Ladies and gentlemen, greetings, and welcome to the HF Foods Group Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jon DeDomenico, Vice President of Investor Relations.

Hello, everyone. Welcome to HF Foods Group's Second Quarter 2025 Earnings Conference Call. Joining me on today's call are Felix Lin, the company's President and Chief Executive Officer; and Cindy Yao, 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 several known and unknown risks and uncertainties. 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 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. We believe that these measures provide investors with a useful perspective on the underlying growth trends of the business and as 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 2025 Earnings Call. I'll provide a business update, and Cindy will speak to our second quarter financial results. Then we will open up the line for Q&A. I am pleased to announce that we continue our momentum in the second quarter of 2025 and are reporting the highest net revenue and gross profit ever recorded at HF. Net revenue increased 4.1% year-over-year to $314.9 million and gross profit increased 5.1% to $55.1 million. Also notably, adjusted EBITDA increased 31.1% year-over-year to $13.8 million. Our results reflect our continued disciplined execution against our strategic initiatives, even amid a dynamic and uncertain macro environment characterized by tariffs, persistent inflationary pressures, and shifts in consumer spending behaviors. These results are a testament to the resilience of our business model and the strength of our operational focus. Our results have been impressive despite the current business environment, including the implications of tariffs and the impact of immigration concerns creating continued economic headwinds. In response to the evolving tariff landscape, we have been actively diversifying our supplier base and exploring alternative sourcing strategies to ensure continuity and cost-effectiveness in our supply chain. Our strategic inventory management and proactive price increases allowed us to effectively navigate the changing environment, delivering solid net revenue growth and significant adjusted EBITDA growth. We're encouraged by our strong performance in the second quarter and the solid foundation we've built. Consistent with what the broader industry has been experiencing, we have seen lower exit velocity and foot traffic towards the end of Q2 and continue into the beginning of Q3 as consumers pull back from spending amid economic uncertainty. There will also be natural seasonality pullback associated with Q3 compared to Q2. That said, we remain extremely confident in our long-term growth strategy. Hence, we are committed to our capital investment and growing our capacity. We aim to continue the momentum we built for the rest of the year. As discussed on our last call, our digital transformation initiative reached a major milestone on May 1, with the successful deployment of a new, modern ERP application across our entire network. All of our locations are now operating on a single, unified ERP platform that will help us to achieve breakthrough levels of efficiency, visibility, and control across our operations, unlocking the full potential of our centralized purchasing capabilities over time. I am pleased to report that the ERP system has been running as planned and without issue. The next phase of this program is focused on rationalizing our sales force. With our operations unified on a single system, we now plan to restructure our sales operation, which will reduce costs over time and further strengthen our competitive positioning. Our strategic facility enhancement initiatives continue to advance across multiple regions. We're nearing completion of renovations at our Charlotte distribution center and continue to make steady progress on our Atlanta state-of-the-art facility project, which we expect will create meaningful organic growth opportunities through expanded cross-selling capabilities. The cold-storage capacity expansion in Atlanta will double our capacity in the region and enable us to significantly increase frozen seafood sales to our existing customer base along the eastern seaboard, significantly expanding our southeast presence. These exciting infrastructure investments reflect our ongoing commitment to optimizing our distribution network and creating a stronger foundation for sustainable growth. 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 United States, 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 M&A opportunities in 2025 and beyond. We're actively evaluating opportunities, and 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.

Thanks, Felix. I will now review our results for the second quarter ended June 30, 2025, versus the same period in 2024. Net revenue for the second quarter increased 4.1% to $314.9 million from $302.3 million in the prior year quarter. The increase was primarily attributable to volume increases and improved pricing in our meat, poultry, and seafood categories. Gross profit increased by 5.1% to $55.1 million for the quarter compared to $52.5 million in the prior year quarter. The gross profit margin increased 13 basis points to 17.5%. The increase was primarily attributable to an increase in volume and improved pricing during the quarter. Distribution, selling, and administrative expenses increased by $1.2 million to $51 million for the second quarter, driven by volume growth. DSA expenses as a percentage of net revenue decreased from 16.5% in the prior year to 16.2% for the 3 months ended June 30, 2025, primarily due to an increase in net revenue and lower professional fees, partially offset by increased payroll, rental, and other expenses. Operating income for the second quarter of 2025 was $4.1 million, up 56.9% compared with the prior year quarter. The increase in income was driven by the increase in net revenue and gross profit, partially offset by the increase in distribution, selling, and administrative expenses. Adjusted EBITDA increased 31.1% to $13.8 million for the second quarter of 2025 compared to $10.6 million in the prior year quarter. Total interest expense decreased slightly to $2.8 million for the second quarter of 2025 compared to $3.1 million in the prior year quarter. Net income increased 117% to $0.5 million compared to the second quarter of 2024. The increase in net income was primarily driven by the increase in net revenue and managing certain DSA costs. GAAP diluted EPS increased to $0.02 compared to $0.00 in the prior year period. Non-GAAP diluted EPS increased to $0.12 compared to $0.04 in the prior year period. The record net revenue and gross profit results demonstrate the effectiveness of our strategic initiatives and operational discipline. These results provide a solid foundation as we continue executing our growth strategy for the remainder of 2025. I will now hand it back over to Felix for closing remarks.

As we look ahead to the balance of 2025 and beyond, I want to emphasize our commitment to executing the comprehensive transformation initiatives that are reshaping HF Foods. 2025 is a year of strategic investment for HF, and the investments we're making in our facilities, digital infrastructure, and operations will establish a strong foundation for our next phase of growth. While short-term uncertainties persist, we remain focused on our long-term strategic objectives. Our investments in digital transformation and infrastructure are strategically designed to drive organic growth through cross-selling opportunities while positioning us to complement this expansion with targeted M&A initiatives. Our key competitive advantages stem from the growing demand for authentic Asian cuisine and our unmatched position as the leading nationwide Asian specialty distributor. We are methodically building the infrastructure, systems, and capabilities needed to fully capitalize on these strategic advantages. As we move forward, we'll continue to identify and implement additional efficiency measures while maintaining our commitment to service excellence and sustainable growth. Thank you for your continued support as we execute our strategic transformation. We look forward to sharing our progress with you on our next call. I'll now hand over to the operator for a live Q&A.

Our first question comes from Bill Kirk with ROTH Capital Partners.

Felix, you talked a little bit about lower exit velocity and foot traffic at the end of Q2 and into Q3. Those sound like industry-wide comments to me. So maybe can you give us a sense for how you think Asian specialty as a subsegment fared in that tougher backdrop? And more specifically, how do you think your market share is faring in today's environment?

Bill, I appreciate the question. One aspect of our industry that is a bit unique, which I mentioned in the earnings report, is that we've observed a decline in foot traffic, particularly towards the end of Q2 and into Q3. This trend seems to be specific to certain markets with a significant agricultural presence. If we examine our customer base, 99% of our clients are independently operated restaurants, with a good mix of takeouts, dine-ins, and buffets. In markets where foot traffic has been affected by recent changes in immigration policy, we've noticed a decline in buffet traffic, particularly impacting those buffet restaurants that rely heavily on frozen seafood products. I believe this has a larger effect on traffic compared to any tariff-related issues that the broader industry might be experiencing recently. Does that make sense?

Bill, does that answer your question?

It does. I was going to follow up. There's a handful of strategic investment projects that you're targeting for growth, including the possibility of M&A. How would you prioritize those projects? And maybe which can be funded through cash generation versus needing to raise outside capital for the project?

Yes. Look, I mean, we have a parallel strategy going on, right? One, from an organic growth standpoint, all the investment that's going in, it's about addressing our capacity constraints. So the investment that's going in Charlotte, that's going on in Atlanta and then beyond that in other territories because we see there's a tremendous amount of cross-selling opportunity for us. It's related to the existing accounts that we currently service, but where our customers they don't have access to our full book of products just given some of the capacity constraints. So we think there's a significant opportunity over the next 3 to 5 years, probably in the range of $200 million to $300 million of organic growth opportunity ahead of us. From an M&A standpoint, we're really prioritizing these first-generation operators that are looking to exit. They're much smaller businesses. And perhaps it's in markets where we already have a significant presence. So tuck-in M&A, very minimal integration effort that can help us from a share-of-the-wallet expansion standpoint and also add to the margin expansion initiative that have going on. So I think both of this is going to require a significant amount of capital. For the most part, I think we'll be able to fund the majority of it through our own cash flow. But as we look at larger M&A targets, I think this is where we have to think about a different capital structure and perhaps get a little bit more active. So we're kind of working through and thinking about the various alternatives here from a capital standpoint.

Our next question comes from Daniel Harriman with Sidoti & Company.

Congrats on the quarter, all the more impressive considering the backdrop. I just had two questions this afternoon. First, understanding that you guys don't guide for the full year, looking out through 2025 and then into '26. Can you just help us think about your growth expectations for '25 considering what you said earlier about foot traffic? And then similarly, as you think about organic growth and we think about the long-term potential of the company, what do you think a good growth rate organically is for you guys for the next 3 to 5 years? And maybe compare that a little bit to your M&A strategy.

Thank you for your question, Daniel. Looking ahead to 2025, we are coming off a strong Q4 in 2024, and we've continued that momentum into the first and now the second quarter, despite some macro uncertainties such as the potential impact of tariffs and reduced foot traffic. In Q1, we achieved about 1% revenue growth, and in Q2, we saw a little over 4%. For the full year, we're likely to trend towards the lower single digits, around 2% to 2.5%, which aligns with the industry average. However, we anticipate more uncertainties in the second half of 2025 as consumers are tightening their spending. Nonetheless, we remain focused on our long-term strategy of investing in our business and expanding our capacity. I believe that over the next 3 to 5 years, there is an organic growth opportunity of $200 million to $300 million within our existing accounts, provided we continue to invest adequately. When you factor in potential M&A opportunities, the outlook for HF remains very promising.

That's really helpful. Congrats again.

Thank you.

Our next question comes from Todd Brooks with Benchmark Company.

Congrats on a record quarter. I wanted to lead off. Felix, you've touched on tariffs a couple of times in the discussion. I know it's been a very fluid situation. Are you getting any better sense of what the tariff impacts might look like that are having to be passed through to customers? So trying to marry maybe potential cost pressures that they're facing and a slight decline in traffic, especially for those buffet customers to understand what sort of pressure the base might be under.

Yes. I mean what we're seeing in the second quarter, it's really this kind of initial reaction, right? A lot of our customers are seeing. And I think previously, I talked about we do a really good job in terms of proactively having dialogues with our suppliers and with our customers, educating them on both fronts in terms of what's happening here from a market standpoint. One of the advantages that we have as a business and certainly what differentiates us from a broader industry is we do not have a significant amount of commitments with our suppliers. So everything happens from a spot market standpoint. So we buy and sell product at spot. So we spend a lot of resources trying to make sure we have the right inventory level and the right type of inventory as we go through knowing that tariff policy is going to change given this administration's kind of preview. So second quarter, we saw a lot of strategic pricing that have flowed through, which significantly picked up on the volume side and added to the performance. As we kind of look ahead here a little bit, I think this is where you're going to see some of this tariff impact start coming in. But as a business, we're not necessarily too concerned about tariff because again, just given the specialty business that we're in, some of this product that we're looking at, there's not a whole lot of alternatives to it. But the foot traffic is one that probably impacts our business more than anything else because if people are not going out to restaurants and spending the money in terms of dining out, then regardless of what the cost is, that's going to have a bigger impact in terms of volume in the business. So we're seeing a little bit of that, again, towards the end of Q2 and the beginning of Q3 and perhaps things are going to change here a little bit as we get into the rest of Q3. There is still a bit of uncertainty. If you look at the amount of frozen seafood business that we do, there's still the question mark in terms of what the tariff is going to be for India. We do buy a good bit of frozen seafood, shrimp specifically from India. So it's currently set at 25%, potentially going to 50%, but it's subject to change. So we're still monitoring that situation very closely. But again, we're doing a fairly good job in terms of managing our inventory. I think at the end of Q2, our inventory level is probably at its highest level in a very, very long time, and it's all due to strategic planning in terms of what might happen in the second half of the year.

That's great. And you talked about some strategic pricing actions. Can you decompose the 4% revenue growth between price and volume growth?

We just implemented a brand-new system. ERP started a complete wrap up here on May 1. So it's going to take a little bit of time, at least a year or so to kind of digest, everyone getting the same platform. But I will say the majority of the increase is perhaps due to better pricing, which also drove some volume increases because naturally, if people are concerned about tariff impact, there's probably a good bit of pull forward pre-buys here. But again, we're not talking about a significant amount that's going to change quarter-to-quarter just given most of our restaurant customers have very limited real estate spaces. So at most, it's probably a week or two pull forward. But again, I think a good bit of is tied down to pricing itself.

Okay. Great. And the last one, if I can. You talked about the ERP implementation. Congrats on getting that in the rear view, obviously. Wondering what the lag is between implementation and efficiency as you're starting to think about margin planning into '26? And I know you talked about the first step being maybe some sales force consolidation. But kind of what's the path now to start extracting efficiencies? And have you sized what the margin benefit from ERP could be for '26?

Yes. Over the past 12 to 18 months, we've dedicated significant effort to the frozen seafood category. This year, we plan to expand into other high-volume categories like sugar and rice, as well as some specialty products. I believe there are opportunities in these areas. However, it's challenging to predict the exact margin expansion percentage since we operate on a spot market basis, unlike larger broadliners that have long-term contracts with suppliers or customers, which give them more stability. Reviewing our results from the past 6 or 7 quarters, a key metric we've focused on is the growth in gross profit dollars, which has shown good improvement. Our goal over the next 3 to 5 years is to achieve a 5% EBITDA margin, whether through cross-selling, boosting organic sales, or mergers and acquisitions.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Felix Lin for closing comments.

So thanks, everyone, for joining us today. We're obviously very pleased with our latest quarterly results as we continue to build positive momentum. We're absolutely laser-focused on executing our long-term strategic plan and continue to deliver value to our shareholders over time. If you have any follow-up questions, please feel free to reach out to our Investor Relations team. And thank you very much for your time today. We look forward to talking to you guys again at our next quarterly call.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.