HF Foods Group (HFFG) Q2 2026 earnings call transcript

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 C-Ray Foods and the timing, terms, and anticipated benefits of that transaction. If you refer to HF Foods earnings release, the C-Ray 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 continue to build momentum in the second quarter, even as tariff pressure, softer foot traffic, and rising fuel costs continue 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. The 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 continue 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 17, when we entered into a definitive agreement to acquire C-Ray 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 United States and extends our M&A playbook into a new geography.

Sea Ray brings six proprietary brands, including Sea Ray Foods, High 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. C-Rate has grown revenue at roughly 15% a year since 2019, with EBITDA margins in the mid-teens. In approximately 5x C-Rate's 2025 adjusted EBITDA, we expect the transaction to be accretive to both margins and EPS from close, supporting the consolidated adjust 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 C-Rate's existing management team, led by incoming CEO Derek Knott, will continue running the business day-to-day. Consideration is a mix of cash and HF Foodstock, and we'll disclose the final split at closing. Once closed, C-Ray gives us a platform to grow in Canada. C-Ray'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 C-Ray, M&A remains a core pillar of our growth strategy. HF Foods is the only scale food service provider in the Asian specialty market in the United States, and we believe we are the strategic acquire 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 terror landscape positions us uniquely to identify and execute attractive tuck acquisition that will benefit from our operational expertise and skill I want to emphasize the significant runway ahead of us. The $50 billion adjustable market we've talked about historically reflects the U. S. alone, and we'll see right 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 in a better position 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 and 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 DSNA, 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.

DSNA is a percentage of net revenue with 16.1% of 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, i. e. EPA 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 debt 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, after 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, and TD Bank, which joined the facility in connection with this transaction. We increased our asset-based 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 C-Ray acquisition and our ongoing facilities investments. Because the refinancing closed at the quarter end, it is not reflected in this quarter's financials. Full terms are available in the Form 8K 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 for the transaction we announced on July 23rd. On July 17th, we signed a definitive agreement to acquire C-Ray Foods. This is the first acquisition outside the United States in HF Foods history and is the clearest evidence yet of what we mean when we say we are the acquirer of choice in this category. The transaction is expected to close in August 2026 and is the most consequential thing we have done this year. The aggregate purchase price is CAD million or approximately million U with the sellers also eligible for contingent earn payments tied to specific EBITDA targets over a two to three period following the closing Consideration is a mix of cash and HF Foods common stock which can be reviewed in the Form 8K we filed announcing the transaction We expect to close no later than August 31st, subject to customary closing conditions and the receipt of any required regulatory approvals.

Now the economics, which are what makes this acquisition compelling. The base purchase price represents approximately five times CRA's baseline adjusted EBITDA of roughly CAD $9.6 million, or approximately $7 million U. S. CRA runs adjusted EBITDA margins in the mid-teens against our consolidated adjusted EBITDA margin of 4.2% this quarter. So this is a business that is margin accretive to the platform from day one and moves us towards the 4.5% to 5% plus consolidated target we have laid out. We are adding a higher margin business at a mid-single-digit multiple, and that is exactly the discipline we told you we would bring to M&A.

Let me close by putting the quarter in a broader context. This is our sixth consecutive quarter of year-over-year net revenue growth. And at $323.8 million, it is the highest quarterly net revenue in the company's history. On a trailing 12-month basis, we are now at approximately $1.25 billion, and all of that growth has been driven by organic volume increase and better pricing.

So, we entered the second half with three things in place we did not have a year ago. First, a refinance and upsized credit facility with revolving commitments at $140 million, term loans turned out to 2036, and materially more liquidity to deploy.

Second, a signed definitive agreement for our first acquisition outside the United States at an attractive multiple with a margin profile well above our own. And third, a transformation program that is now largely built rather than under construction, which lets us shift from implementation to optimization with purchasing discipline, route and warehouse efficiency, cross-selling opportunities, and tighter cost control as fuel and other input costs remain elevated. We will stay disciplined on capital deployment and selective on the tucking opportunities that strengthen the platform.

The balance sheet capacity we just created is there to support that, and C-Ray is the first demonstration of what we intend to do with it. With that, I'll turn it back to Felix.

Thanks, Paul. Before we move to Q&A, I want to spend a moment on why C-Ray is such a significant milestone for us. C-Ray has spent 25 years building its business in Canada, and we're proud to have them join HF Foods. Just as C-Ray gives us a platform to grow in Canada, C-Ray has recently established its own operations in the U. S. , including a planned direct import operation in Los Angeles.

And we believe our distribution network, sourcing scale, and West Coast infrastructure can help accelerate that. C-Ray also brings a customer base that includes retail, wholesale, and restaurants. We talked for a long time about extending our platform beyond the United States, and C-Ray is the first step in that long-state strategy.

Now our focus turns to executing well, working closely with the C-Ray team on a smooth transition, and beginning to act on the cross-selling and supply chain opportunities as the deal moves toward closing in the third quarter. Alongside that, we'll keep advancing the facilities and systems that are already underway, and we'll stay disciplined as we evaluate further opportunities that strengthen the platform. Thank you for your continued support. We look forward to updating you on our progress next quarter. I'll now turn it over to the operator for Q&A.

Yeah, hi, Aaron. It's Felix. Specifically from a customer mix standpoint, we see C-Ray as a great platform to potentially open up new channels here for us. Historically, for the U. S. market, HF, our business has been focused on independent restaurants. For C-Ray, independent restaurants in Vancouver, in the western part of the Canadian market, it's actually a smaller part of their mix. You know, they have a pretty healthy mix of retail and also wholesale business channels that goes into Asian specialty grocery stores. And with the margin that we're seeing, we see that as a huge opportunity for us for the future. So that's one thing that, you know, in addition to the margin profile, that's very exciting to us.

Yeah you know one of the things that we talked about for the last couple earnings call is we focusing on how do we expand our gross profit dollar especially you know coming in 2026 the focus has been trying to conquer new market shares through our expansion in the southeast with newer and higher amount of seafood mix that coming into the business So I think, you know, obviously one thing that was not expected in 2026 was the rising fuel costs. So we expect volumism to continue to tick up to offset some of the margin and conquest accounts-related margin concession that we'll be giving. But with C-Ray, their gross profit margin is north of 20%. So I think over time, especially in Q4, that's going to be a nice mix of business coming in for the fourth quarter of the year for us.

Hi, Daniel. So let's address Southeast first, right? And again, you know, Southeast, yes, we have enjoyed a little bit of additional capacity here in the first half of the year. And one thing to note is that, you know, we're – Our additional freezer capacity likely won't be ready until later in the year or even into 2027, but we have seen a meaningful volume increase with respect to seafood, so volume has grown in that category.

Charlotte is still going through inspection at the moment, so all the renovation is 100% completed. So hopefully within the next week or two, Charlotte can be operational. You know, in Charlotte itself, specifically, it's more of an efficiency play with us being able to cut our distribution routes for our Great Wall Virginia business that's currently based on Richmond, Virginia. So probably going to be in Q4 or so, we'll just see some DSNA improvement, you know, coming from Charlotte.

With the Midwest, we are doing some minor capacity improvement. So, again, likely it's going to be toward the end of 2026 and then 2027 before we see some meaningful capacity expansion opportunity there.

Yeah, I mean, not specifically to World Cup. Now, there is a seasonality to our business, right? I mean, Q2 generally is one of our higher kind of foot traffic volume quarter, and then as you get into Q3, You know, with kids going out of school and summer vacation happening, then the foot traffic typically kind of slowed down a little bit. But we have seen a pretty meaningful kind of improvement on takeout that we've seen, you know, historically in Q2, offsetting by some continued foot traffic noises that we're seeing on the buffet and dining restaurants. So nothing too different versus the prior year. So it's kind of normal seasonality that we're seeing in 2026 so far.

You know, we've been actively going on the offense, right? Historically, we've really benefited from, you know, business coming to us just over nearly three decades in business. So for the first time, you know, we've been running a lot of promotional campaigns with our West Coast business, working with some key vendors to partner, kind of expand their brand and their awareness in the market. And then specifically in the Southeast, it is a heavy push on seafood. So I think, you know, specifically in Q2, we've seen some meaningful volume gains on the seafood side, which drove some of the gross profit dollar improvement that's kind of offsetting some of the pricing pressure that we're seeing, both because of the rising diesel cost and from a conquest standpoint.

So I expect, you know, the rest of the year in 2026, we're still going to be in this kind of conquest mode before, you know, margin and everything else gets normalized properly in 27 and beyond.

So again, I want to thank everyone for your continued support of HF Foods. It's an exciting time for us as we continue to execute our strategy. We look forward to closing the C-Rate acquisition in the coming weeks, which will be a significant milestone for us. We'll update you all on the progress of integration on our next earnings call. Thank you for your time.