FGI Industries Ltd.

Good morning, ladies and gentlemen, and welcome to the FGI Industries, Inc. Second Quarter 2024 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 8th, 2024. I would now like to turn the conference over to Jay Chung, Vice President of Investor Relations at FGI Industries. Please go ahead.

Thank you. Welcome to FGI Industries' 2024 Second Quarter 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 factors section of our latest filings with the FCC. 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, which is available on the company's website. Today's call will begin with a performance review and strategic update from Dave Bruce, followed by a financial review from Perry Linton. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Dave.

Thank you, Jay. Good morning, everyone, and thank you for joining our call today. I am pleased to share our second quarter results reflected the strategic investments we've made in our organic growth initiatives across our brands, products, and channels for BPC strategy. FGI reported total revenue of $29.4 million in the quarter, representing a year-over-year increase of 0.6%. Gross profit was $9 million, reflecting growth of 11.9% compared to our prior year. Gross margin improved to 30.5%, an increase of 310 basis points compared to the second quarter of 2023. The industry outlook remains relatively flat overall, with our customers forecasting minimal growth in 2024. During the second quarter, some of our shipments experienced extended lead times and delays due in part to our transition to SAP enterprise software and continued industry-wide import logistics challenges. This impacted our second quarter results. Freight rates have more than doubled since December 2023, and we are closely tracking prices for the remainder of 2024. We expect to fulfill the delayed shipments in the second half of the year. Sanitary ware revenue declined 8% year-over-year in the quarter. We remain optimistic about flush guard in the second half of 2024. We continue to shift towards lower-priced offerings in our bath furniture segment and are excited about our assortment and new programs that are more aligned with market pricing and design trends. The shower systems business benefited from new customer programs reporting an increase in revenue of 37% compared to the same period last year. In custom kitchen cabinetry, Covered bridge revenue increased 66% in the quarter, driven by continued strong dealer and customer expansion across the U.S. Isla Porter, our digital-only custom kitchen joint venture, is setting the stage for its official launch. Isla Porter aims to establish a relationship with the premium designer community with on-trend products via an AI-backed digital sales platform. Our geographic expansion plans in Europe and India hold significant promise of driving growth. During the quarter, we opened an office in a showroom in India and engaged new distribution partners in the burgeoning bath market. Our strategic growth initiatives are progressing well and are expected to fuel above-market organic future growth. I commend our FGR team for their dedication to our long-term objectives, positioning the company for success in 2024 and beyond. With that, I'll hand it over to Perry for a more detailed financial review.

Thank you, Dave, and good morning, everyone. I will begin by providing additional details on the quarter, followed by an update on our current liquidity and balance sheet. Finally, I will conclude our guidance for the fall year 2024. For the second quarter of 2024, revenue total 29.4 million, an increase of 1% compared to the second quarter of 2023. As Dave mentioned, FGI experienced delayed shipment due in part to our transition to SAP enterprise software and ocean freight disruption. We expect to fulfill delayed shipment in the second half of the year. Growth profit was $9 million in the quarter, an increase of 11.9% year-over-year, driven by our higher margin products. Our growth margin improved to 30.5%, in the quarter compared to 27.4% in the prior year. We expect some moderation in the gross margin as delayed shipment of lower margin products are fulfilled in the second half. Our operating expenses increased to $9.4 million from $7.4 million in the prior year due to inflation and ongoing investment in our growth initiatives, including the marketing spend for FlashGuard, iLaporter, Coverbridge Kitchen Camper Tree, and our Canadian wholesale business. We expect operating expense to decline in the second half of the year. A certain expense in the first half will now recur in the third and fourth quarter. Gap operating income was negative half million in the quarter, down from 0.6 million the prior year. Higher operating expenses due to investing in our growth initiative accounted for the loss as overall revenue was largely frayed and the gross margin was higher in the quarter. Moving to our balance sheet, at the end of the second quarter, FGI had $17.4 million in total liquidity, which we believe is more than sufficient to fund our growth initiative. Total liquidity declined slightly from $17.8 million in the prior quarter. We are leaving 2024 guidance unchanged with revenue in the range of 115 to 128 million, adjusted operating income in the range of 2.8 to 3.8 million, and adjusted net income in the range of 1.2 to 2 million. Please note that the guidance for adjusted operating income and adjusted net income is through certain non-recurring items. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Ruben Garner of Benchmark. Your line is already open.

Thank you. Good morning, everybody.

Hey, good morning, Ruben.

Good morning. So just a quick one on the SAP enterprise switch. When did that happen? Can you quantify what the impact was? And then any comments on how that may be beneficial to you guys going forward?

Yeah, we implemented SAP at the end of Q1. Technically Q2, May 1st, was our official implementation date. We're excited about what it's going to do for us. We were using a very old, outdated ERP system at the company, and we're already seeing benefits of the rollout and the efficiencies it's going to bring to our business. But, of course, like many companies have experienced on a new rollout, there were some hiccups, and it did – absolutely impact our domestic shipments as well as some of our direct import shipments for the quarter, but those are not lost sales. That's business that we expect to fully spill over into Q3.

Okay, and then I understand you guys have been moving down price points a little bit. We've heard that there's been a little bit of weakening in the consumer, particularly at the entry level. Are you seeing Any signs of that? We've seen a couple categories where there's been D-stocks take place, not exactly related to you guys, but just in the broader big box channel. Any risk there? How do you feel about where inventory is and that consumer in particular?

Sure. No, it's a great question. I think I mentioned at the – I think it was on the Q4 call. You know, we didn't really anticipate talking about D-stocking this year as an issue, and that's still the case. I think we went through most of our pain last year going into this year. Our inventory position has increased a bit only because we're backing up for a lot of new program launches that are anticipated in the second half, and I think I mentioned that last time. From a customer perspective, we actually are in – our customers are in a very good position with us on the majority of our product categories. And I think that I've mentioned before that the most affected category that we had when it came to destocking and as far as trade down was the bath furniture. But we've actually now finally, I've talked about how we've been implementing and we debuted a lot of our newer, more mid-priced product strategy at the Kitchen and Bath Show in February, and that's now taking effect. So we're starting to place that product. And we're starting to see a little bit improved order cadence from our larger customers as it relates to the bath furniture going into the second half. So I think to answer or go back to your destocking question, no, we're not seeing that. We're actually seeing the exact opposite. We've already hit the floor, and I think we're only going to see improvement from here.

Okay, very helpful. And then in terms of next year, I guess R&R market aside, we can kind of – take our best guess at that. Can you remind us on what you have within your control between new products, new customers, any way to quantify that yet? Or is it still too kind of early to kind of get an idea of what that might look like?

Yeah, if I can quantify 2025, I'd be a genius, I think, Reuben. But we feel good. Let me say this. We feel really good about the momentum we have right now as we're in Q3 going into Q4. Many of the newer program launches that we talked about are in play right now. They're actionable items for our sales teams as we speak. We like the fact that on the bath furniture side, we're starting to see a turnaround. We really like what we're seeing in our kitchen business. Our kitchen business is really moving full steam ahead, probably its fastest momentum in many years since we've had the program. So I think that would sort of imply that our, you know, heading into 2025, outside of macro issues, obviously, which we'd have to monitor, but we're excited where things are going right now. We're finally, you know, it's been a lot of discussion about these new programs and new customers coming on board, but now that they're sort of starting to be executed, You know, as of now, I mean, it's very early to talk about next year, but we're cautiously optimistic about next year as well. Again, let's see the macro issues, how they affect things. But, you know, our expectation would be to, you know, outpace any of those issues in the first place with our new business opportunities.

Great. Congrats, guys, and good luck on Ford. Thank you.

Your next question was, It comes from Greg Keebus of Northland Securities. Your line is already open.

Hey, good morning, Dave and Barry. Thanks for taking the questions.

Hey, Greg. Good morning. Good morning.

You know, given, I guess you reiterated guidance, sorry, anything that surprised you, you know, positively or negatively in the quarter and maybe into Q3, just try to get a sense of puts and takes on, you know, maintaining expectations for the remainder of the year.

Yeah, I mean, I think, you know, maintaining our guidance sort of gives you an idea about sort of what we expected. We know that from an expense perspective, we know that our first half is heavily weighted on our OPEX. And generally, our sales tend to have a spike in the second half normally. And then as we had spoken about, a lot of our newer businesses coming in the second half of this year. So we weren't really too surprised. I think we did mention some of the shipping delays in the SAP. That definitely impacted to some degree. And we don't know specifically. I mean, again, we're not really worried about it because we know it's drilling over. But You know, that would have impacted Q2 numbers. We probably could have shown a better Q2 had we not had those issues. But that's just a short-term blip. We're really not nervous about it. So, yeah, I mean, that's why we reiterated the guidance. We kind of are moving along sort of as expected. I think for us, one of the positives is despite macro issues, you know, you hear a lot of our peers are talking about flat business or down single digits, R&R. was looking like it was going to rebound in Q4, maybe not as much, but it's not going to, we don't feel that's going to affect us as much because a lot of our business is going to be new incremental sales. And that's something we've preached for quite a while, which is outpace that, that market, right? Despite, you know, these single digit declines. So, We're feeling pretty good about it. And yeah, so to go back to your original question, I don't think there was anything completely unexpected that we've seen through the first half at this point.

Great. Appreciate the color there. And I guess, you know, regarding, you know, what you're seeing with freight rates, you know, how is, I guess, Is that trending in Q3? Do you expect a similar impact in Q3 relative to what you saw in Q2? Just curious, I guess, your outlook on that and then whether you expect it to maybe improve or kind of stay the same.

Yeah, yeah. The freight business is always sort of a guessing game. You know, it was a lot different a couple of years ago when things went off the wall, which was, you know, very unusual. We're not in that situation now. I think we're definitely seeing continued rate climbs. There's mixed conversation in the industry as to when they're going to come down. Some of the industry insiders that we've been talking to have been saying late Q3 into Q4. Some have been saying early 2025. So we're monitoring it. We're not particularly concerned. We have to be very careful. As our inventory mix starts to be affected by higher landed cost product, we'll have to take a look to see how do we protect our margins. Again, a lot of our customers handle their own freight. We ship them directly from Asia, so we don't have to worry too much there. But we have to be competitive in the marketplace, right? So we'll always be competitive and we'll always monitor costs. And as of now, we're not in any sort of worry mode. I think it's just a monitor, wait and see approach to see where the market goes.

Got it. That's fair. Great. And I know we've talked about the Indian market in the past. I'm curious, kind of the updated outlook on penetrating that market. I saw you open an office there. I'm curious if you could address that opportunity and maybe the next steps in that market.

Sure. So I think I mentioned on one of the calls, our strategy initially is to secure some key distributors in some key markets. We've already secured one. We have two just about ready to close, and those distributors will begin the process to seed the dealer and builder market for us in the north and the south of India. But one of the key components of that was us registering in India as a company, which we did, and opening our office slash showroom. It's primarily a showroom with a small office, and the showroom is critical because it allows us to, for the first time, invite in the architects, the designers, the builders, the dealers, to see our product, and we will have an official sort of company launch there sometime this fall. It's not quite ready on the date yet, but the showroom should be ready September, October timeframe. So before year end, we'll have that launch. And what that's going to do is going to really get our name out into the market. It's going to help us seed the market. And once we do that, we expect a lot more speed. and growth, and we'll be able to talk more about that as we go into next year about, you know, we'll get into a little more detail maybe in each particular market that we're in. Great. Appreciate that. Sure.

There are no further questions at this time. I would hand over the call to David Bruce for closing comments. Please go ahead.

Thank you for your time and interest today, everybody. We appreciate your continued support of FGI. Stay well, and if we don't connect during the quarter, we certainly look forward to speaking with you on our next quarterly call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.