Q3 2022 FGI Industries Ltd Earnings Call

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Operator: Good morning, and. And welcome to FGI Industries third quarter 2022 earnings conference call. All participants will be in a 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 Mr. Paul Bartolai. Please go ahead.

And welcome to <unk> Industries third quarter 2022 earnings conference call.

Right.

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the stocky followed by Seattle.

After todays presentation, there will be an opportunity to ask questions.

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To ask a question you May press Star then one on your telephone keypad.

To withdraw your question. Please press Star then two.

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Please note this event is being recorded.

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I would now like to turn the conference or what the Mr. Paul Battaglia.

Paul Bartolai: Thank you welcome to FGI Industries' third quarter 2022 results conference call. Leading the call today are president and CEO, David Bruce and Chief Financial Officer Perry Lin.

Leading the call today are president and CEO , David Bruce Chief Financial Officer Perry land.

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.

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.

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.

Today's call will begin with a performance review and strategic update from Dave Bruce, followed by a financial review for Perry Lin. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to Dave.

By a financial review for Mary Lynne.

At the conclusion of these prepared remarks, we will open the line for questions with that I'll turn the call over to Dave.

David Bruce: Thanks Paul and good morning to everyone. Our team continued to execute well during the third quarter despite the uneven market conditions as we made significant progress on our margin recovery initiatives and made solid advancements on our organic growth program.

As we forecasted entering the year, we have seen some moderation in the broader R&R market demand trends owing to the headwinds facing the housing market and these pressures were exacerbated by significant inventory destocking during the last two quarters. We were able to overcome these issues in the second quarter and still generate year-over-year revenue growth. However, the level of channel inventory reduction at some of our key customers was too significant to overcome in the third quarter, causing our revenue to decline versus the prior year period and come in below our expectations.

Level of channel inventory reduction at some of our key customers was too significant to overcome in the third quarter, causing our revenue to decline versus the prior year period and come in below our expectations.

While it is difficult to predict how long the channel inventory destocking will continue we believe based on current discussions with our customers that we should return to more normalized levels of inventory purchases in 2023. We remain focused on factors we can control, including our organic growth programs and our margin recovery initiatives, both of which we made excellent progress on in the third quarter.

We remain focused on factors we can control, including our organic growth programs and our margin recovery initiatives, both of which we made excellent progress on in the third quarter.

We remain encouraged by our key organic growth programs as evidenced by the continued strong growth in our other product categories during the quarter, which includes our jet boat shower systems and covered bridge custom kitchen cabinetry business.

Our growth initiatives remain on track despite the near-term market headwinds and we expect our order pattern momentum to return once channel inventory levels normalize.

In addition to the progress on our organic growth programs, we made significant strides in our margin and recovery initiatives as well with gross profit margin expanding by 325 basis points on a sequential basis despite the decline in revenue. Strong growth in our newer higher margin product lines continued pricing momentum and a reduction in freight cost combined to drive the strong margin performance with gross margins quickly returning to levels witnessed prior to the supply chain disruptions just over a year ago.

and a reduction in freight cost combined to drive the strong margin performance with gross margins quickly returning to levels witnessed prior to the supply chain disruptions just over a year ago.

We are confident in our ability to at least maintain these levels of gross margins and expect operating margins to move higher over time, owing to growth in our higher margin product categories, a rebound on bath furniture, and operating leverage.

Higher margin product categories, a rebound on the Bath furniture and operating leverage.

End market demand trends held up relatively well across our key product categories during the third quarter, but the inventory destocking weighed on our revenue trends with total revenue decreasing by 24% on a year-over-year basis.

Our sanitary ware business declined by 18% in the third quarter, driven primarily by declines in our Canadian sanitary ware business, and our bath furniture business saw revenues fall 63% as this business has been more severely impacted by the inventory correction and is also seeing some softer end demand.

Despite the market headwinds, our other product category, which is primarily our shower systems and custom kitchen cabinetry business grew 61% in the quarter.

Overall, we still expect our business to hold up well during the current period of market uncertainty. Roughly 80% of our revenue is tied to the repair and remodel market, which tends to be more stable and predictable than the new construction market, and our focus on the more resilient kitchen and bath market should drive more stable trends over time.

Our company-wide focus is on driving above-market growth and creating value regardless of the market environment and its uncertainties. Consistent with our long-term strategic plan, we intend to compound growth at above industry averages, while driving value creation through a balanced focus on organic growth using our BPC strategy, operational improvements, and efficient capital deployment.

System with our long term strategic plan, we intend to compound growth at above industry averages, while driving value creation through a balanced focus on organic growth using our BPC strategy operational improvements and efficient capital deployment.

Some of our key accomplishments against these key initiatives during the third quarter are as follows. The key to our organic growth strategy is our BPC initiative, which stands for brands, products, and channels. We have made nice progress through our BPC program during the quarter and I wanted to highlight a few of these items.

The key to our organic growth strategy is our BPC initiative, which stands for brands products and channels. We have made nice progress through our BPC program during the quarter and I wanted to highlight a few of these items.

First, we have discussed the opportunities around our custom kitchen cabinetry business under the covered bridge brand on our recent calls and we continued to make great progress on this program during the third quarter.

We continue to generate strong growth in the dealer network, which increased to 126 at September 30th, 2022, up from 71 at the start of the year with significant growth in the dealer channel expected to continue into 2023.

We have also reached preliminary agreements with certain large national customers to act as their key custom kitchen suppliers, which should generate incremental growth in 2023 and beyond as well. As we stated last quarter, we have invested in new manufacturing capacity to support the anticipated business development opportunities. So we are well positioned for incremental growth in this business.

The incremental growth in this business.

Secondly, we have also continued to see growing momentum in our shower systems business. Beginning in the fourth quarter of 2022, the company's Jetco shower program at Lowe's will be co-branded with their private label brand and will be called Allen and Ross shower wall system by Jetco. The new in-store point of purchase marketing material will make the purchase of Jetco walls, together with SGI shower bases, a much easier process, while the strength of the Jetco brand in the market is expected to drive incremental sales into 2023. Additionally, we are excited to announce that our Jetco shower bullet line will officially launch in our Canadian wholesale market in November.

Julien store point of purchase marketing material will make the purchase of Jetblue walls, together with SGI shower basis, a much easier process, while the strength of the brand in the market is expected to drive incremental sales into 2023.

Additionally, we are excited to announce that our jet boat shower bullet line will officially launch in our Canadian wholesale market in November .

Thirdly, FGI will be launching several new product lines and branding initiatives in the fourth quarter of 2022 and first quarter of 2023 across the company's entire geographic footprint and I would like to highlight a few of our more notable programs.

<unk> will be launching several new product lines and branding initiatives in the fourth quarter of 2022, and first quarter of 2023 across the company's entire geographic footprint and I would like to highlight a few of our more notable programs.

FGI's flagship craft and main brand and will be kicking off an exciting assortment of new products, including new electronic bidet toilets, which will give the company and more complete program of bidet toilets at various price points and features.

In Canada, in addition to the launch of our Jetco shower bolt line, we are excited to announce the launch of our contract branded two-piece toilet along with our new avenue branded one piece Karen design with a focus on water-saving, ease of cleaning, and end user comfort. We expect these branded product introductions to drive incremental sales within both the wholesale and showroom channels in Canada. In Germany, FGI has announced a major sanitary ware product launch that should help drive a new cycle of innovation and product development.

And showroom channels in Canada.

In Germany F. Gi has announced a major sanitary ware product launch that should help drive a new cycle of innovation and product development.

The company is confident that the coordinated launch of these new products will further our efforts to capitalize on our BPC strategy as FGI continues to upgrade product offerings with features, benefits, and styles that should drive incremental sales and profit growth.

I'd also like to highlight that FGI will be displaying many of its new products at the 2023 National Kitchen and Bath Show in Las Vegas, Nevada in January 2023. FGI will have over 2000 square feet of exhibit space, the largest exhibitor in company history, and the exhibit will include all the company brands, including covered bridge kitchens, contract, craft and main bathroom products, and the Jetco shower wall systems. We welcome any investors or analysts attending the show to stop by to see some of our exciting new products.

<unk> will have over 2000 square feet of exhibit space the largest exhibitor in company history and the exhibit will include all the company brands, including covered bridge kitchens contract craft and main bathroom products and the jet boat shower wall systems, we would welcome any investors or analysts attending the show to stop by to see some of our exciting new.

Products.

The final item I would like to highlight under our BPC strategy is the expansion of our geographic footprint into the United Kingdom and Australia. This is an important step in further growing our international presence, which we started several years ago first in Canada and followed by Germany.

We see tremendous opportunities to leverage our existing product and operational base and to successfully grow into these new geographic regions.

We are already seeing early success in these markets as evidenced by our recent award of a new sanitary ware program for 2023 by Bunnings, the largest home improvement retailer in the Australian market. We're actively building our local talent base in both these countries and look forward to meaningful, long-term growth opportunities in the years ahead.

We're actively building our local talent base in both these countries and look forward to meaningful, long-term growth opportunities in the years ahead.

We are extremely excited by our continued execution against our organic growth programs under our BPC 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. As I mentioned previously, we made significant progress on our margin recovery initiatives during the quarter with gross margin improving by 325 basis points on a sequential basis and 490 basis points year over year. I am very pleased that we've been able to drive gross margins back to levels witnessed prior to the supply chain disruptions just over a year ago.

I am very pleased that we've been able to drive gross margins back to levels witnessed prior to the supply chain disruptions just over a year ago.

Finally, is our dedication to efficient capital deployment. We have several organic growth initiatives in various stages of development that we are very excited about and should be meaningful contributors to growth in the coming quarters and years. And these programs will continue to be the primary use of capital in the near term. That said, we continue to evaluate bolt-on opportunities and discuss opportunities with potential partners.

That said, we continue to evaluate bolt on opportunities and discuss opportunities with potential partners.

While we are disappointed by our topline results during the quarter, we remain excited by the progress on our strategic priorities and we look forward to continuing to update the investment community on our progress against these important goals. With that, I will turn it over to Perry for a more detailed review of our financials.

With that I will turn it over to Perry for a more detailed review of our financials.

David Bruce: Thank you, Dave and good morning, everyone. I will provide some additional details on the quarter given the update on our liquidity and balance sheet and wrap it up with our updated full-year 2022 guidance. Revenue totaled $38.5 million during the third quarter 2022, a decrease of 24% compared to the prior year due to volume [inaudible] caused mainly by inventory destocking also witnessed in the bath furniture market. These factors were partially offset by continued strong growth in our other segment. driven primarily by our shower system and kitchen camp [inaudible] recently.

Compared to the prior year due to volume praised you have caused by mainly by inventory Destocking. We also witness in the Bath furniture market.

These factors are what partially offset by continued strong growth in our auto segment.

driven primarily by our shower system and kitchen camp [inaudible] recently.

Looking at our business line, sanitary ware revenue was 26 million during the third quarter of 2022, a decrease of 18% compared to the prior period. The revenue decline was largely the retail or the channel inventory reduction by key partners, primarily in the pro channel and customer demand has remained relatively stable, so we expect the volume to rebound as inventory levels are adjusted.

So about 18% compared to quiet period now.

The revenue decline was largely the retail all the channel inventory reduction by key partners, primarily in the pro channel and customer demand has remained relatively stable. So we expect the volume to rebound us inventory label adjusted.

Furniture revenue was $5.6 million during the third quarter, a decrease of 63% compared to the prior period. The best furniture business has begun to see some pressure from destocking in recent quarters. So we were expecting to see these trends begin to normalize in the back half of the year.

However, we continue to see customers reduce inventory level, which [inaudible] revenue in the third quarter. While we have seen some modest pressure on demand trends in the broader bath furniture market, we remain optimistic of that we will rebound quickly as inventory normalizes.

Children normalize.

Other revenue was $7.4 million during the third quarter of 2022, an increase of 61% compared to the prior period driven by strong volume growth in our custom kitchen business and our [inaudible] system.

Gross profit was 8 million during the third quarter of 2022, a decrease of 1% compared to the prior year period. The revenue decline was largely offset by significantly improved gross margins, which have improved to 20.9% during the quarter, up 190 basis points from 16% in the prior year period.

The revenue decline was largely offset by a significantly improved gross margins, which have improved to 29% during the quarter.

190 basis point from 16% in the prior year period.

The improvement in our gross margin percentage is primarily attributable to solid growth in higher margin products, such as the shower system and kitchen [inaudible] continued pricing gains and a reduction in freight cost as opposed to the elevated [inaudible] period last year.

We expect the positive factor, which drove the strong margin performance in the third quarter to remain in place, which combined with expanded rebound in the bath furniture segment should enable the company to drive additional gross margin gain overtime.

Factor, which drove the strong margin performance in the third quarter two of remaining price.

Which combined with expanded up rebound in the best furniture segment should enable the company to drive additional gross margin getting overtime.

GAAP operating income was $1.7 million during the third quarter of 2022, down from 1.8 million in the prior year period. The decrease in operating income was driven by the decline in revenue, partially offset by the significant improvement in gross margin.

Retail operating margin was 4.3% during the third quarter, up from 3.6% in the same period last year.

GAAP net income was $1.3 million or 11 cents per diluted share during the third quarter of 2022, down from 1.4 million or 20 cents in the same period last year. The reduction reflects the decline in operating income as well as an increase in our diluted share count.

Now turning to the balance sheet and our liquidity. As of September, 30th, 2022, the company has 6 million of cash and cash equivalent and total [inaudible].

September 30th 2022, the company has 6 million of cash and cash equivalent and total dad's setting meaning.

At the end of the quarter, the company had five million availability under our credit facility, net of the data of credit. Combined with cash, total liquidity was 11 million as of September 30th.

We were pleased to see an improvement in our working capital level during the quarter, which has been elevated in the recent quarter, owing to the supply chain challenges. The reduction in working capital [inaudible] a strong free cash flow conversion in the quarter. We expect our capital spending needs to remain around 1% of the revenue.

Has it been elevated in recent quarter, owing to the supply chain challenges the reduction in working capital draw with a strong free cash flow conversion in the quarter, we expect our cash capital spending needs to be remain around 1% of the revenue.

We believed we were in a solid liquidity position that is more than sufficient to fund our growth initiatives. We were extremely pleased with the quick rebound in our margin performance during the third quarter and we remain encouraged by the progress on our organic growth initiative.

We were extremely pleased with the Quaker rebound in our margin performance during the third quarter and we remain encouraged by the progress on our organic growth initiative.

However, this was not enough to offset the significant inventory destocking we are seeing in the back half of the year. As a result, we are adjusting our 2022 financial guidance and now expect revenue in the range of 164 to 168 million and operating income to be in the range of 6 to $6.5 million and net income to be in the range of 4.5 to 5 million.

to $6.5 million and net income to be in the range of 4.5 to 5 million.

While we are disappointed that we are lowering our guidance, we are pleased that we are lowering the net income range by less than one million at midpoint of the range despite a roughly 20 million reduction in our revenue guidance, owing to the strong progress we have made in our margin improvement initiative.

This completes our prepared remarks. Operator, we are now ready for our question and answer portion of our call.

Prepared remarks, operator, we are now ready for question and answer portion of our call.

Operator: Thank you very much. We will now begin the question and answer session. To ask a question, press star and one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Thank you.

Yeah.

We will now begin the question and answer session.

Last quick question, you referenced star and one on your telephone keypad.

Okay, using a speakerphone please pick up your handset before pressing the keys.

I would draw your question. Please press Star then two.

At this time, we will pause momentarily.

Symbol Eros now thank.

Thank you.

The first question is from the line of Rueben Garner from the Benchmark. Please go ahead.

From the benchmark. Please go ahead.

Multiple speakers: [Reuben Garner] Thank you and good morning everybody. [David Bruce] Good morning Reuben. [Perry Lin] Good morning. [Reuben Garner] So maybe just start with the inventory destocking, is there any way to gauge where inventory stands from a volume standpoint today versus maybe three or four or five years ago for you guys? I mean, it sounds like after things normalize you're expecting maybe volume growth or volume more in line with the market dynamics, in line with excuse me, the sell through to return, but can you help us just understand where inventory in the channel stands today versus a quote unquote normal?

Rubin the money.

So maybe just start with the.

The inventory Destocking is there any way to gauge where inventory stands from a volume.

Standpoint today versus maybe.

Three or four or five years ago for you guys I mean.

It sounds like you know after things normalize you're you're expecting maybe volume growth or volume more in line with the market.

Dynamics are and you know.

Yeah.

Okay.

In line with excuse me with the sell through to return, but can you help us just understand where.

Inventory in the channel stand today versus what you know a quote unquote normal.

David Bruce: Sure. Destocking, as you've probably seen with other companies, has been going on all year throughout the industry and too many of our customers faced the issue with us. It sort of crept up on us in the middle of Q3. And that process takes a while to flush out obviously. In many cases it will take many months because the one part of the supply chain process that has not greatly improved is lead times. So there's almost an active, what I would call a passive restocking going on, meaning there's still inventory coming in for customers that they technically don't need. I mean, they're not placing orders for some new inventory and they're still getting some tailwind with effect of older orders that are coming in delayed. But because that started to happen in Q3, our anticipation is that a lot of that from our perspective at least in our situations will flush out as we go into the beginning of the year. We're starting to see some change already as we enter Q4 to some degree with some of the business that have particularly in our bath furniture segment which probably was most affected by the destocking. We're starting to see a very slow improvement there heading into Q4. So again, it's just a flush out theory that we're waiting for. It is happening and most likely as we enter the Q1 of 2023, we're going to see that level off.

Destocking has.

<unk> seen with other companies has been going on all year throughout the industry and we didn't have.

To many of our customers have faced the issue with us.

Crept up on us in the middle of Q3.

And that process takes a while to flush out obviously.

In many cases it will take.

Many months because the one part of the supply chain.

A process that has not.

Lately improved as lead times right. So there's almost a.

And active.

What I would call a passive REIT.

<unk> stocking going on meaning theres still inventory coming in for customers that they technically don't need right I mean, they there they're not placing orders for some new inventory and theres still getting some tailwind with effect of older orders that are coming in delayed but because that started to happen in Q3, our anticipation is that a lot of that from <unk>.

Perspective at least in our situations will flush out as we go into the beginning of the year.

We're starting to see some change already as we enter Q4 to some degree with some of the business that have particularly at our Bath furniture segment, which had probably was most affected by the destocking, we're starting to see a very slow.

Improvement there heading into Q4, so again.

It's just a flush out theory that we're waiting for it is happening and most likely as we enter the Q1 of 2023, we're going to see that level off.

Reuben Garner: Okay. What gives you confidence that there isn't another step lower in inventory in the channel? Is it conversations with customers? Is it where it stands relative to history? I mean, do you think that's helpful there? The reason I ask is I know you had some level of destocking furniture piece earlier in the year. It sounds like they took another step lower. I'm just curious like how much further? Is there a point where they can't do that anymore?

Is there I mean, what gives you confidence that there isn't another step.

Lower inventory in the channel as it is the.

Conversations with customers as it is it for you.

Where it stands relative to the history I mean, the one thing that's.

That's helpful. There.

Can I ask is I know you had some level of destocking.

Furniture piece earlier.

Brian the year it sounds like they took another step lower I'm just curious like how how much further is there a point where they can't do that anymore.

David Bruce: Yes, there is. As a matter of fact, the good news is during this destocking phase the end-market demand is only moderately lower. We're not seeing a severe dip in end-market and end-user demand at this point. The majority or the main driver behind the revenue is because of the destocking. So to answer your question of why we feel pretty confident that we're not going to see dramatic increasing destocking there mainly because of the moderation of the end-user demand. And for us the other positive is that we're still driving new incremental sales growth and taking share within our newer product categories, our covered bridge kitchens or some of the things you heard in my opening comments about our new toilet technology, our shower system. So even if there was a larger increase in I should say a decrease in demand, our incremental sales growth alone would, in our minds, more than offset any additional softness in end-user demand.

The good news is during this destocking.

Phase.

The end market demand is only moderately lower you know we're not seeing a.

A severe dip and end market and end user demand at this point.

The majority of the or the main driver behind.

The revenue Miss is because of the Destocking. So to answer your question of why we feel pretty confident that we're not going to see dramatic increasing destocking there mainly because of the moderation of the end user demand.

And for US the other the other positive is that we're still driving new incremental sales sales growth and taking share within our our newer product categories are covered bridge kitchens are some of the things you heard in my opening comments about our new toilet technology, our shower system. So.

Even if there was a larger increase in.

Oh, I should say a decrease in demand our incremental sales growth alone.

It would in our minds more than offset any additional softness in end user demand.

Reuben Garner: Okay, and then the margin recovery, obviously pretty impressive in the face of the inventory destock. Can you talk about as you move into next year, how much more room there is for improvement there? What are the puts and takes? Other than the top line do you still have costs coming in and previous price increases flowing through that are going to help continue to drive that higher even if the volume is softer? I guess just update us on kind of the margin progression as we move into 2023.

Top line do you still have costs coming in and price you know previous price increases flowing through that are going to help continue to drive that higher even if even if volume is softer or I guess just update us on kind of the margin progression as we move into 'twenty three.

David Bruce: Sure. So that's a great point. Yes, absolutely, understanding that specifically for our merchandize that primarily comes from China or southeast Asia, your freight rates, let's talk about the freight rates and logistics that have obviously been improving, but those freight rates are based on the day that the product ships. So obviously, in the marketplace, it is being received today might be cost effected negatively with higher freight rates from three months ago for example, right? So we're going to see flow through. Our inventory carrying costs continue to reduce as we go into Q1 and Q2 next year. At the same time, as we have been mentioning and you just touched upon, we've taken pricing actions with customers throughout the year. Some of those were fairly recent, so again, it won't have a full impact until really the beginning, sort of in the middle of Q4 going into Q1 and Q2. So we're pretty confident that we can at least maintain our margins, if not, we expect them to grow because on top of that I'll go back to our BPC strategy, which I mentioned. We are focused on new incremental sales growth and particularly at our higher margin categories. The shower and the kitchens for example, we expect tremendous growth there so. You roll all those things up together, our margin picture, we're pretty confident going into next year.

Yes, we absolutely understanding that for specifically for our merchandize that primarily comes from.

China or southeast Asia, you know your freight rates, let's talk about the freight rates and logistics that have obviously been improving but those freight rates are based on the day that the product ships. So obviously.

In the marketplace.

It is being received today might be.

Cost effected negatively with higher freight rates from three months ago. For example, right. So we're going to see flow through.

Our inventory carrying costs continue to reduce as we go into Q1 and Q2 next year at the same time.

As we have been mentioning and you just touched upon we've taken pricing actions with customers throughout the year some of those.

We're fairly recent so again it won't have a full impact until really the beginning.

Sort of in the middle of Q4 going into Q1 and Q2, so we're pretty confident.

That our margin.

We get at least maintain our margins if not we expect them to grow because on top of that I'll go back to our BPC strategy, which I mentioned, we are we are focused on new incremental sales growth and particularly at our higher margin categories right the shower.

And the kitchens for example, we expect tremendous growth there so.

You roll all those things up together.

Margin picture, we're pretty confident going into next year.

Reuben Garner: Okay, great. And then the last one from me, the last couple of quarters, we've talked about potential for new products, new business wins, just curious, there were a couple of announcements in the press release. Are these related, are those separate? The opportunities that we've talked about in the past, is that still on the come?

The last couple of quarters, we've talked about potential for for.

New.

Products are.

New business wins, just curious that there was a couple of announcements.

In the press release are these related to those are those separate is that is the thing.

The opportunities that we've talked about in the past is that still on the come.

David Bruce: Yeah, absolutely. We have multiple opportunities. Now of course, we added and you heard today, we're expanding markets as well so those are more I would say global opportunities in the UK and Australia. But getting back to where our current footprint was, yes, there are multiple new opportunities within multiple channels also in all of our product categories right now. Timing is of the essence of course to announce those in detail and many of those would come to fruition most likely probably Q4, but most likely getting pushed out into the beginning of 2023 and they cover the vast majority of our product lines and multiple channels that we're dealing with.

I would say global.

Opportunities in the U K, and Australia, but getting back to where our current footprint was.

Yes, there is multiple new opportunities within multiple channels at all also.

And all of our product categories right. Now you know timing is of the essence of course to announce those in detail.

Many of those would come to fruition most likely.

Probably Q4, but most likely getting pushed out into the beginning of 2023.

They cover.

The vast majority of our product lines and multiple channels that we're dealing with.

Multiple speakers: [Reuben Garner] Okay, great. Thanks guys, I'll leave it there. Good luck going forward. [David Bruce] Okay, thank you. [Perry Lin] Thank you Reuben.

Operator: Thank you. The next question is from the line of [inaudible] from Northland Securities. Please go ahead.

The next question is from Atlanta Gibbs from Northland Securities. Please go ahead.

Multiple speakers: Hey, good morning, David and Perry, thanks for taking the question. [David Bruce] Good morning, thank you. [Unknown Speaker] Yeah, if I could follow up on Reuben's first kind of line of questioning, what kind of gives you confidence that the inventory maybe correct, I guess? I think you mentioned Q4 kind of seeing a little bit of improvement, but when we think about it, would it be more of a prolonged kind of correction in 2023, or would you expect it to snap back relatively quickly? Just trying to think of the time.

Yeah, if I could follow up on Rubens first kind of line of questioning.

What kind of gives you confidence that the inventory maybe correct I guess.

You know I think you mentioned Q4 kind of seeing a little bit of improvement, but you.

You know when we think about it you know would it be more of a prolonged kind of correction in 2023 or would you expect it to snap back relatively quickly just trying to think of a time.

David Bruce: Yes, I mean, I think our anticipation now as we look at it here in the month of November in Q1 and I will say this, it varies a little bit by geographic region and also varies a little bit by product categories. So for example, I see Canada for sure and possibly early Q1, good Q1 level to go off and having destocking sort of get back to normal. Here, we might have a little bit longer only because the cabinets are more of a challenge and it's only because our cabinet program is so broad here, and it's a much larger, a much more diversified product category, but at the same thing I anticipate that with our shower business, our sanitary ware business, and even the cabinets I believe by the end of Q1 into Q2 is what we would see things normalize. And I could see that being even earlier when it comes to our sanitary ware and the shower systems business. So if anything it's going to take a little bit longer I would say the cabinetry, but Q2 would be the longest I would see it going.

He is a little bit by geographic region are also varies a little bit by product categories. So for example, I see Canada for sure and possibly early Q1, good Q1 level I go off and having.

Destocking sort of I'll call it that and get back to normal here, we might have a little bit longer only because the cabinets are more of a channel and it's only because our cabinet program is so broad here.

And it's a much larger.

A much more diversified product category, but at the same thing I anticipate that with our shower business.

Military where business and even the cabinets I believe by the end of Q1 into Q2 is what we would see things normalize and I could see that being even earlier.

It comes to our sanitary ware.

The shower systems business. So if anything it's going to take a little bit longer I would I would say the cabinetry, but Q2 would be the latest.

The longest I would see it going.

Unknown Speaker: Got it, very helpful David. And I guess I also kind of wanted to ask if we are seeing end-market demand staying relatively strong, does it almost surprise you to see the level of destocking that you did see from your customers? Sorry, if I missed this in your prepared remarks, but maybe why do you think that's happening? Is it really just them being cautious?

And I.

Hey, I guess.

I also kind of wanted to ask.

Does it if we are seeing end market demand staying relatively strong.

Does it almost surprise you to see the level of Destocking that you did see in.

So from your customers.

Sorry, if I missed this in your prepared remarks, but maybe why do you think that's happening is it is it really just them being cautious.

David Bruce: I've seen this before, not to this degree in years past, and what happens is when you have a tremendous logistics snag in delivery so to speak, there was a lot of unknown about container availability, there was a lot of unknown about delivery times. And I don't want to use the word panic, but customers and ourselves you got to a point, look we've got to be prepared to stay in stock and we did a very good job of that to make sure we were in stock for our customers, so they can so they could get product, but we also deliver product to our customers directly from [inaudible] and it's hard to predict, right? So what happens is when the situation was really bad and the anticipation of delivery was unknown, excess orders are placed in some degree and they're spread out and then all of a sudden as things start to pick up a lot of those spread out orders start to get delivered all at one time, right? So they start to get product in and at the same time, sometimes what happens is you start to get the wrong product, and you've got product you didn't need as quickly and the product that you needed just coming later, right? So you're always chasing product, you're always chasing trucks, you're always chasing those circumstances, and I call it the bullwhip effect. By the time you see what's happened, and you start to realize what's coming in you're like, oh, wow, now we've got to take a look at where is our demand. And like I said, demand only moderated slightly, it wasn't a disaster from a demand side, but when you have all that inventory come in all at one time it creates a backlog. So I think that's the situation that you have seen the market in, some people experienced it earlier in the year, we experienced that a bit later. I don't think ours as to the severity as some of the other industries may have faced but for sure I think it's a more manageable, this isn't a disaster situation that's not manageable, and I believe, like I mentioned, we're already starting to see some easing of it now but realistically, it's Q1, Q2 release at this point.

A tremendous.

Logistics.

Meg and delivery so to speak right. There was a lot of unknown about container availability. There was a lot of unknown about delivery times.

And I don't want to use the word panic, but they're good.

Customers and ourselves you got to a point so look we've got to be prepared to stay in stock and we did a very good job of that to make sure. We were in stock for our customers. So they can so they could get product, but we also deliver product to our customers directly.

From age on Ocean containers and <unk>.

And we it's hard to predict right. So what happens is when the situation was really bad and the anticipation of delivery was unknown.

<unk> orders are placed in some degree and they're spread out and then all of a sudden as things start to pick up a lot of those spread out orders start to.

Get delivered all at one time right. So they start to get product in and at the same time, sometimes what happens is you start to get the wrong product and you've got product you didn't need as quickly in the product that you needed just coming later right. So you're always chasing product you're always chasing trucks, you're always chasing those circumstances and I call. It the bullwhip effect by the time.

You see what's happened.

And you start to realize what's coming and you're like Oh, Wow that we've got to take a look at whereas our demand right and like I said, the bandwidth demand only moderated slightly it wasn't a disaster from a demand side, but when you have all that inventory come in all at one time it creates a backlog right. So I think thats. The situation that you have seen the market in some people experienced it earlier in the year.

We experienced that a bit later I don't think ours as to the severity as some of the other industries may have faced but for sure I think it's a more manageable. This isn't a disaster situation, that's not manageable and I believe like I mentioned, we're already starting to see some easing of it now but realistically. It's Q1 Q2 release at this point.

Unknown Speaker: [Unknown Speaker] Got it, makes sense. And hey, nice growth out of the other product category. Just wanted to follow up there in terms of what product lines you're seeing more of a success in that segment, and then kind of driving that growth. [David Bruce] Yeah, so both our shower systems and our kitchens I'll give a little more color. So our special order custom kitchen business is just being very, very well received in the market. I think we expanded our dealer base and more than doubled our dealer base almost doubled already this year through September. You're going to see again, we can't announce any details, but we're in talks with a large national customer that would take on this program, which will be a game changer for us and we have great anticipation for this program going into 2023. 

And hey, nice growth out of the other product category just wanted to follow up there on in terms of what product lines Youre seeing.

More of a success in in that segment, and then kind of driving that growth. Yeah. So so both our shower systems in our kitchens I'll give a little more color. So our special order custom kitchen business is just is just being very very well received in the market I think we expanded our dealer base and more than doubled our dealer base almost doubled.

Already this year through September .

We're going to see again, we cant announce any details, but we're in talks with a large national customer that would take on this program, which will be a game changer for us and we have.

Right great anticipation for this program going into 2023 on the shower systems side, we are seeing.

On the shower systems side, we're launching new items on our shower doors, our shower basis, some exciting new shower walls. You'll see a lot of this product if you make it out to the [inaudible] show. We've already got placement for some of this, people are preordering products, so there's a lot of excitement there. And again, we've always harped on our BPC strategy, and that's part of it, right? Those new brands, not only higher volume in our brands, but better quality, a higher ticket and of course, what's maybe the most important is higher margin product for us, right? So these are all incremental opportunities that we see going into 2023.

People are preordering products, so theres a lot of excitement there so.

And again, we've always harped on our BPC strategy and Thats part of it right those new brands not only higher volume in our brands, but better quality, a higher ticket and of course.

What's maybe the most important its higher margin product for US right. So these are these are all incremental opportunities that we see going into 2023.

Unknown Speaker: Okay, great. I guess lastly I just wanted to follow up on your entrance into the UK and Australian markets. Do you expect to maybe expand that business, I guess, maybe what's the strategy to expand that business in those new markets going forward?

Do you expect to maybe expand that business.

I guess, maybe how what's the strategy to expanding that business in those new markets going forward.

David Bruce: Yes, what I would say is as a general statement. I would use our example in Germany, I think we talked about our German model when we were doing our roadshows and through some of our investor conferences. We have a very capital light model in Germany. We installed a couple of people, our Sales Manager, Vice President, and [inaudible] team, very little overhead. And the reason that was able to work is because they were able to leverage a global product and logistics platform that we already have in place. So we have all of our manufacturing partners that we've had for a very long time, we have our product teams, our merchandising teams over in Asia, and of course, we have a global teams within each of our geographic markets that work together to develop products. And one of the things that's unique about our company is that we don't dictate product development and marketing for each region from a central location, everything is decentralized. So we allow the markets to create what they need. So if you looked at that German model, which went from zero to $16 million worth of business in about eight or 10 years, that sort of model is what we're trying to replicate in the UK and also in the Australian market. We think we can do that, I don't want to say easily, nothing's easy, but we have experience at replicating and leveraging our operating experience and our merchandising, and our product experience, and our quality into those markets, allowing those sales managers and those very small teams to develop what they need for their customers. So we're extremely excited about it because we have experience with it from that German market. We're just going to take what we've learned and bring it into these new markets now.

I would say is as a <unk>.

General statement I would use our example in Germany, I think we talked about our German model.

When we were doing our roadshows and through some of our investor conferences.

We are a very capital light model in Germany, we installed a couple of people our sales manager Vice President.

The <unk> team.

Very little overhead and the reason that was able to work is because they were able to leverage a global product and logistics platform that we already have in place right. So we have all of our manufacturing.

Manufacturing partners that we've had for a very long time, we have our product teams our merchandising teams over in Asia and of course, we have a global.

Global teams within each of our geographic markets that work together to develop products and one of the things that's unique about our country. Our company is that we don't dictate.

Product development and marketing for each region from a central location everything is decentralized. So we allow the markets to create what they need. So you can take if you looked at that German model, which went from zero to $16 million worth of business in about eight or 10 years that sort of model is what we're trying to replicate in the UK and also in Australia market.

I think we can do that I don't want to say easily nothing's easy but.

We have experienced at replicating and leveraging our operating experience at our merchandising and our product experience on our quality into those markets, allowing those sales managers in those very small teams to develop what they need for their customers. So we're extremely excited about it because we have experience with it from that German market.

We're just going to we're going to take what we've learned and bring it into these into these new markets now yeah.

Perry Lin: I'd like to piggyback a liitle. Besides the successful model we have in Germany, we also have a very successful model in Canada. So for UK, Australia, and whatever piece of massive opportunity over there, we have a good business model that we can replicate and go [inaudible].

Unknown Speaker: Okay, good to hear. Thanks, guys.

Okay. Good to hear thanks, guys.

David Bruce: Thank you.

Operator: Thank you. Ladies and gentlemen, as there are no further questions, this concludes our question and answer session. I'd like to turn the conference back to Mr. David Bruce for any closing remarks.

Ladies and gentlemen, as there are no further questions. This concludes our question and answer session.

I'd like to turn the conference back to Mr. David Bruce for any closing remarks.

David Bruce: Thank you for the time and interest today. We appreciate your continued support of FGI. Stay well and we look forward to connecting with you on our next quarterly call. Thank you.

Thank you.

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

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