FGI Industries Ltd.

Good morning and welcome to the FGI Industries Inc. first quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Paul Bartholai, Managing Director, Valum Advisors. Please go ahead.

Thank you. Welcome to FGI Industries' first quarter 2023 results conference call. Leading the call today are President and CEO David Bruce and Chief Financial Officer Perry Lin. We issued a press release after the market closed yesterday detailing our recent operational and financial results. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a 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 SEC. Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the press release issued yesterday and in the appendix of this presentation. Today's call will begin with a performance review and strategic update from David Bruce, followed by a financial review from Barry Lynn. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Dave.

Thanks, Paul. Good morning to everyone, and thanks for joining our call today. We were very pleased with our strong operational execution and continued progress against our strategic initiatives during the first quarter, despite what remains a very challenging market environment. Even with the destocking headwinds pressuring our revenues, we were able to generate meaningful first quarter gross margin improvement while our consistent focus on our organic growth initiatives should position the company to return to profitable growth as inventory conditions normalize. We reported a first quarter gross margin of 26.5%, which was up 925 basis points compared to the prior year period, and up 285 basis points versus the fourth quarter, despite the ongoing customer inventory correction and uneven demand trends in the repair and remodel market witnessed during the quarter. While our gross margins were helped by lower freight costs and the benefit of last year's pricing actions, the biggest factor has been our focus on higher margin product categories and our good, better, best product strategy, which has resulted in a significantly improved product mix. While the first quarter gross margin levels are likely not sustainable for the long term, the favorable gross margin drivers remain in place. and we expect strong gross margin improvements for the full year 2023 compared to last year. The inventory correction that has been a headwind to our revenue growth over the last year has persisted into 2023, with the macro uncertainty adding another layer of pressure, as many large customers are taking a very cautious stance and looking to reduce inventories to levels below historical averages. This caused our first quarter revenue to decline 38% compared to last year. The more cautious inventory strategy by many of our large customers is expected to prolong the destocking headwinds, particularly in the pro channel where the inventory correction will likely extend into the second half of the year. While the uncertain demand environment, persistent inflation, and destocking headwinds are pressuring top line results in the near term, We are continuing to invest in our organic growth initiatives, and I'm very proud of the progress we have made on our strategic priorities during the quarter. We were awarded several new product programs with key retail partners that will be key contributors to organic growth in the coming quarters. And we continue to invest in the new kitchen cabinetry program that we discussed last quarter. We remain confident in the progress we are making on our organic growth initiatives through our Brands, Products, and Channels Strategy, or BPC. Our strong performance as it relates to our BPC strategy is a testament to our commitment to innovation and customer satisfaction, and we are confident in our ability to capitalize on these successes and continue delivering value to our customers in the future. It is during challenging market environments like the one we are experiencing now, where the strengths of our business model are evident notably our diversified product offering and longstanding customer relationships. While many industry participants are facing challenges due to consumers trading down to lower-priced products, we are well-positioned given our good, better, best product portfolio. We are seeing some pressure on our higher-end products, particularly in bath furniture, but this is being partially offset by stronger growth in our good, better private label offerings. In addition, we benefit from our deep and longstanding relationships with key customers who look to FGI for support during difficult times. And as a result, we have not suffered any product line cancellations or customer losses. Now looking at the broader R&R market, as I discussed earlier, we expect the stocking to continue to be a headwind during 2023. And we can see this extend out further given a more conservative inventory strategy by many large customers as they reduce their base level inventory requirements. While the inventory correction has been a challenge, end market demand has held up relatively well across our key product categories. Our bath furniture business has seen the most pressure, but overall, the repair and remodel market is performing as we would expect based on the current macroeconomic environment. The new residential construction market is not a meaningful part of our business. but there have been some signs that the market is bottoming. Commentary from the public builders has been more constructive during the first quarter, with most players noting improved order trends during the key spring selling season. As it appears, buyers are starting to adjust to a new normal of higher mortgage rates. Overall, the trends in our end markets are consistent with our expectations coming into the year, and we continue to expect our end markets to decline in the mid to high single digits during 2023. While the inventory pressures were more pronounced than we expected during the first quarter, based on our strong margin performance progress on our organic growth drivers and stable end market trends, we remain confident in the 2023 financial targets we provided to start the year. The higher mortgage rates, persistent inflation, and macro uncertainty are clearly impacting consumer spending levels in the near term. but we remain optimistic regarding the longer-term outlook for the kitchen and bath repair and remodel market and FGI's position in the industry, and therefore continue to invest in our business despite the current headwinds. As a result, we remain focused on our strategic plan and are dedicated in our efforts to drive long-term growth above the market and create value regardless of the market environment. As a reminder, our long-term strategic plan is focused on three key initiatives. which include driving organic growth using our BPC strategy, operational improvements, and efficient capital deployment. We made important progress against these strategic initiatives during the first quarter, including the following key accomplishments. As it relates to our BPC program and our organic growth initiatives, we were awarded several important new programs during the quarter. The company secured an agreement with a large Canadian retailer for a refresh of its in-store sanitary ware line, including new toilets with new product rollout expected to commence in September of 2023. Second, we continue to generate strong interest in our custom kitchen program. After a successful kitchen and bath show in January, we have added an additional 34 dealers to our portfolio, bringing the total dealer count to 159 active dealers at the end of the first quarter, with additional dealer growth expected to continue. And third, we won several important programs for our shower business. We added an online shower door program for an existing large Canadian retail partner, which is expected to commence in June of 2023. Additionally, FGI is set to revolutionize the customer in-store experience with a unique program for a large U.S. retailer, that enables store associates along with the customer to collaboratively design and immediately quote and take orders for custom shower doors. FGI's new online shower door configuration tool will allow for a seamless shopping experience and is expected to add incremental higher margin shower door sales. Finally, we were just recently awarded a national in-stock program for our shower wall systems as well as an online shower base program with a large U.S. retailer, which will begin with a rollout of up to 300 locations in the second half of 2023. This program will feature new and unique finishes, which further expands the shower wall program's industry-leading design portfolio. We are extremely excited by our continued execution against our organic growth programs under our PPC strategy, and we remain confident that these initiatives will help us drive above-market organic growth as market conditions normalize. The second focus of our value creation strategy is on operating efficiency and driving margin expansion. We clearly, once again, made significant progress on our margin improvement initiatives during the first quarter as we reported gross margin of 26.5%. This is well above our typical historical levels, and while we don't expect to be able to maintain these levels longer term, we are encouraged by our strong execution and the benefits of our evolving business mix shift towards higher margin product categories. Finally, is our focus on efficient capital deployment. Following the challenges caused by the supply chain disruptions and inflationary pressures, we made meaningful progress in reducing our working capital usage in recent quarters, which has resulted in improved free cash flow conversion. This further bolstered our solid liquidity position and financial flexibility. As a result, we have ample capacity to invest in our organic growth initiatives. Overall, I was very proud of our execution during the quarter. We generated another quarter of strong margin expansion. We were awarded several new business programs, and we made important progress on our strategic goals. While we were disappointed in our first quarter top-line results, we continued to invest in our organic growth strategy and remain confident that we are well positioned for improved growth in the coming quarters. With that, I will turn it over to Perry for a more detailed review of our financials.