HF Foods Group Inc. (HFFG) Q3 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the HF Foods Group. Third Quarter 26 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Anna Kate Heller, ICR. Anna Kate, you may begin.

Hello, everyone. Welcome to HF Foods Group's third quarter 26 earnings conference call. Joining me on today's call are Felix Lin, the company's president and chief Executive Officer and Paul Magari, 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 recently completed acquisition of Sea Ray Foods, Inc. The integration of that business and the anticipated benefits of the transaction. If you refer to HF Foods Group's 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, 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 Xi Lin.

Thank you, Christine, and good afternoon, everyone. I will start with a business update, and Paul will speak to our third quarter financial results. Then we will open up the line for Q&A. Our third quarter delivered solid top line growth. Net revenue increased 4.1% year over year to $319.6 million making our seventh consecutive quarter of year over year net revenue growth. Driven primarily by volume growth in seafood along with pricing improvement in produce, and commodity. Gross profit increased 5.9% to $53.4 million. And gross margin expanded to 16.7% from 16.4%. Adjusted EBITDA was $11 million compared to $11.7 million in the prior year. Our bottom line was held back this quarter primarily by fuel. Industry wide fuel price inflation caused a significant year over year increase in our auto and truck expense. We partially offset that with operating efficiencies from our transformation work and we have implemented fuel surcharges across our customer base to share a portion of this burden with our customers. The foundation of our transformation program is now largely built. With investments made in our sales operations, digital infrastructure and facilities, Now our focus has shifted from implementation to optimization. Including route and warehouse efficiency, purchasing discipline. Cross-selling across the Southeast and Midwest remains an important opportunity. But it is 1 we are building out over the next 3 to 5 years paced by the capacity and capital we put behind. We remain confident these investments are building a stronger foundation for sustainable profitable growth even as we continue to navigate some near term pressure from elevated fuel costs. Regarding facilities, our Charlotte location is largely ready. But we are still awaiting final permitting from local authorities. That process has taken longer than we anticipated, and is largely outside of our control. We anticipate resolution of this process by the end of this calendar year. The biggest milestone of the quarter was closing our acquisition of Sea Ray Foods on August 31. A leading Canadian importer and distributor of ethnic and specialty frozen seafood. Based in Richmond, British Columbia. it is our first acquisition outside the United States and extends our proven M&A playbook into a new geography. Sea Ray brings 6 proprietary brands, including Sea Ray, Ocean's Best, Hanoi's Best, SmartFish, Diamond Shrimp, and Go Label into our seafood category. Which already makes up about 35% of our net revenue. It has been just over 2 months since we closed, and we are approaching this integration deliberately. Our first priority was continuity. And on that point, the transition has been smooth. Sea Ray's management team led by Derek Ng continues to run the business day-to-day. Customers and suppliers have stayed with us. And Sea Ray's results are not part of our reporting. We will share more specific milestones as we hit them. In its first month under ownership, Sea Ray contributed $4.2 million on net revenue and $600 thousand of adjusted EBITDA. That is an adjusted EBITDA margin in the mid teens consistent with the profile we described in the announcement and well above our consolidated margin. The fourth quarter will be our first full quarter with Sea Ray. With Sea Ray closed, M&A remains a core pillar of our growth strategy. You have heard us describe HF Foods as the only scale food service provider in the Asian specialty market in The United States. And as an acquirer of choice in our space, Sea Ray is that strategy in action a higher margin business that chose to join the platform for the scale and operating expertise we bring. Our criteria have not changed. We look to expand our footprint in high potential markets. Capture operational synergies broaden our customer base, and enhance our product and service capabilities. Just as important, our first priority now is integrating Sea Ray well. We will pursue additional opportunities only at the right price with the right fit, and where we have the capacity to integrate them. Within that discipline, we continue to evaluate opportunities in 2027 and beyond. Sea Ray also changes the landscape of our opportunity. It gives us our first platform outside The United States. In a Canadian market where Sea Ray has spent 25 years building its brand and relationship. It adds proprietary brands and a higher margin business to our seafood category. And it brings retail and wholesale customers alongside our core restaurant base. At over $1.2 billion in annual net revenue. We are now the largest and leading player in the Asian specialty space. And Sea Ray gives us new avenues to build on that position. No 1, whether larger or smaller competitors, is better positioned than HF Foods to capture this opportunity in the coming years. With that, I will turn the call over to Paul to walk you through our financial performance for the quarter in more detail.

Thanks, Xi. I will now review our results for the quarter ended September 30, 2026, versus the same period in 2025. Let me start with the bottom line. Because that is where the quarter fell short. We grew net revenue for the seventh consecutive quarter expanded gross margin and generated strong cash flow from operations. Our profitability was not where we wanted it to be. 2 things drove that. Fuel and a concentration of nonrecurring costs tied to the refinancing of our credit facility and the Sea Ray acquisition. I will walk through both along with what we are doing about them. Net revenue for the quarter increased 4.1% or $12.6 million to $319.6 million. From $307 million in the prior year quarter. The increase was primarily due to volume growth in seafood and pricing improvement in produce and commodity, partially offset by price deflation in meat and poultry, specifically chicken. Net revenue also included $4.2 million from Sea Ray, reflecting 1 month of contribution following the close of the acquisition on August 31. Gross profit increased $3 million or 5.9% to $53.4 million for the quarter compared to $50.4 million in the prior year quarter. Gross profit margin increased 16.7% for the quarter compared to 16.4% in the prior year quarter. The increase was primarily driven by volume growth in seafood and the higher margin contribution from Sea Ray, both of which we expect to carry forward, as well as tariff refunds received during the quarter. Distribution selling and administrative expenses or DS&A increased $5.9 million or 11.9% to $55.2 million for the quarter and were 17.3% of net revenue compared to 16.1% in the prior year quarter. I would split that increase into 2 pieces. More than half of it was professional fees tied to nonrecurring events, the amendment and upsizing of our revolving credit facility, the refinancing of our property portfolio, the Sea Ray acquisition, and other legal matters. Those costs are excluded from adjusted EBITDA, and the transaction related portion is largely behind us. The rest was primarily due to auto and truck expense reflecting elevated fuel costs, and higher truck lease expense. Partially offset by lower repair and maintenance costs from the investments we made into a newer fleet. Felix touched on our fuel surcharge program. Like much of the industry, we have responded to higher fuel costs, with the surcharge across our customer base. it is a partial recovery by design, and we will continue to manage it actively as diesel prices move so that it helps offset fuel cost over time while keeping our pricing competitive. Adjusted EBITDA decreased 6.3% to $11 million for the quarter compared to $11.7 million in the prior year quarter. And included $600 thousand from 1 month of contribution from Sea Ray. Adjusted EBITDA margin was 3.4% compared to 3.8% in the prior year quarter. For the first 9 months, adjusted EBITDA was $34.7 million down less than 2% from last year despite the fuel headwind. Fuel headwinds in the quarter and year to date were approximately 1.4 million and $3.2 million, respectively. Total interest expense was $3.4 million for the quarter compared to $2.9 million in the prior year quarter. The increase reflects the higher term loan balance following our July refinancing partially offset by the mortgage debt we repaid as part of that transaction. Net loss attributable to HF Foods was a loss of $4.2 million for the quarter compared to a loss of $1.1 million in the prior year quarter. The increase of $3.1 million was primarily driven by a $2.9 million decrease in income from operations and a $900 thousand unfavorable change in income taxes partially offset by a $900 thousand favorable year-over-year change in the fair value of our interest rate swaps. Adjusted net income attributable to HF Foods was $2.1 million for the quarter compared to $4.3 million in the prior year quarter. Loss per share was $0.08 for the quarter compared to a loss of $0.02 per share in the prior year quarter. Adjusted net income per share was $0.04 per quarter compared to $0.08 in the prior year quarter. Now on CapEx. We spent approximately $22.3 million for the 9 months ended September 30, 2026. The largest item remains the purchase of our previously leased Chicago distribution center. Which we discussed last quarter, along with investments in solar and capacity expansion. With the Chicago purchase behind us, spending slowed meaningfully in the third quarter. On the solar investment, we expect to benefit from a onetime investment tax credit that will reduce our overall solar investment by approximately 40%. Separately, our fleet renewal is already paying off in lower repair and maintenance costs, and we expect this to continue. Turning to the balance sheet. As we discussed on last quarter's earnings call, we refinanced and upsized our credit facility in July. That gave us liquidity to close the Sea Ray acquisition while continuing to invest in our facilities. Cash for cash provided by operating activities was $23.6 million for the first 9 months of 2026. More than 5 times the $4.5 million in the prior year period driven mainly by a smaller inventory build than last year when we purchased ahead of tariff increases along with the timing of working capital. As of September 30, 2026, after closing Sea Ray, we had cash of $16.4 million and access to approximately $49.1 million in additional funds through a $140 million line of credit subject to a borrowing base calculation. Turning to Sea Ray. We owned it for 1 month of the quarter, so this is an early read. But it is an encouraging 1. As Felix mentioned, Sea Ray's first month came in the mid teens adjusted EBITDA margin, more than 4x our consolidated margin this quarter, on a business we acquired at approximately 5x its 2025 adjusted EBITDA. That makes Sea Ray accretive to our consolidated margin from its first month and a tailwind towards the 4.5% to 5%+ consolidated adjusted EBITDA margin target we have laid out. The fourth quarter will be our first full quarter with Sea Ray and our results. And we like what we have seen so far. Let me close by putting the quarter into a broader context. The top line and cash flow were strong, Profitability was not. We understand why. A meaningful part of this quarter's cost pressure came from onetime cost of transactions we chose to undertake and both of those transactions leave us in a stronger position. Fuel is the piece we do not control, and we have acted on it. Underneath that, this is our seventh consecutive quarter of year over year net revenue growth for the first 9 months of 2026, net revenue is up 3.8% to $955.4 million. Sea Ray now adds a higher margin growth engine on top of that base. We head into the fourth quarter with 3 things working for us. First, the fourth quarter will be our first full quarter with Sea Ray, at a margin several times that of our total consolidated margins. Second, the fuel surcharge program is now in place. And third, the nonrecurring transaction costs that weighed in on this quarter are largely behind us. We took on debt this year to buy our Chicago facility and Sea Ray. Both add earnings capacity and our refinancing facility gives us the runway with maturities out to 2020-2030 to grow into that leverage. We will stay disciplined on the capital deployment and selective on the tuck in opportunities that strengthen the platform. The balance sheet capacity we created is there to support that, And as noted before, Sea Ray is the first demonstration of what we intend to do with it. With that, I will turn the call back to Felix.

Thanks, Paul. Before we move to Q&A, I want to come back to why Sea Ray is such a significant milestone. for us. We have talked for a long time about extending our platform beyond The United States. And Sea Ray is a first step in our long-stated strategy. Sea Ray has spent 25 years building its business in Canada. And we are proud to welcome the team to HF Foods. Just as Sea Ray gives us a platform to grow in Canada, we believe its recently established US operations, including a planned direct import operation, in Los Angeles, can be accelerated by our distribution network. Sorting scale, and West Coast infrastructure. Sea Ray also brings a customer base that includes retail, wholesale, and restaurants. Now our focus is on executing well. Completing a smooth integration with the Sea Ray team and capturing the cross selling and supply chain synergies between our 2 businesses. Alongside that, we will keep managing through fuel cost pressure, driving efficiencies across our network. And staying 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 will now turn it over to the operator for Q&A.

Thank you. We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment, please, while we poll for questions. Our first question is from Aaron Grey with Alliance Global Partners. Please proceed with your question.

Hi, good evening, and thank you very much for the questions. First question for me, I just want to get an update in terms of where you stand on some of your cross selling initiatives. I think you mentioned last call, you know, some might be able to be starting at the end of 2026. So any update there? And then how we should think about the timing of some of the cross selling opportunities as part of the top line synergies, with the Sea Ray acquisition? Thanks.

Hi, Aaron. Yes. So if you look at Q3 specifically, most of the growth have been driven by seafood volume. I think that is part of our cross selling strategy specifically in the East. In the Southeast kind of kicking in. So I would say that is still very much in the front end of it. So I think we expect in 2027, there is perhaps going to be a little bit larger cross selling piece to the growth strategy. Especially where investments are going in Chicago as well. Where we are trying to get into nonfrozen seafood business. So again, overall, we are still in the early stages of that. When we quantify the overall cross selling opportunity, you know, several hundred million dollars of organic growth opportunity, that is really over a 3- to 5-year period. So we do expect that in the subsequent years, that number is gonna grow from here. And then from CRA standpoint, I think we are still in the very beginning phase of that. I think the focus right now is how do we integrate the business in fully from a systems and data and all that standpoint, So we expect over the next few months, that is gonna be the priority before we get into a full cross selling or synergy exploration. Okay. Great. Thanks, Xi. Second question for me, on the Sea Ray acquisition. Right? So I kind of appreciate it is still early days of having closed it. Just maybe initial indication in terms of, you know, how it is been relative to your expectations. I know it is been a while since you had, you know, a larger acquisition. So just the team's ability to integrate it, how's that been relative, to your expectations And how that could impact how much more you could take on potentially with another acquisition as you continue to evaluate. Thank you. Yeah. From a integration readiness standpoint, you know, we have been spending the last 12, 18 months really a big part of our transformation plan. You know, the end result is not only trying to gain efficiency through our own core business, it is also to make sure we have a ready-to-go M&A integration playbook. So I think what we are seeing especially through the first month, you know, couple months of owning Sea Ray, we are seeing that M&A playbook, you know, come in into play here. So things have been going fairly smooth, and there have not been really any surprises in terms of the Sea Ray business. And, again, I think we are trying to do this as efficiently as we can but also making sure that, again, we are taking the steps. necessary steps to make sure there is no issues that are coming out of it. From a capacity standpoint, again, we are always going to be very optimistic. 12, 18 months ago, we talked about Sea Ray was not necessarily on the radar screen. But because we are the acquirer of choice, not only, you know, in The US market, but now we have proven the fact that we are in the Canadian market as well. So the pipeline is still very much, you know, vibrant. We are just gonna be evaluating these as they come in. But we do expect that M&A will continue to be a core part of our growth strategy here on a go forward basis. Okay. Great. Thanks for the call. I will jump back in the queue.

Our next question is from Daniel Scott Harriman with Sidoti and Company. LLC. Please proceed with your question.

Xi, Paul, good afternoon. Thanks for taking my questions. I just have 2 quick ones today. Obviously, I understand that DS&A was up in the quarter with fuel, but trying to get a sense of how much of that, which is onetime deal and financing cost, where you think it will settle, you know, in subsequent quarters. And then, obviously, the contribution from Sea Ray was strong for the 1 month that it was there. Do you think that is a decent run rate, what they did that 1 month, to kind of use moving forward as we think about the end of 2026 and beyond?

Yeah. Hey, Daniel. This is Paul. I think, for the Sea Ray 1 month, I. that is probably good to use going forward. I mean, it is it is early, but, that is what we are kinda looking at right now. The DS&A, the breakdown of those, I think you are looking at more than half was related to onetime charges. Related to the acquisition and the upsizing of the ABL and the property portfolio. And then the rest was mainly fuel. I mean, there is some uptick in our lease expense, but mainly fuel. And obviously, with the fuel as it is, you know, we are not sure when that is gonna end, but we put some programs in place to try to offset that or mitigate some of those costs. But the onetime costs we see falling off here there is some drag for the quarter a little bit, but nothing major that we see going forward. Very helpful. Thanks, Paul.

Our next question is from Bill Kirk with ROTH Capital Partners. Please proceed with your question.

Hey, everybody. Thank you for taking the questions here. I guess understanding that there is no explicit guidance I was hoping you could help us think about in what ways 2027 might look different than 2026. And in what ways would it maybe look similar to what we have seen so far in 2026?

Hi, Bill, Thanks for the question. Look. I mean, you know, overall, you know, there is a lot of changes here in 2026, right? If we just think about isolated to Q3 for a second, even within Q3, if you look at from a macro standpoint, fuel, the national average diesel price, how much that has changed? For the month of July, I think the index was roughly about 31% higher year over year August was 45%, and then September was roughly about 64% higher. So that changes quite a bit, you know, of dynamic in terms of the things that we are facing which impacts both the input, you know, inventory cost, pricing, and certainly DS&A outbound delivery charges. And now with Sea Ray, you know, acquisition coming into play. So I think, overall, next year, the focus will be how do we manage some of these fuel challenges that continue to kind of drag down the overall industry is this gonna be a short term where we will see a little bit of a retreat on the diesel price over the next 3 to 6 months. That will have a material, you know, implication in terms of how 2027 is gonna go. And it is certainly you know, for Sea Ray, we are gonna try to fully integrate that in and then from there, expand a high margin business here, try to grow that business significantly in 2027. So I think it is too early to tell, but we are certainly going through that process now as part of our annual budgeting process here for 2027. Okay. that is great. And then, Felix, you called out the M&A environment. I think you used the word vibrant. When you look out there, do you see other of these Sea Ray-type deals, meaning, like, 5x EV-to-EBITDA for 15% EBITDA margins? Are there other things out there like that? Or when we think about your M&A strategy, is Sea Ray kind of unique in that regard of what is available and out there? Oh, I think going through the whole Sea Ray acquisition process, it certainly opened up a whole new kind of a market for us. If you look at the Canadian market, you know, granted, it is a much smaller market compared to the US. You know, it is 40 million people versus 300+ million here stateside. But I think there are a lot of opportunities there. So we do see there are potential other targets that have similar financial profiles compared to Sea Ray. But, again, you know, if you look at from an M&A standpoint, there is all these different criteria that we are looking at. Some of it could be in market play where, you know, there is margin expansion opportunity for our existing businesses. Some of it might be, some of synergies that we can leverage. So, again, we have a pretty significant pipeline and all these different targets fit into different bills of it. So I think we just gotta evaluate them as they come up and certainly, we are trying to be patient, exercise a little bit of caution. But, again, I think 2027 we do expect ourselves to be continue to be active here on the M&A front. Thank you. I appreciate all that context, Xi.

We have now reached the end of the question and answer session. I would like to turn the floor back over to Xi Lin for closing comments.

Again, I want to thank everyone for paying attention and continue to support HF Foods. You know, going through Q3, even though we have seen some pretty challenging macro factors that have impacted the overall industry and the business, Again, I think the agility and the flexibility of HF Foods how we have conduct ourselves, our business over the last 25, 30 years, continue to set us apart versus some of our competition. So we expect again, over the next several quarters, some of these. Hopefully, the factors impacting us subside. But the future still remains very bright for the company, and we look forward to continue to execute on our plan. I look forward to updating you guys on our progress here in the next quarter. Thank you.

This concludes today's teleconference. Please disconnect your lines and have a good day.