FGI Industries Ltd.

Q4 2022 Earnings Conference Call


spk_0: good morning and welcome to the ft i industries incorporated fourth quarter twenty twenty two earnings call all participants will be and listen only mode should you need assistance please signal cough specialist by pressing the starkey followed by zero after today's presentation there will be an opportunity to ask questions please note this event is been rico sort it out now like to turn the conference ever to paul bark bark to line please go ahead
spk_1: thank you
spk_2: welcome to ft or industries fourth quarter and four year twenty twenty two result cabbage call waiting call today or president and ceo david bruce and she financial officer parallel we issued a press release after the market closed yesterday detailing a recent operational a financial results i would like to remind you that management commentary and responses to questions on today's happens call may include for looking statements which by their nature are uncertain out that of the companies control although these for looking statements are based on management current affectations employees as results may differ materially quite discussion of some of the factors that could cause actual results to differ please refer to the risk factor section of our latest filings with the fcc additionally please note that you can find reconciliations of historical non get financial measures in a press release issued yesterday and in the appendix or this be into action please call will begin with a performance review a strategic update from david bruce followed by a financial interview from parallel at the conclusion of these prepared remarks we will open a line for questions but that attorney every dave thanks for good morning to everyone and thanks for joining or call today twenty twenty two was an exciting year for ft i it was our first year as a public company and i am extremely proud of our strong execution throughout the year despite what turned out to be a very challenging operating environment
spk_3: we made important progress against our strategic priorities and performed extremely well operationally and as a result we are well positioned to continue to execute our value creation strategy in the coming years during the year we continue to make critical progress at our bpc initiative which stands for brands product and channels and is the key driver of are organic growth strategy i'll provide more specific slater in my comments but we further ramped t new products programs expanded existing product categories and launched several brand that issue during twenty twenty two which would enable us to gain market share expand our market penetration and drive strong organic growth in the coming for years and years
spk_2: in addition we continue to make significant gains at our margin recovery initiatives with our fourth quarter gross margin up meaningfully off vs last year and a from the third quarter or gross margins are well above the pre pandemic levels and we expect continued strength and are gross margins going forward ft i and the building products industry as a whole face a number of challenges during twenty twenty two including persistent inflation i'm going supply chain disruption global unrest and widespread customer the stock however thanks to the hard work and dedication our team members across the organization we continue to focus on that we could control and as a result we believe we are in an attractive position as we enter twenty twenty three
spk_3: we will likely continue to face them industry headwinds especially in the early part of the year but i am very encouraged by the outlook for up to i
spk_2: now turning to the quarter or fourth quarter results were once again negatively impacted by inventory the stocking a key customers which caused our revenues to come in below our expectations and decline nearly forty percent for last year we had expected some moderation in the inventory adjustments we had been seeing but the impact was more significant
spk_3: that the expected during the fourth quarter we expect the stocking to continue to be a headwind into the early part of twenty twenty three but we have started to see customers inventory levels begin to normalize with daughter kate and slowly improving during the first two months of twenty twenty three this is more evidence within that the i like channel as we expect these starting with that are pro customers to extend further into the second quarter wild his early in the year and the market environment is very fluid with the ongoing momentum in our internal broke initiatives we are well positioned for return to organic growth once channel inventory levels normalize
spk_2: while our revenue performance was challenged we made significant progress on our margin initiatives during the fourth quarter or fourth quarter gross margin came in at twenty three point seven percent up from fourteen point five percent in the same period last year and up two hundred and eighty basis points sequentially driven by pricing benefits more favorable next and lower freight pass as a result we were able to report gross profit that was basically flat for last year despite the significant revenue headwinds are gross margins are now about the levels we enjoyed prior to the supply chain disruptions and inflationary headwinds the pressured our results
spk_3: and back and are targeted range our goal is to at least maintain that gross margin levels me achieved in the back half of the year with a focus on further expanding our operating margin as volumes recover and we enjoy the benefits of improved scale that said as we continue to grow are higher margin new product categories and see a rebound that are about furniture business we do see additional potential positive gross margin drivers in the future
spk_2: while our revenues have come under pressure and recent quarters due to customers restocking and work at the man has held up relatively well across our key product categories we have seen some pressure and are about furniture business as we have discussed on prior cause but overall the repair remodel market is performing as we would expect during this period of market uncertainty
spk_3: the new housing market is seen considerable pressure that new wholesale down twenty percent plus the recent months but the repair and remodel market has been more stable
spk_2: as we look into twenty twenty three still elevated interest rates are a headwind for new home construction and existing home sales which does have some impact on our business in addition persistent inflation as a headwind for consumer spending and general impacting our business as well
spk_3: on the flip side with new home sales under pressure homeowners are likely to stay in a car club logar often leading to increased investments into updating or refreshing their existing homes with kitchens and baths often a key priority and it is also important to remember that nearly forty percent of homes don't have a mortgage and eighty five percent of homes are locked into mortgage rates
spk_2: below today's rate so higher mortgage rates have little impact of significant percentage of homeowners and the repair remodel spending
spk_3: putting all this together while we remain optimistic on the long term outlook for our industry we do see some reason to be cautious regarding the outlook for twenty twenty three
spk_2: we expect the current industry headwinds such as elevated mortgage rates inflation pressures and macro uncertainty to result in our overall market declining in the mid to high single digits during twenty twenty three we continue to focus our energy other things we can control in an effort to drive long term growth about the market and create value regardless of the market environment
spk_3: consistent with our long term strategic plan we remain focus our a freaky initiatives which includes driving organic growth using er ppc strategy operational improvements and efficient capital deployment we made important progress against the strategic initiatives during twenty twenty two positioning us to pursue profitable go during twenty twenty three and beyond dumb of our key accomplishments during twenty twenty two are as follows we made nice progress to our bpc program with continued growth and are keen new product initiatives expansion of existing brands and products and further penetration of some of our key channels some key highlights include first we meaningfully expanded our custom kitchen cabinet free business under the covered bridge brand generating strong growth and art dealer network which increased to one hundred and thirty five at the end of twenty twenty two up from seventy one at the start of the year the strong momentum has continued into twenty twenty three with fourteen additional dealers and it in january
spk_2: as we have discussed previously the have invested in new manufacturing capacity to support the anticipated business development opportunities for a kitchen cabinet tree business both in the dealer network and with large national customs second we also continued to see growing momentum in our shower systems business in the fourth quarter we lost our cobranded program at lowes which combined are jet line with their private label brand and will be called allen arrive shower while system by dzeko we believe the initial reception has been very positive and will now lead to further in she lives to enhance the program new finishes and styles as well as new in store merchandising displays third during twenty twenty two we lost several new product lines and bread initiatives across the companies entire geographic footprint including new products under ft eyes flagship crap and main brands the launch of the jet coach our while lying to the canadian wholesale market and a major sanitary were product out in germany that should help drive a new cycle of innovation epa developer
spk_3: for it we expand that are geographic footprint during the year adding locations in the united kingdom and australia
spk_2: we are excited by the tremendous opportunities we see in these markets and will look to leverage our existing product and operational base to successfully grow into the new geographic regions the cemetery where program for bombings the largest home improvement retailer in the australian market will feature new to per day toilet sweet that woman pants on things offering and will continue to improve our overall product mix with higher margin arctic a product we are extremely excited by or continued execution against organic growth programs under or bpc strategy
spk_3: and we remain confident that these initiatives or help us drive above market organic growth as market conditions normalize
spk_2: the second focus of our value creation strategy as on operating efficiency and driving margin expensive
spk_3: we clearly made significant progress are marginal recovery initiatives during twenty twenty two as we exited the year with a gross margin of twenty three point seven percent during the fourth quarter
spk_2: our ability to quickly returned to the gross margin levels witness prior to the supply chain disruptions in just over a year gives me confidence or our ability to continue generating profitable growth in the future finally as our focus on efficient capital deployment following the challenge is caused by the supply chain disruptions and inflationary pressures we made meaningful progress and reducing are working capital usage in a recent quarters which has resulted in approved free cash flow conversion this further both that are solid liquidity position and and financial flexibility as a result we have a full capacity to invest organic growth initiatives
spk_3: our strategic priorities will remain much the same during twenty twenty three we will continue to pursue our b b c strategy to drive organic growth including continued investment that our shower systems and covered bridge kitchen cabinet a business additionally i'm excited to announce that we will be investing in a new venture targeting the kitchen market we are very act
spk_2: sight of about this opportunity to add are rapidly growing kitchen business and look forward to providing more details as soon as we are able we will also maintain our focus on operational execution to drive operating margin improvement and strong free cash flow generation with a goal of expanding our operating margin to the high single digit range longer term
spk_3: finally we will maintain our disciplined approach to capital allocation the primary use of capital in the near term will continue to be investment in organic growth initiatives however we continue to evaluate both on acquisitions and other strategic opportunities with potential partners such as the new kitchen mansour venture i just highlighted overall twenty twenty two was xx asshole and important year for ft i buy we fell short of the financial targets be set at the beginning of the year we executed well despite an extremely volatile and unpredictable market environment and i am confident we are well positioned to execute on our strategy and drive strong financial results as market conditions stabilize with that i will turn it over to parry for a more detailed review of our finances
spk_4: thank you day and go morning and we one i will provide competition not details on the quarter given the up day on our decreed that he and bash and and right hand ah but with our four year twenty twenty three guidance revenue todo thirty one point a medium you mean the first quarter of twenty twenty two a decrease over thirty nine percent compared to pry year do you plan read to ongoing eventually be stocking as were some soft any in customer demand looking at our business lines senator way or revenue was twenty point two million during the fourth clinton a decrease from thirty four point two mean and doing deprive he appealing now revenue the guy was largely the result of a not you and your weight reduction by keep on is particularly in the pro channel and customer demand as and we might read a diva stable now we continue to expand on him to weep on a him until we label i just it's funny how revenue was six point one mean you're doing the first quarter pound vantage point six million last year the best financial be and he's also continue to see prayer from the stocking the human talk we corruption in as furniture started out yet and then some of out on a kinda goes so we want you reading to see these chains begin to nominating the back half hour commute on the to but we continue to see him and
spk_3: are we live action creation of revenue through the first quantum on a rabbit me was five point four million doing the first caught up on it don't need to essentially friend found that pride period
spk_4: at the timing in our shall be nice was offset by continue moment any now teach and to be week despite the girls to in our chances and be some nice to be some in twenty twenty three as the we'd love to spend our qa binding problem with los and the continue always ancient into canada growth probably was seven point five million during the first quarter of twenty twenty two best can eat frank found lothian as nothing and never can progress we made our much and recover we initiate keeps lottery said the revenue the kind gross margin improved to twenty three point seven percent doing
spk_3: fourth quarter of from fourteen point five percent last year and twenty point nine percent in the so quarter of twenty twenty two the improvement in our gross margin is a result of a more favorable makes pricing game and no reduction in for a concert versus an elevated level experienced last year we expect this positive factor to remain in place doing twenty twenty three allow us to mend and gross margin
spk_4: at current levels with an opportunity for for upside to them by a potential on recovery gap operating on was one mean and doing that for we scored a fourth quarter up from zero point seven media in the prior year period is good in zero point three million in charge during the fourth quarter of twenty twenty two adjusted operating on whether one point three million up
spk_3: zero point six mean yeah oh eighty nine percent found the prior year
spk_4: during by the improve course margin performers and lowest downing and distribution expenses partially offset by landlord revenue as a result adjusted operating margin was three point two percent doing the fourth quarter up from one point four percent in the same period last year gap in main come was zero point seven million or seven cents per diluted share the owing the fourth quarter of twenty twenty two down from one medium over fifteen cents in the same period last year
spk_3: it's gooding one time item in both period adjusted the name come on a fourth quarter was the one medium or eleven cents per diluted shit up from your point seven million over ten things not him now turning into the vanish an hour decreed that the as of december thirty first
spk_4: that funny twenty two and a company had ten point one meaning of cash and cash equivalent and total dad of nine point eight mean him and the end of the don't we had thirteen point seven million of availability under our quite facilities net albert later of credit combined with cash totally credit he was twenty three point eight you add the yeah yeah i am we are pleased with the continued improvement in our walking kept on label doing the golden would you have been elevated in recent quarters only into the supply chain challenges that reduction in working capital job at a strong free cash bro conversion in the called them we expect our
spk_3: capital spending made to we men around one percent of rabbit mean we believe we are in the solid degree that he position that these more than sufficient to fung our growth in shaggy finally turning into guidance
spk_4: despite a challenge your market environment we were able to make a significant progress the email margin recovery initiative during twenty twenty two and a we expect this past the trying to continue into twenty twenty three however as day about has already highlighted we expect that we pair and we modeled market to face the somehow with doing twenty twenty three which we expect to result in oboe or in our industry want him declining in the mid to high single digit and range doing twenty twenty three we expect humans already starting to continue into first half of the you which combined with that he spotted decline in oil not a industry vibes will like of a resounding the chinese your rabbit knew that job for twenty twenty three we remain confident in our organic growth in the shade you and is back to outperform the market once the mentor we label adjust in addition our guidance of refracts a investment with added to our new kitchen program that there for describe of which are we are total roughly half a million in twenty twenty three we these factor as a backdrop we are providing twenty twenty three financial guidance as follow revenue in the range of one hundred forty five to one hundred sixty three mean it adjusted operating income in the range of six to six point eight mean him and adjusted the name come in the range of ballpoint to to pop four point seven media priest not that guidance for the net income and operating income is being why did on an adjusted basis and the school now recording items
spk_0: that can breathe our prepared remarks operator we are not ready for the question and answer portion of our cope thank you will now begin the question and answer session to ask a question you may press star than one on or tone phone if you're using a speaker phone please pick up your handset before pressing the keys to withdraw your question please press star than to at this time will pass momentarily to similar roster
spk_5: i first question comes from rubin garner from the benchmark company please go ahead
spk_6: taking the morning everybody they get morning morning robot the money november i'm wonder just if we could square up the the outlook a little bit on the the top line so you mention are no down i think mid to high single digits of them as a market
spk_2: would the the d stockings impact be incremental to that made the high single digits in it so is there any way that kind of quantify what can i hit you're anticipating that to have a on the first half of a twenty three yeah out of the thanks within and i'll bring that back to let's go back to cute read as the get the whole picture here so few three of last year you know is when we started to see a very abrupt impact from the be stocking and the middle up to three until a kids raid
spk_7: and it was initially with a retail we saw in the retail side first and then it followed up on a pro side of our business
spk_3: so that we fully expect that was obviously the largest impact of we saw you for and we we continue to see that as we had mentioned going into the first half of this year so in relation to the market decline the know if the market the klein without the stocking isn't as impactful because we are still taking share we haven't lost any marketshare we have lot lost any programs on the market and we're continuing to add new incremental business that we have several opportunities on the table that we expect the executes in the second half so in the end the starting is the major impact and we're seeing i'm a bit of a relief and order cadence i think i mentioned as we've entered que one as it relates to the starting on the retail side of the pro the pro side again we expect the continue a little bit more towards the middle of the year but the second half as when we anticipate that we should see more of a normalization
spk_6: as far as the impact of the stocking and as far as the are in our market you know we sort of bacon what we expected that at the same time we've also make them some opportunities that we know if you're be executed and and we have others that beat that we have not baked din that we feel very very concerned about in the second half
spk_8: a consistent the player the the mid to high from the that of market behind it would not include the impacts of the starting now with the
spk_2: the incremental to
spk_6: that's good clear that like yeah that that that's obviously you know assuming assuming all things are equal going into que en for example if there was no the stocking be would definitely anticipated softening in the markets but our expectation would be that would be old outpaced that with a market gains that were seeing with a new business opportunities perfect and then i'm on the a see that the kitchen and bath and i recognized you don't have a ton of detail right now but one question about it is there any revenue benefit in the guidance for this year bake them from that worries twenty twenty three for the most
spk_3: harden investment year and and so the past is is gonna have a you know outside impact yeah yeah you're exactly correct so we weep
spk_9: anticipate that they'll be no revenue we did not take any revenue into the guide for that knew that new investment but we didn't we did it he did build in the anticipated unexpected investment for twenty twenty three we would see the benefits of at next year
spk_6: okay and how about on
spk_3: pricing just given the stocking environment and the consumer and what happened over the last couple years can you just walk andrew yeah any pushback you've been getting what kind of maybe maybe tied for the car on the you're seeing or you know it and have he started to see deflation and in a big away and therefore you're able to get the the price that yeah i think we we've actually seen a little toddler fact some sense all that give that a little broader picture will go back again to last year were obviously the rope enormous or inflationary pressures as we entered the for the entire year and as we and i a i had mentioned on previous calls that we were adjusting price to our customers throughout the year and and the majority of those price actions were executed by the end of two for and so some obviously wouldn't have full impact until this year we don't really anticipate any additional inflationary pressures at this point and what we have seen in the market and you know as you know as even though we have grown sales of our brands are proprietary private label brand business is still a larger portion of our business and we are seeing more when i i would portray down activity in the market from maybe more premium price brand names to the private label grants particularly in the in the retail environment and as you know we we also sell with it i i'll say a good better best strategy within the private label space so we're we're seeing a little advantage they are little tail and for us because we anticipate that that's gonna continue to be straw
spk_5: and customers can zoom in on private label brands right now is quite positive and so we look that as a talent as we enter or the first half and continue into the second half the as well
spk_0: getting so he took i gonna pass it on good luck this year thank you again
spk_10: the next question comes from bring your boss from northland securities please go ahead big more very they day the questions a great thanks how many yeah i could follow up just on on maybe the case for fear you deal with the expectations for employees back in the morning i think the second half
spk_3: can you be more specific on what you do whether quarterly or between the two halves of kind of expected in your guys yeah so we anticipated or originally we were thinking that d stocking l l and if they originally this is prior to the guide we thought these docking word and a bit quicker but here's what we think you know and it's it's a bit different geographically
spk_2: we started to see in our canadian market and the wholesale are all call the pro market
spk_3: rebound a bit quicker we started to see some recovery earlier in the first quarter were here in the us we anticipate the pro market at this point two
spk_2: become more normalized maybe more in the middle of the year it into the late part of the middle a second half a second quarter
spk_3: retail we've already started to see some breakthrough as far as order cables i wouldn't call it cadence at this point i would just called the beginnings of or the i'm in tory levels dropping on the our customer sides of give you an example many of our customers experienced anywhere between forty to seventy percent
spk_2: higher than normal him into a level that they went into the fourth quarter last year so there's levels or is as you can imagine that takes time to normalize that so i think what we're going to see and the retail side as adler for normalization by the middle part of the or i think second half of would be my anticipation would be we'd see cables that would be more normal a
spk_3: in that part on the pro side again i think
spk_10: same but a little a little bumpy or because of the housing market and understanding or new constructions going to go and the some of our pro business obviously not as for a smaller contractors but we are products do end up a new construction as well so even though that all a small part of our overall business i will have to watch the pros i will closer gotta marry on the day yep i'm in a couple of i mean he spoke exactly what is silly he thought the relatives each channel
spk_11: the i live approaching with it the most great
spk_3: gravy to and a covered with the other channels from the a relatively speaking of the being affected from the yeah well the it it's very similar to get a lot of our econ sales are linked or related to a brick and mortar right there a brick and mortar customers that that sell online of is the same
spk_2: the same effect as far as a d stocking goes
spk_3: the the same we're seeing the same on our hospitality distributors that we deal with as well although that's actually picked up a bit we are seeing since our kitchen and that show that we read in january we've seen a little bit where activity on the hospitality side that we have
spk_10: on the art or typical pro business so yeah i mean i i think it's it's it's it's a industry wide sort of overall average i don't think one child has particularly outperformed another i would just say in general that retail seems to have a broken first than a sense then that more than comparable commercial side of our business gotta go and you know one of have to replace mortgages
spk_3: i'm nice to see the song comments there despite the and nine to get you prepared remarks you mentioned some other libraries a black market experience going forward doesn't sound the near term but could you could you elaborate on mothers' factors to be sure so you know we've mentioned and we've had yeah we've we've up only posted some of our results by by category in a we really experienced
spk_2: exponential growth in our shower systems business and in our kitchen business and that's where i think the we originally you know going back to the beginning a twenty twenty two when we first when i feel we talked about er ppc strategy
spk_3: the we we really anticipated the a large growth area there and those higher margin categories and we continue to do that and we're continuing to see that so and not only that you know i think i've talked about not not getting into the weeds of all of our product categories but we've talked about how are we engineering the mix of all of our programs including our cabinetry on anna and the sanitary were business so we're really reengineering a mix of a in every one of our products category to to continue to grow not only the brands but and the image and but the quality of the product the ticket the margin ah but what we're seeing forest we're seeing the impact of the shower systems business in the kitchen growth
spk_10: that was part of that part of the merger by that's part of the reason you saw margin improve our but that will or that's also the drivers that you're gonna see and we expect a going into the balance of as your as well
spk_3: okay understood on the i get the latin from p i just wanted to ah ah yes the the good to impact that is the the supply chain disruptions you don't try to get a fencing whether they're changing and all are
spk_12: the same of unless of course yeah i would say now that things have have pretty much moderated be know there's always there's always blips on the screen so to speak as a comes to supply chain but as of right now i would say that we're almost back to earth
spk_0: create a pre pandemic level as far as disruption so we're we're getting we have a lot more cadence milner are ordering and our delivery so yeah that's that's no longer on the radar right now as a as a threat for the year
spk_3: good thanks guys
spk_0: yes

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