FGI Industries Ltd.

fourth quarter 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 Jay Chung, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you. Welcome to FGI Industries' 2024 Fourth 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 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, 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 Lind. 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 fourth quarter results reflect the strategic investments we've made in our organic growth initiatives across our brands, products, and channels, or BPC strategy. FGI reported total revenue of $35.6 million in the quarter, representing a year-over-year increase of 15%. Gross profit was $8.7 million. a decrease of 3.2% compared to the prior year. Gross margin was 24.6% compared to 29.2%, a decline of 460 basis points compared to the fourth quarter of 2023, due in part to customer marketing support and costs related to new business and associated promotional expenses in bath furniture. The industry outlook remains relatively flat overall, with our customers forecasting minimal growth in 2025 but our investments have driven revenue growth well above the market. FGI's fourth quarter revenue increased significantly compared to the third quarter 2023 due to growth across all our businesses and geographies. Revenue grew 14.7%, 9.9%, and 23.3% in the quarter for the U.S., Canada, and Europe markets respectively. SanitHeavyWear revenue increased 5.8% year-over-year in the fourth quarter compared to the prior year period. Our bath furniture revenue increased 40.2% year-over-year as our shift to market-aligned program pricing and design outpaced our sales expectations driven by new business wins. The shower systems business reported an increase in revenue of 17% as demand trends remain positive further supported by our new customer programs and continued order growth from a broader customer base. In custom kitchen cabinetry, covered bridge revenue increased 68.3% in the quarter, driven by continued order momentum, expanded geographies, and higher dealer count. Isla Porter, our digital custom kitchen joint venture, continues to establish relationships with the premium design community with on-trend products, via an AI-backed digital sales platform. Our geographic expansion in Europe and India holds significant promise of driving growth in coming quarters. Our strategic growth initiatives are progressing well and are expected to fuel above-market organic growth. I commend our FGI team for the dedication to our long-term objectives, positioning the company for success for the remainder of 2025 and beyond. Before I hand it over to Perry, I want to say a few words about tariffs. The increasing tariff environment in 2025 remains fluid. FGI is working with our suppliers and customers to support one another as we navigate the new normal together. We went through a similar process during the first Trump administration's tariff increases, so this is not new to us. We are confident that we can work through what comes given the close relationships we have cultivated over the years with our vendors and customers. 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 with our guidance for the fall year 2025. As Dave mentioned, for the fourth quarter 2024, Revenue totaled $35.6 million, an increase of 15% compared to the fourth quarter of 2013. Gross profit was $8.7 million in the quarter, a decrease of 3.2% year-over-year. Our gross margin declined to 24.6% in the quarter, compared to 29.2% the prior year. Our operating expenses increased 28.4% to $10 million from $7.8 million in the prior year due to primarily investing in initiatives related to our BPC growth strategy. GAAP operating income was negative $1.3 million in the quarter, down from a positive $1.2 million in the prior year. Lower growth margin and higher operating expenses due to investing in our growth initiative accounted for the loss. Moving to our balance sheet, at the end of fourth quarter, FGI has $15.6 million in total liquidity, which we believe is more than sufficient to fund our growth initiative. We are providing our initial 2025 guidance as follows. Our revenue guidance is $135 to $145 million. The adjusted operating income guidance is negative $2 million to positive $1.5 million. The adjusted net income guidance is negative $1.9 million to positive $1 million. Please note that the guidance for adjusted operating income excludes certain non-recurring items. Adjusted net income excludes certain recurring items and includes an adjustment for minority interest. That concludes our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily while we assemble our roster. The first question comes from Greg Gibas with Northland Securities. Please go ahead.

Hey, thanks. Good morning, Dave and Terry. Thanks for taking the questions. You know, wanted to follow up on your Tariff commentary. You know, I guess if you could elaborate maybe more on the expected impact to the business, how you're maybe working to remediate the impacts as well.

Yeah, you know, like we sort of mentioned, you know, we've been through this before, and you see the news like we do. And, you know, we've been working closely with our suppliers as well as our customers to mitigate as best we can through, you know, some support on cost. Obviously, some of the tariffs are quite high. We're not going to be able to, you know, obviously support all of that, but we'll do our best. At the same time, we continue, as we've spoken before, to look at diversifying sourcing, and we're in the midst of doing that now with certain things, certain categories. And I think that, you know, we feel pretty comfortable based on our expectation of where the tariffs are going to go and how we can partner with our suppliers and our customers to, you know, navigate through this. And, you know, this is not new, and we feel pretty comfortable with our planning right now going into the middle of the year.

Okay, got it. And, yeah, hey, if I could just follow up, too, on kind of the outlook. I'm wondering if you could just expand on, I guess, kind of the assumptions that go into that as it relates to, you know, obviously some of the headwinds. But, you know, you talked about still expecting, you know, I guess, projections are for roughly flat industry related growth in 2025. So just, I guess your assumptions and confidence that you can kind of continue to see growth in your BPC strategy.

Yeah, no, it's a great question. And it's something we've mentioned before is that, you know, we do expect the industry to be relatively flat. But as we demonstrated in Q4, we have a lot of new programs out there. We're expanding in our markets and channels, and that's all incremental growth. And quite frankly, that's where we see the majority of the growth that you saw and Perry mentioned on our guide, right? So we're very happy and confident with the new programs that are, many of which have been already agreed to and are now in an implementation stage. And there's others that hopefully we get to that point in the second half of this year. And that's, you know, pretty much how we've built our guide. And despite a flat market, and it's something we've talked about for quite a while, how our expectation has been with the BPC strategy to outpace the market despite any flattening out there. And for sure, that's what we anticipate for the broader part of the market this year.

Got it. That's helpful. I'll pass it on. Okay.

The next question comes from Reuben Garner with Benchmark. Please go ahead.

Thank you. Good morning, guys, and excuse any duplicate questions. I missed the first few minutes of the prepared remarks. So, just a question on your outlook for operating income. I guess kind of flattish or breakeven at the midpoint, you know, if I can you just kind of help me with the components With how you get there, you're probably going to have, I don't know, roughly 8M and incremental. Revenue, so a 1M and a half and incremental profits on that. I thought there was some things that occurred in 24 that were kind of. Non recurring and maybe would reverse or you'd get back this year. Are there other offsets? Are you including kind of tariff pressures already in that outlook? Can you just walk me through the bridge on the earnings side?

Yeah, no, it's a great question. Yeah, the majority of what you're seeing here is we are looking at tariff pressure in the guide, and there's a potential upside to that depending on where that lands. But we obviously are trying to be relatively conservative with the outlook and understand that it is real, the tariff pressure, and it's coming. At the beginning of the year, if you remember, there was not a lot of understanding in the market as to when tariff may be impacted in the industry and things have moved a lot quicker. So, you know, we've sort of adjusted for that to understand that that's going to impact business for more time in the calendar year. So that's the majority of why you see that sort of flattish range to slightly positive, you know, because of tariffs. Outside of that, you know, we're very, like I mentioned just on the previous comment, we're quite happy with our new growth particularly some of the new markets and some of the newer programs and some of the larger new customers we have. So that's the upside, right? So now it's a matter of just balancing that tariff headwind and trying to maximize what we can to mitigate that as best we can.

So you guys weren't public last time we went through this or saw this as an industry or country even. Can you talk about how it works? I mean, do you use surcharges for things like this or do price increases go through? And then I understand it's a fluid dynamic, right? And so one day it's a 20% tariff, the next day it's a 45. How do you operate the pricing side in that sort of volatile backdrop?

Yeah, it's a great question. It's a little complex, but we generally work closely with customers. Customers also need help as to how they implement something like this. And then we work with our suppliers on trying to maximize any cost that we can get and support from their side. And then we adjust for timing on both sides. We work with our customers and understand that there's an inventory mix when product starts to come in at the tariff cost. So we work with them on timing. And yeah, I wouldn't, you know, there are some companies that would call it a surcharge. They might even surcharge on invoice, but it's generally a little bit more consistent for us to adjust price as necessary when we know what that price would be. And then if things change, we can make that adjustment as well. Our new SAP system, of course, we implemented makes that a bit easier now. That's part of the reason we implemented it. It allows us for some flexibility and it allows us flexibility for our customers and our suppliers as well.

And do the specific tariffs on China make it likely or possible that you would need to find product elsewhere, or is it not to that level yet? You know, are there other sourcing adjustments or offsets that can be made, or is this all strictly you will have to put through price to keep up with the cost pressures you see?

No. As a matter of fact, we've been active in diversifying our sourcing, and so some of that diversification will positively impact this situation. As far as how much and how do we account for that, we've built that in to some degree, but that's a fluid situation as far as moving some of our sourcing to impact 2025. But yeah, we've already been doing that, and there's probably more to come as we navigate through this. We have other options and things, but As you can imagine, that's quite a fluid situation.

That's a day-to-day, week-to-week type thing. Great.

And then last one for me is the kind of flattish end market outlook. I recognize you guys are mostly exposed to kind of the R&R panel. What are your thoughts on risks versus upside there? Consumer confidence has obviously taken a big hit here of late. Is the feeling just that it's been a tough couple of years and so we're kind of likely to bottom out even if consumer confidence isn't so great? Or does that put that outlook at risk? I know it's kind of developing just over the last 30 days or so here.

Yeah, I think originally if you went back to the later part of last year, everybody was looking at this year as sort of a level set year for the, let's talk about the R&R market in particular. And if you look at some of the forecasts in R&R, it was essentially forecasted flat to down a couple points. It's still there. It's anywhere from down one or two points up to up one or two points by the end of the year. I think what's maybe muted some optimism for the second half has been the tariffs and the unknown macro environment with what's going on now. So I don't think the overall R&R outlook has changed much. other than maybe being extended flat, you know, through the whole year. But it's such a fluid situation. Two to three months from now, that whole outlook could change, you know, for the back half. So our saving grace is sort of what I mentioned before. Our new programs and implementations, our new business wins and our new market growth is our buffer to that flat market outlook, right? So we're comfortable that, you know, these new programs will be implemented and, you know, help us outpace that market as per our guide.

And so last one for me, just a clarification on that. I mean, is it fair to say that the new business wins are in the range of that kind of $8 million at the midpoint in your guide and the rest is just kind of lavish market? Or is it something lower than that and there's some price in there from the tariffs?

Yeah, it's all a blend. I mean, because there's going to be tariff pricing impact. There is going to be a little bit of organic growth with some of our larger customers. Then, of course, we have the incremental share growth from the new programs, right? So we've blended all that together. And again, each one of those elements outside of the new stuff, I mean, outside of the new programs, a lot of that's fluid. You know, we look potentially for us as we implement the new programs, We feel so confident about the success of them if they ramp up quicker than we expect and they perform better than we expect, we might even have an upside. But of course, we're being cautious because again, the market is a little topsy-turvy right now and it's just a little unknown. So we want to make sure that we're not over-exaggerating our wins here and just make sure that we can outpace the market as we expect.

Great. Thanks for the detailed guidance and good luck. Sure. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to David Bruce for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.