FGI Industries Ltd. Q1 2023 Earnings Call

Speaker 1: Good morning and welcome to the FGI Industries Inc. first quarter 2023 earnings call.

Speaker 1: All participants will be in lesson only more. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker 1: 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.

Speaker 1: Please note this event is being recorded.

Speaker 1: I would now like to turn the conference over to Paul Bartholai, managing director, volume advisors. Please go ahead.

Speaker 2: Thank you. Welcome to FGI Industries, first quarter, 2023 Results Conference call.

Speaker 2: We begin the call today, our president and CEO David Bruce, and chief financial officer Perrilyn.

Speaker 2: We issued a press release after the market closed yesterday detailing our recent operational financial results.

Speaker 2: I would like to remind you that management's commentary and responses to questions on today's conference call may conclude forward-looking statements.

Speaker 2: 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. Today's call will begin with a performance review and strategic update from David Bruce, followed by a financial review from Barry Layton.

Speaker 2: At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Dave.

Speaker 2: Thanks Paul. Good morning to everyone and thanks for joining our call today.

Speaker 2: We were very pleased with our strong operational execution and continued progress against our strategic initiatives during the first quarter, despite what remains a very challenging market environment.

Speaker 2: Even with the destocking headwinds pressuring our revenues, we were able to generate meaningful first quarter gross margin improvement while our consistent focus on our organic growth initiatives should position the company to return to profitable growth as inventory conditions normalized. We reported a first quarter gross margin of 26.5%, which was up 925 basis points compared to the prior year period, and up 285 basis points versus the fourth quarter.

Speaker 2: despite the ongoing customer inventory correction and uneven demand trends in the repair and remodel market, witness story in the quarter.

Speaker 2: While our gross margins were helped by lower freight costs and the benefit of last year's pricing actions, the biggest factor has been our focus on higher margin product categories and our good, better, best product strategy, which has resulted in a significantly improved product mix.

Speaker 2: While the first quarter gross margin levels are likely not sustainable for the long term, the favorable gross margin drivers remain in place, and we expect strong gross margin improvements for the full year 2023 compared to last year. The inventory correction that has been a headwind to our revenue growth over the last year has persisted into 2023, with the macro uncertainty adding another layer of pressure. As many large customers are taking a very cautious stance and looking to reduce inventories to levels below historical averages.

Speaker 2: This caused our first quarter revenue to decline 38% compared to last year.

Speaker 2: The more cautious, cautious inventory strategy by many of our large customers is expected to prolong the destocking headwinds.

Speaker 2: particularly in the Pro Channel, where the inventory correction will likely extend it to the second half of the year.

Speaker 2: While the uncertain demand environment, persistent inflation, and destocking headwinds are pressuring top line results in the near term, we are continuing to invest in our organic growth initiatives and I am very proud of the progress we have made.

Speaker 2: on our strategic priorities during the quarter.

Speaker 2: We were awarded several new product programs with key retail partners that will be key contributors to organic growth in the coming quarters.

Speaker 2: And we continue to invest in the new kitchen cabinetry program that we discussed last quarter. We remain confident in the progress we are making on our organic growth initiatives through our brands, products, and channel strategy, or BPC.

Speaker 2: Our strong performance as it relates to our VPC strategy is a testament to our commitment to innovation and customer satisfaction and we are confident in our ability to capitalize on these successes and continue delivering value to our customers in the future.

Speaker 2: It is during challenging market environments like the one we are experiencing now, where the strengths of our business model are evident.

Speaker 2: Notably, our diversified product offering and loans long-standing customer relationships.

Speaker 2: While many industry participants are facing challenges due to consumers trading down to lower priced products, we are well positioned to give our good, better, best product portfolio.

Speaker 2: We are seeing some pressure on our higher end products, particularly in bad furniture, but this is being partially offset by stronger growth in our good, better private label offerings.

Speaker 2: In addition, we benefit from our deep and long-standing relationships with key customers who look to FTI for support during difficult times. And as a result, we have not suffered any product line cancellations or customer losses.

Speaker 2: Now, looking at the broader R&R market, as I discussed earlier, we expect the stocking to continue to be a headwind during 2020-2030, and we can see this extend out further, given a more conservative inventory strategy by many large customers as they reduce their base level inventory requirements.

Speaker 2: While the inventory correction has been a challenge, and market demand has held up relatively well across our key product categories.

Speaker 2: or a bath furniture business has seen the most pressure, but overall the repair and remodel market is performing as we would expect based on the current macro economic environment.

Speaker 2: The new residential construction market is not a meaningful part of our business.

Speaker 2: But there have been some signs that the market is bottoming. Commentary from the public builders has been more constructive during the first quarter, with most players noting improved order trends during the key spring selling season.

Speaker 2: As it appears buyers are starting to adjust to a new normal of higher mortgage rates.

Speaker 2: Overall, the trends in our end markets are consistent with our expectations coming into the year, and we continue to expect our end markets to decline in the mid to high single digits during 2023.

Speaker 2: While the inventory pressures were more pronounced than we expected during the first quarter.

Speaker 2: Based on our strong margin performance progress on our organic growth drivers and stable end-market trends, we remain confident in the 2023 financial targets we provided to start the year.

Speaker 2: The higher mortgage rates, persistent inflation, and macro uncertainty are clearly impacting consumer spending levels in the near term.

Speaker 2: But we remain optimistic regarding a longer term outlook for the kitchen and bath repair and remodel market and FGI's position in the industry and therefore continue to invest in our business despite the current headwinds.

Speaker 2: As a result, we remain focused on our strategic plan and are dedicated in our efforts to drive long-term growth above the market and create value regardless of the market environment. As a reminder, our long-term strategic plan is focused on three key initiatives, which include driving organic growth using our BPC strategy, operational improvements, and efficient capital deployment. We made important progress against these strategic initiatives.

Speaker 2: During the first quarter, including the following key accomplishments. As it relates to our BPC program and our organic road initiatives, we were awarded several important new programs during the quarter. First, the company's secured an agreement with a large Canadian retailer for a refresh of its in-store sanitary wear line, including new toilets.

Speaker 2: with new product rollout expected to commence in September of 2023.

Speaker 2: Second, we continue to generate strong interest in our custom kitchen program. After a successful kitchen and bath show in January , we have added an additional 34 dealers to our portfolio, bringing a total dealer count to 159 active dealers at the end of the first quarter, with additional dealer growth expected to continue.

Speaker 2: And third, we want several important programs for our shower business.

Speaker 2: We added an online shower door program for an existing large Canadian retail partner, which is expected to commence in June of 2023.

Speaker 2: Additionally, FGI is set to revolutionize the customer in-store experience with the unique program for a large US retailer that enables store associates along with the customer to collaboratively design and immediately quote and take orders for custom shower doors.

Speaker 2: FGI's new online shower door configuration tool will allow for a seamless shopping experience and is expected to add incremental higher margin shower door sales.

Speaker 2: Finally, we were just recently awarded a national in-stock program for our shower wall systems, as well as an online shower base program with a large US retailer, which will begin with a rollout of up to 300 locations in the second half of 2023. This program will feature new and unique finishes.

Speaker 2: which further expands the shower wall programs industry leading design portfolio.

Speaker 2: We are extremely excited by our continued execution against our organic growth programs under our PPC strategy, and we remain confident that these initiatives will help us drive above-market organic growth as market conditions normalize. The second focus of our value creation strategy is on operating efficiency and driving margin expansion. We clearly once again.

Speaker 2: made significant progress on our margin improvement initiatives during the first quarter, as we reported gross margin of 26.5%.

Speaker 2: This is well above our typical historical levels, and while we don't expect to be able to maintain these levels longer term, we are encouraged by our strong execution and the benefits of our evolving business mix shift towards higher margin product categories.

Speaker 2: Finally, is our focus on efficient capital deployment. Following the challenges caused by the supply chain disruptions and inflationary pressures, we made meaningful progress in reducing or working capital usage in recent quarters, which has resulted in improved free cash flow conversion.

Speaker 2: This further bolstered our solid liquidity position and financial flexibility. As a result, we have ample capacity to invest in our organic growth initiatives. Overall, I was very proud of our execution during the quarter. We generated another quarter of strong margin expansion.

Speaker 2: We were awarded several new business programs and we made important progress on our strategic goals. While we were disappointed in our first quarter top line results, we continued to invest in our organic growth strategy and remain confident that we are well positioned for improved growth in the coming quarters.

Speaker 1: With that, I will turn it over to Perry for a more detailed review of our financials. Thank you Dave, and good morning everyone. I will provide some additional details on the court given an update on our liquidity and balance sheet and life is up with all four year 2023 guidance.

Speaker 1: Revenue total 27.2 million during the first quarter of 2023, a decrease of 38% compared to prior year, by memory due to continued inventory destocking as well as some softening in customer demand. Currency was having during the quarter and negatively impact revenue by 1.1%.

Speaker 1: Looking at our piece in his mind, Senator Revere revenue was 15.4 million during the first quarter, down from 26.8 million.

Speaker 1: during the prior year period. The revenue decline was driven by channel inventory reduction at the key partners, particularly in the pro channel. As customers are becoming increasingly cautious regarding inventory levels, with some large customers reducing their inventory level to below no more historical levels.

Speaker 1: There have been some pockets of softness, but overall, end-customer demand has remained relatively steady. Based furniture revenue was 5 million during the first quarter.

Speaker 1: The best furniture business also continue to be the impact of the innovative channel inventory levels, which has been prolonged by some modest waking of demand. Xiaoxi's revenue was 5 million during first quarter 23.

Speaker 1: down from $6 million last year. The decline in shower system revenue is expected to be temporary, as momentum in the business remains strong, highlighted by several awards with national retail partners that will begin roll out in second half of 2023.

Speaker 1: Our revenue was 1.8 million during the first quarter of 2023, up from 730,000 last year, driven by growth in our custom-kissing cabinetry business. Growth's profit was 7.2 million during the first quarter, down only 4.3% from last year.

Speaker 1: As the revenue decline experienced during the quarter was offset by a more favorable mix and lower-free cost as a result, growth margin improved to 26.5% during the first quarter. Up from 17.3% last year and 23.7%.

Speaker 1: in the first quarter of 2022. While we expect this positive factor to remain in place in the early 2023, we don't expect to be able to sustain the first quarter-ghost margin levels. However, we continue to expect 2023-ghost margin to improve meaningfully from 2022 levels.

Speaker 1: Our operating expense increased to 7.2 million during the first quarter, up from 6.8 million last year. As we continue to invest, our growth initiative is by the near-term revenue heavens.

Speaker 1: The higher operating expenses reflect marketing spending for new product initiatives, expenses for kitchen and baths, trade shows, cost to support the Australia and UK expansion, and expenses tied to our new kitchen business development opportunity. Get upgrading income was nearly break even during the first course.

Speaker 1: operating income was 0.1 million down from adjusted operating income of 0.9 million during the prior year period. Children buy the decline in growth profit combined with the incremental growth.

Speaker 1: income was 0.1 million down from adjusted operating income of 0.9 million during the prior year period. Children buy the decline in gross profit combined with the incremental growth investment.

Speaker 1: Gap-9 income net loss was 0.3 million or 3 cents per title share during the first quarter of 2023. Down from Gap-9 income of 0.5 million or 5 cents in the same period last year. Is screwing one term item in both periods adjusted.

Speaker 1: NetLots for the first quarter of 2023 was 0.2 million over two cents put by Lothitiusher. Nung Phong adjusted the income of 0.7 million over seven cents last year.

Speaker 1: Now, turning to the beneficiary and all the crediting. As of March 31st.

Speaker 1: In 2023, the company had 7.4 million of cash and cash equipment, and total debt of 8.4 million. At the end of the quarter, we had 15.1 million of availability under our credit facilities, net of data of credit. Come by with cash.

Speaker 1: Total liquidity was 22.5 million at quarter end. We continue to be pleased with the improvement in our working capital levels. Which has been elevated during 2022, or into the supply chain challenges.

Speaker 1: The reduction in working capital has driven strong free cash flow conversion over the last two quarters. And we currently are in the net debt position of one million. An improvement of 10.5 million compared to our pick net debt of 11.5 million at 2nd quarter 2022. We believe we are in a solid liquidity position.

Speaker 1: that is more than sufficient to fund our growth initiative.

Speaker 1: Finally, turning into the guidance.

Speaker 1: While inventory this stocking had a bigger than expected impact during the first quarter, the end customer demand has to remain largely in line with our expectations.

Speaker 1: and we continue to benefit from our margin improvement initiative. We continue to be encouraged by our organic initiative with several new programs that we have to launch in the second half of the year. So, we might our guidance reflect the investment.

Speaker 1: related to our new teaching program that will, that's total roughly 0.5 million in 2020 as well as additional investment in growth initiative.

Speaker 1: With this factor as a backdrop, we are maintaining our 2023 financial guidance that co-for revenue in the range of 145 to 163 million, suggested operating income in the range of 6 to 6.8 million.

Speaker 1: and adjusted net income in the range of $4.2 to $4.7 million. Please note that guidance for net income and operating income is being provided on an adjusted basis and is good for non-recurring items.

Speaker 1: This desk complete our prepare remarks. Operator, we are now ready for the question and answer portion of our call.

Speaker 1: Thank you. We will now begin the question and answer session to ask a question. You may press start then 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys.

Speaker 1: To withdraw your question, please press star then 2. At this time we will pause momentarily to assemble our roster.

Speaker 1: Our first question comes from Craig Gibbards with Northland Securities, please go ahead.

Speaker 2: Hey, good morning, David and Mary. Thanks for taking the questions. Congrats on the nice execution and the challenging environment. But one of the asks.

Speaker 2: You know, I guess given the revenue performance in Q1 seemed a little bit below your expectations.

Speaker 2: And perhaps the ongoing dispute talking was maybe worse than you anticipated too. You know, what kind of gives you confidence that you can maintain that full year revenue outlook?

Speaker 3: Thanks, Greg. It's Dave. Yeah, there's a couple things. So as definitely we have seen the destructing extent, part of that is also due to the softening of the art that we mentioned.

Speaker 3: which is extending that destocking period. And I think I also mentioned some of our larger customers are also looking at reduced inventory levels.

Speaker 3: as a base as they move forward. As a cautionary move, right, because they want to make sure that inventory levels are more in line with where the market can demand this. With that said, though,

Speaker 3: We fully expect that in the second half you're going to see what I used to call a blow-up effect, which is going to be now Customers are going to have a need for inventory and need to replenish I think I mentioned on our last call that we've seen that trickling in from the retail side, you know, we've seen more of the destocking Pressure on the pro business, but as you heard

Speaker 3: that I mentioned today, or for the additional growth in our shower business as well as our kitchen business, we fully expect to execute those and execute more new incremental business despite where the market is for the second half. So when you take the lighter Q1, you're going to see

Speaker 3: We do a lot of that business. Those are initiatives many of them were not baked into our guidance so we actually have a good expectation that we would be able to continue to meet our revenue guidance for the year. For sure, we would expect that we'd probably be getting closer to the low end of that guidance depending on how far that destocking goes out.

Speaker 3: But that will be effective. Destocking ending and reordering coupled with new incremental sales gives us that confidence.

Speaker 2: That's extremely helpful Dave. One of the follow-up I guess I'm in that gross margin improvement. How much was maybe a result of the price increases versus the mixed shift and maybe versus the results lower freight cost here ever?

Speaker 3: Yeah, it's a good question. I guess I think your comment was also around, you know, it'll be difficult to maintain these levels of gross margins going forward. I just want to get a sense of why you're thinking about that. Or why? Yeah, I want to clarify that. So we've been seeing a rapid improvement in our margins for a very first. I'll tell you why. You know, we have...

Speaker 3: And we fully expect, like Perry had mentioned, we're going to improve our margin meaningfully as we move along compared to prior years. And we fully expect to get, you know, we're not deviating from our guidance of saying that longer term, midterm really, mid to high single digit even margins as we move forward with our BPC strategy. That's still in place. And I think what I, it will, well, more forward.

Speaker 3: product categories on some of the promotional product in sanitary wear. The margin percentages will come down some, but the dollars will increase and that'll add obviously to our overall gross margin dollar increase. So we fully expect that our margins longer term will continue. I think when I mentioned it today, we were really referencing more of the fact that

Speaker 3: The speed that our margins are growing now, you know, as the revenues are lower, our margins will improve part of that as max, right? Because we're not going to see some of the lower margin product categories which create a lot of the volume. But overall, as a business, as we grow out or and execute that BPC strategy, like I mentioned, they were shower and kitchen growth.

Speaker 2: those margins will continue to grow. Okay, great. That's helpful. I guess last one for me, we did want to follow up on your commentary on those several new product programs with your retail partners. You know, great to hear that those are coming in. I guess first question around those would be the timing. I think you said that that kept.

Speaker 3: or in the next year? Yeah, I mean, they'll be meaningful. You know, the timing in our business as well as, you know, anybody's business, but timing with us, you know, with shipping from Asia and, you know, understanding when things are right, you know, some of that is up to us that's completely finalized.

Speaker 3: things with our retail partners as far as store sets and operational issues that go on domestically here. So we do it. That's why I mentioned the second half, you know, Q3, Q4, sometime we would expect some of it to trickle over into Q1 of 2024. And of course, next year we would have more of a...

Speaker 3: straight line knowledge of that business month by month. But I would just say to you that these are meaningful opportunities. Other ones in the hopper too, as I would say, is they're all meaningful and material to the business in a meaningful way. And again, these, the ones I mentioned to you today I brought up because they will.

Speaker 1: I would like to turn the conference back over to David Bruce for any closing remarks.

Speaker 3: Thank you for your 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. The conference of FGI Industries has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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