1.7 million. On the solar investment, we will benefit from an investment tax credit refund that will reduce our overall investment by 40%. Turning to the balance sheet. At the quarter end on July 29th, we closed an amendment that refinanced and upsized our credit facility. Our bank group is JPMorgan Chase as administrative agent and the lender together with Fifth Third Bank and TD Bank, which joined the facility in connection with this transaction.

We increased our asset base revolving commitments from $125 million to $140 million and refinanced our existing term loans, which had an outstanding balance of approximately $95 million into term loans totaling $125 million. The revolving facility now matures in July 2031 and the term loan in July 2036. The transaction gives us meaningful incremental liquidity to fund our growth initiatives for both the Searay acquisition and our ongoing facilities investments. Because the refinancing closed after quarter end, it is not reflected in this quarter's financials. Full terms are available on the Form 8-K we filed on July 31, and I want to thank our banking partners for their commitment in helping us drive the growth of HF Foods. Now to the transaction we announced on July 23. On July 17, we signed a definitive agreement to acquire Searay Foods.