FGI Industries Ltd.

Good day and welcome to FGI Industries Inc. Second Quarter 2025 Results Conference Call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touchtone phone. 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, Chief Financial Officer. Please go ahead.

Thank you. Welcome to FGI Industries' 2025 Second Quarter Results Conference Call. Leading the call today are Chief Executive Officer David Bruce and Chief Financial Officer Jay Chung. 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 Jay Chung. 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 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 $31 million in the quarter, representing a year-over-year increase of 5.5%. Gross profit was $8.7 million, a decrease of 2.9% compared to the prior year. Gross margin was 28.1% compared to 30.5% in the second quarter of 2024, a decline of 240 basis points due primarily to the ongoing tariff environment. FDI was impacted by an industry-wide pause during the quarter as customers evaluated the impact of tariffs on their businesses. FGI and our customers continue to evaluate a China Plus One strategy to diversify and broaden our geographic sourcing. The industry outlook remains uncertain due to tariffs, but our strategic investments in our brands, products, and channels have driven a revenue growth well above the market. FGI's second quarter revenue increased compared to the second quarter of 2024 due to the growth in our sanitary ware, bath furniture, and covered bridge cabinetry businesses while shower systems revenue declined. Revenue declined 0.4% in the U.S. and grew 2% and 36.7% in Canada and Europe, respectively. Sanitary wear revenue increased 4.3% year-over-year in the second quarter compared to the prior year period. Our bath furniture revenue increased 2.7% year-over-year as our shift to market-aligned program pricing and design drove new business wins. The shower systems business reported a decrease in revenue of 11.2%, even as demand trends remain positive. Other revenue, primarily covered bridge, increased 67.7% 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 future growth i commend our fgr team for their dedication to our long-term objectives positioning the company for success for the remainder of 2025 and beyond before i hand it over to jay 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. We are seeing the order pipeline recovering, even as some customers remain cautious due to the continued tariff uncertainty. With that, I'll hand it over to Jay 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 full year 2025. As Dave mentioned, for the second quarter of 2025, revenue totaled $31 million, an increase of 5.5% compared to the second quarter of 2024. Gross profit was $8.7 million in the quarter, a decrease of 2.9% year over year. Our gross margin declined to 28.1% in the quarter compared to 30.5% the prior year. Our operating expenses increased 1.3% to $9.5 million from $9.4 million in the prior year due primarily to investing in initiatives related to our BPC growth strategy, including Isla Porter in India, and one-time costs related to optimizing our warehouse operations. GAAP operating loss was $0.8 million in the quarter, down from a negative $0.5 million the prior year. Lower gross margin and higher operating expenses due to investing in our growth initiatives accounted for the loss. Moving to our balance sheet, at the end of the second quarter, FGI had $16.4 million in total liquidity, which we believe is more than sufficient to fund our growth initiatives. We are maintaining our 2025 guidance as follows. Our revenue guidance is $135 to $145 million. The adjusted operating income guidance is negative 2 million to a positive 1.5 million. The adjusted net income guidance is negative 1.9 million to a positive 1 million. Please note that the guidance for adjusted operating income excludes certain non-recurring items. Adjusted net income excludes certain non-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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Ruben Garner with Benchmark. Please go ahead.

Thank you. Good morning, guys. Good morning. Let's see.

You referenced your customers kind of pausing for tariffs. I'm curious, is that more so they're concerned about demand degradation from the consumer side itself, or is it about just kind of the moving target on the tariff front and not wanting to buy inventory at tariff levels that could potentially come lower, or is it a combination of the two?

Yeah, so that's a great question. And, you know, as we sit here in August, this tariff pause took place back at the beginning of the quarter. And if you remember, the tariffs that were originally announced were quite large and substantial, and then, you know, subsequently had been reduced. So because of that tremendous uncertainty, there was a pause because everyone was trying to determine, you know, at the time, had they brought product in with those larger tariffs, it would have been impacted dramatically. So due to the uncertainty, there was a length of time, several weeks, where orders were paused, and it obviously impacted the quarter. Since, you know, we've been feeling really good about our order pipeline and how it's been moving along. So we don't feel that we're going to see something like that again. But as you also have watched the more recent news regarding tariffs, some things are still unsettled. China tariff discussions were paused again for another 90 day reprieve. So I think there'll still be some caution in the marketplace. but not to the extreme that we saw at the early part of Q2, which impacted our numbers in the quarter.

Okay, and the China plus one strategy you referenced, is that in all segments of your business, including sanitary ware? I know that's a place in the past that's been heavily sort of reliant on China.

Yes, you're 100% correct. And yes, it will be... impacting all of our businesses. There's some things we won't be able to reveal quite yet, but we are extremely active right now in diversifying our global sourcing base. As I've said to a lot of people more recently, there'll be a completely different picture from a global sourcing footprint map this time next year than you've seen today from our company. So there'll be impacts across all the product categories for FGI.

Okay. And I know we have limited history with you guys being a public company, but it looks like your operating expenses historically were higher in the second quarter than the first, and they were lower. Just curious if that was kind of a temporary pullback on your end tied to the uncertainty. How should we expect, I guess, those gross margin and operating expenses to trend in the second half? What's embedded in the guidance?

Yeah, I mean, you know, so we understood and took action based on what we saw occurring in the quarter. We were very diligent in watching our expenses. We have some expense levers to pull to do that. You know, in our margins, You know, I think we had said when our margins got substantially higher previously, you know, we didn't expect them to remain that high. We still saw a realistic picture in the upper 20s to continue, and we still believe that, you know, based on, again, the pipeline and particularly what we've talked about, the growth of new programs and new introductions, which is where most of the growth is coming from at this point.

Yeah, I mean, as far as expenses are concerned, I think it was very prudent to try to cast a very careful eye on where we're spending our expense dollars. So we've cut where we could without sacrificing growth for the future. And I would expect that we would continue that process throughout the year and into 2026.

Okay, just a clarification from me, and this is my last question. The upper 20s, that's a gross margin comment, and is that the back half we think we can get there even with the tariff situation?

Yeah, I mean, we have pretty good confidence that the new businesses that we continue to implement And I say that positively because those were some of the things that were paused a bit in Q2. Those new programs should allow us, if all goes well and as planned, to achieve those margin levels.

Great.

Thanks for the detail, guys, and good luck for the rest of the year. Thank you.

The next question comes from Greg Gebers with Northland Securities. Please go ahead.

Hey, good morning, David and Jay. Thanks for taking the question. I wanted to, I guess, follow up on your ability to navigate the effects of tariffs with vendors and customers and then kind of how maybe the negotiations have gone. If you could touch on maybe how that's played out as expected maybe to date and just kind of how those discussions have gone.

Yeah, I think it's been a little different than last time. You know, we've been through this before, as I mentioned. And the first time this happened back in 18, you know, it was sort of like an initial impact of tariff. And it was, I think the biggest difference was the amount of uncertainty that surrounded tariffs the first time was quite small. because things were sort of firm and then everybody implemented a plan to work with customers on pricing adjustments and work with our suppliers. This time, things were quite fluid and still are quite fluid. And the amount of the tariffs were so large, there was obviously only so much any supplier could do or any factory, but we still worked together with our customers and our suppliers and we adjusted pricing where we could to help our customers maintain value. And what I mean by that is the key that we see is how do we continue to maintain value in a certain price band for certain products in certain categories to make them make sense. You also saw, I think, in the market, in some cases with us, but definitely with others, you saw a shift in where maybe efforts were going and where to invest in products. Certain products maybe lost value. and were more challenging to maintain a value for the end consumer. And I think you're going to continue to see that going into next year. You're going to see better value products that offer a very fair price and good quality, more so than ever before. I think you might have read that private label Businesses that we're pretty strong in have been doing quite well because we offer a greater value in many cases than some of the brands potentially. So that's the big difference. The uncertainty this time and the length of time of this uncertainty with the lack of a definitive final tariff adjustments globally, not just from China, have made things more challenging. But through all of that, what we have seen is our adjustments with our customers' work, and more importantly, all of the new businesses that we've been talking about and the new wins and taking share in the market continue to happen. Some of that has been a little delayed, but the execution plans are in place right now to continue through, and we'll see results from that from going into Q3 and Q4.

Great. That's helpful. Totally makes sense regarding your commentary about the most severe impact of the tariffs and at least the kind of lag or pauses on decision-making taking place at the beginning of the quarter. Did you feel good about the order pipeline and kind of how it's improved? I wonder if you could kind of maybe provide a little bit more color on the degree of the improvement, maybe since the beginning of Q2 to maybe where we are today in terms of You know, those pauses and kind of uncertainty on decision making.

Yeah, I would say that we were on a positive trajectory, you know, going into this pre-tariff impact. And we had, like I mentioned, you know, newer programs that were scheduled to launch. And some of that got delayed, obviously, that wasn't canceled and orders were paused. You know, so everything was sort of just a big slowdown all at one time that had a more precipitous impact in a short period of time. And I would say for the most part, we're back to feeling that same momentum that we had prior to this, right? And there's peaks and valleys there with some little one-offs of individual customers or products that we're still trying to get our hands around. And of course, we're still navigating the global tariff environment. And I think the added differential is the acceleration that we've had with our global sourcing. initiatives, which will start to impact our business this year, but will have a much more dramatic, I'll say, impact overall next year, especially when you look overall at our global footprint compared to what it was at the beginning of this year. So I think the offering that we're going to be able to bring to our customer base as far as global sourcing options and de-risking their sourcing in China particularly, will be pretty dramatic for us.

Got it. And, you know, I know it's had effects on quarters in the past. Anything worth calling out in terms of the timing of product programs, either favorable or unfavorable in the quarter in any way?

No, like I said, you know, some of them were, you know, we had new launches scheduled for the summer in some cases with some customers. Some of them are smaller. Some of them are larger. And of course, when tariffs hit in April, that delayed some of that, right? But now we're looking at things that take place in Q3 and early Q4. So the impact to this year was a little bit reduced. But as we probably mentioned earlier at the end of last year, that's sort of been baked into our guidance because we anticipated these tariffs, as you know. And it's hard to know exactly how much time would be impacted when tariffs were announced. We didn't anticipate... the gravity of the tariffs as early as they were. But luckily, like I said, our pipeline seems to be coming back a little quicker than we thought. So all in all, it's sort of evened out. So we're pretty comfortable where we stand right now.

Okay, got it. And I guess lastly, just another clarification question on gross margins. Did you kind of provide any Any specifics in terms of what's embedded in your guidance of the back half or simply kind of return to improvement in the back half, you know, versus what we saw in Q2?

Yeah, I mean, you can imply based on our numbers. I mean, what you saw so far through the first, I mean, our implication is we're keeping that guidance because our expectation is that we're going to rebound based on, you know, what our original plan was. We'll still capture, even though they're delayed, we'll capture some impact in 2025 in the new programs, a little bit less. But again, we sort of strategically baked some of that in when we built the guidance because we knew this tariff impact was going to come one way or the other.

Okay. Yep. Thanks for clarifying. Thanks very much. Okay. Thank you.

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

Thank you for your time and interest today to everyone. We really 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 call. Thank you.

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