Q2 2023 FGI Industries Ltd Earnings Call
[music].
Good morning, and welcome to the <unk> Industries second quarter 2023 earnings Conference call.
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Please also note that this event is being recorded today.
I'd now like to turn the conference over to Paul Barden, Managing Director Vallum Advisors. Please go ahead Sir.
Welcome to <unk> industries second quarter 2023 results conference call.
Leading the call today are president and CEO , David Bruce Chief Financial Officer, Mary Lynne.
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.
Today's call will begin with a performance review and strategic update from David Bruce followed by a financial review from Heartland.
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.
Thanks, Paul Good morning to everyone and thanks for joining our call today.
During the second quarter, we maintained focus on our long term strategy and continued to make important progress on our growth and margin initiatives. Despite the sluggish demand trends and inventory headwinds, which once again pressured results.
We continued to execute at our BPC growth initiatives and added several new awards and partnerships during the second quarter, including a new licensing agreement that should drive incremental growth at our sanitary ware business as well as new sales partnerships that will allow us to expand our geographic footprint into India and eastern Europe .
In the coming years, all of which should put F. G. I in a strong position to return to organic growth as industry conditions normalize.
As we have discussed on prior calls a key focus of our BPC strategy is to increase the contribution from branded products and prioritize higher margin markets and categories.
Success under these initiatives has been a key factor in the meaningful gross margin improvement in recent quarters.
This continued into the second quarter with record second quarter gross margin of 27, 4% up nearly 1000 basis points from last year.
As a result, our second quarter gross profit declined by less than 5%. Despite a nearly 40% drop in revenue.
While the volume rebound in approach at all and Bath furniture could impact the gross margin trajectory in the near term. We expect the continued benefit from our strategic focus on higher margin categories, such as shower systems and kitchen cabinetry as well as improved operating leverage to further benefit margins overtime.
The industry wide inventory correction that has been a headwind to our revenue growth has lingered into 2023 with uneven demand in the R&R channel and macro uncertainty, adding another layer of pressure.
This has caused many of our large customers to take a very cautious stance on inventory levels with many industry participants attempting to reduce inventories to levels below historical averages.
This is prolonged destocking headwinds, particularly in the pro channel.
Where the inventory correction is extending into the second half of the year and.
In addition, our European business centered in Germany has faced pressure due to a combination of destocking headwinds along with significant recessionary pressures in that country.
These factors are proving to be a more significant headwind than we anticipated at the start of the year and as a result, we are adjusting our full year guidance. We now expect full year 2023 revenues up 120 million to $130 million adjusted operating income of $3 5 million to $5 million and.
<unk> net income of 2 million to $3 million.
While we are disappointed to lower our full year outlook, we still see plenty of reasons for optimism both in the broader market and in particular with our company specific initiatives.
Looking at the broader R&R market.
<unk> has been uneven, but the overall market is holding up as well as we would expect the R&R market tends to be more stable than the broader building products category and that is what we are seeing.
The best furniture business continues to see the biggest impact from a demand perspective, we are taking numerous actions to drive further volume growth, including anticipated new product line, Rollouts and select pricing adjustments.
Importantly, we are not seeing signs of a broader discounting or promotional activity in the market.
Looking forward, we have been encouraged by a stabilization of inventory trends as we look into the back half of 2023 and enter 2024.
We have also been encouraged by the recent housing data, which is showing signs of stabilization and improvement as buyers get accustomed to the new level of mortgage rates common.
Commentary from the public builders continues to be more constructive with most players, noting improved order trends and increasing buyer confidence.
Overall the trends in our end markets are largely 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.
While the trends in 2023 have been more challenging than originally expected our longer term optimism for the kitchen, and bath repair and remodel market and <unk> position in the industry remain unchanged.
As a result, we continue to invest through this cycle and remain focused on our strategic plan, which ultimately is 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.
I'm very excited by the progress we made against these strategic initiatives during the second quarter.
So I would like to walk through some of our key accomplishments.
As it relates to our <unk> program and our organic growth initiatives. We were awarded several important new programs and entered into a couple of exciting partnerships. During the quarter first we entered into a five year licensing agreement that will provide F. G. I access to an industry, leading overflow toilet technology, which can provide a.
Key differentiator in the market, we expect to launch new sanitary Ware products utilizing this technology at the 2020 for kitchen and Bath show.
We entered into two exciting new partnerships that will enable us to expand our geographic footprint into the high growth Indian and eastern European markets, We engaged in Euro India, a sales organization based in Mumbai, India to serve as a catalyst for our geographic expansion and heightened market presence in it.
Yeah.
India will focus exclusively on marketing and selling F. Gi sanitary ware lineup of products to both wholesale and hospital hospitality trade channels across the country.
In addition, we also recently formed a strategic partner ship with me a partner to extend our presence into eastern Europe .
Leveraging their expert resources located in the target customer countries media partner working with our international sales team is now actively identifying potential customer targets in the region prioritizing cultural relevance and understanding throughout the process.
This collaboration aims to significantly enhance F. G is market penetration and growth prospects in the eastern Europe region to further support our V. P C strategy.
Third we continued to execute on our recently announced awards, including our online shower door program for an existing large Canadian retail partner, which commenced in June 2023, and the rollout of F. G is industry, leading shower wall program into as many as 300 locations of a large U S retailer.
Both programs are on track and should contribute to improved shower systems orders in the second half of 2023 and into 2024.
Our custom cabinetry business continues to grow rapidly with significantly higher incremental gross margins than the company average or.
Our premium covered bridge brand added 57, new dealers, thus far in 2023, bringing the total dealer count to 180 at the end of the second quarter as we mentioned last quarter. We continued to develop a new business venture that we feel has tremendous potential in the online custom kitchen cabinetry space, we look forward updating the market.
On our progress in the coming quarters.
We are very excited by our progress on our strategic initiatives and we remain confident that this 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 once again made excellent progress on our margin improvement initiatives as we reported another quarter of strong year over year gross margin improvement.
While lower freight costs and pricing have been a contributor to the improved margin performance. We think it is important to understand that our strategic decision to focus on higher margin categories has been the main driver of the improved performance and we view this as a structural shift that will continue to benefit margins over the long term.
Finally, as our focus on efficient capital deployment.
Following the challenges caused by the supply chain disruptions and inflationary pressures, we made meaningful progress in reducing our working capital usage in recent quarters, which has resulted in improved free cash flow conversion.
This further bolstered our solid liquidity position and financial flexibility.
As a result, we have ample capacity to invest in organic growth initiatives at the same time, we continue to actively pursue bolt on opportunities. Although as we have stressed on previous calls we remain disciplined and rigorous in our approach and our acquisition strategy.
Overall macro conditions haven't a challenge and we are disappointed to fall short of our original financial targets I am very proud of our execution. We continue to generate strong margin improvements. We were awarded several new business programs, including important partnerships to further expand our geographic footprint into.
New high growth markets, and we made important progress on our strategic goals. We think this all serves to position the company very well for the future.
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 quarter given an update on our liquidity and balance sheet and wrap it up with our full year 2023 guidance revenue totaled 29.2 medium doing the second quarter of 2023, a decrease of 79.
Compared to the prior year due to continued inventory destocking as well some modest south Canadian the whole constant currency.
Currency was a headwind during the quarter and negatively impacted revenue by one 2% looking at our business Tonight.
San Antonio we are wrapping it was 18.8 million until when the second quarter down from $32 3 million during the prior year period due to continued inventory hanging, particularly in the pro channel. We continue to see large cost I'm going to take a cautious stance regarding inventory.
Labels gave any sluggish demand trainees.
It's a prolonging the inventory curve.
Fraction, however, our Santa totally what revenue did increase 23% sequentially from the first quarter of 2023.
So we are seeing some cost I'm not beginning until we tend to more normal order patterns and we are helpful. Hopeful for a continued rebound in older trained too in the back half Alberta as Eamonn.
Eamonn Tobi label normalized and demand rebound driven by recent improvement in the housing industry fundamentals.
Turning to wrap and he was at $4 8 million during the second quarter of declining farm Ravening 7.7 media in the prior year period the.
The Brown, a bath furniture market in particular, the Bath Cabinetry has continued to be a race sluggish demand train coffee inventory label to remain elevated.
In response to the ongoing demand headwinds as Dave mentioned, we had the mad to some modest pricing adjustments on certain bath furniture product, which is expect to drive improved demand shall I say system revenue was $4 3 million during the second quarter down from $6 5 million.
And last year due to some modest inventory destocking and what the timing why I'm grabbing a decline on lots of yet the overall momentum in the business remains strong with the recently awarded new programs expected to drive for improved trained in second half 'twenty to 'twenty three.
Hello, Brian Penny, which can say.
Primarily all the custom kitchen cabinetry business was $1 3 million during the second quarter essentially fry upon the prior year why don't they don't want a modest loss in older. Following the strong pass up the new business coming out of kitchen, and Bath show that does start off the train in the business.
Main strong and we expect strong momentum in the back half of the gross profit was 80 million during the second quarter, a decrease of only four 9% compared to last year.
Some ramp in new high wind continued to be offset by improved margin performance.
Profit margin improved to 27.4% during the second quarter of 2023 off at 980 basis points from last year.
While many driven by more favorable product mix gross margin also benefited from lower freight cost and the full benefit of the price increase implemented during 2022, our operating expense increased to 7.4 million during the second quarter up from 6.7 million loss a year.
We continue to impact our gross initiated the higher operating expenses refract marketing spending for new product initiative cost to support our geographic expansion program and that paints a tie to our new kitchen business opportunity.
<unk> operating income was 580000 deal when the second quarter of 2023 down from income of 1.7 media in the prior year, excluding one time expenses.
Adjusted operating income was 642000 during the second quarter.
The decline in operating income was a result of the revenue decline and the continued.
Last night in operating expense tied to the growth in Asia, partially offset by improved gross margin as a result operating margin was two 2% during the second quarter down from three 6% in the same period last year, but an improvement in the farm that break even point.
The ability during the first quarter of 'twenty to 'twenty three GAAP net income was.
0.1 median or one <unk>.
Do they pick share deal when the second Codell 20th on these three most us net income of $1 2 million or 10 cents per diluted share in the same period last year. Excluding one time items adjusted net income for the second quarter up 2023 was 0.2 million or two cents per diluted this year now.
Turning into balance sheet in order to create the team.
At June 30.
2023, the company had $6 9 million of cash and cash equivalents and total debt. All the same 1.9 million Andy and open the call that we had the $15 7 million of the ability under our credit facility Nate Alpha beta of Crazy combined with cash total liquidity was.
$22 6 million at quarter end, we believe we are in a solid liquidity position that is more than sufficient to fund all goes in D. C. A T.
Finally, turning into guidance a stay of the discuss inventory destocking has proven to be a bigger headwind and then expanded as a result, we are lowering our full year 2023 guidance not that guidance, Dave online for maintenance income and operating income is being provided on the adjusted.
Phases, and it's good that we kind of items. In addition, our guidance include a part.
And naturally have a media in Spain.
Our new kitchen Cabinetry initiative that completes our prepared remarks, operator, we are now ready for question and answer portion of our call.
Yeah.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two.
At this time, we will take our first question, which will come from Reuben Garner with benchmark. Please go ahead.
Thank you and good morning, everybody.
Morning, Robert Good morning, Julien.
Hum.
So.
Just trying to clarify the comment on the Destocking is did you mentioned some customers were showing signs of returning to normal order patterns sequentially.
Is all of the Destocking that you're seeing at this point at the pro level and can you remind us how much of your business goes through that channel and then I guess, maybe just for clarification purposes, what you're seeing specifically at retail.
Thanks for the question Yeah, we're seeing it in both the pro and retail side. It is moderating so that is why we mentioned that.
They continue to come down, but theres more of a lag.
And as you know we have.
A relatively.
High concentration.
Some larger customers in both the pro and the retail side and as their inventory has been.
Funneling down and moving out through the channel.
There are baseline inventory levels are also being adjusted to be a bit lower than they were prior to all of these inventory issues and at the same time in both the pro channel in the retail channel. We are seeing a softening we've said that the auto market is going to be you know as <unk>.
Projected to be down you know in the high single digits. This year. So when you combine.
The softening of the on the demand side with the.
Extended lower inventory levels is this sort of dragging out a little bit more of what we expected on the destocking side, though again because of the larger customer size that.
That impacted us.
And extended a bit it's very hard for us too.
Recover that as quickly as we would've thought would've wanted to we didn't completely anticipate we were cautious to face that may extend further into the year and I think we had mentioned that but.
By doing so it obviously is a was more of a challenge to overcome as quickly.
So we Havent limited.
Financial history with you guys is there normally a.
Like a stocking quarter for your industry.
And if so.
Is that something that is just being pushed out like we've seen in other categories, where the where the retailers of the dealer's channels, just saying Hey look we normally stock up in the fourth quarter, we're going to we're going to.
Pushed pause and wait just given all the uncertainty you were going to wait until <unk>.
Early part of next year to make sure the consumers Okay. How things Okay. Before we go ahead and and kind of returned to normal buying is there something like that dynamic like that in your space.
Actually for the for the most part no we're relatively theres not much seasonality.
To our business.
When I say that there.
There was a bit of seasonality on the retail side tied a little bit to the spring season, because obviously, everybody gets out and about and as they promote the spring businesses, we see a little bit of a bump there.
The only seasonality I would say that we did miss last year.
Was going into the end of the season because of our manufacturing being in Asia for the most part.
People get ahead of the holiday season, and Chinese New year for example, and usually give us a little bit of and.
An order bump towards the end of the year in advance of those holidays last year, because we were that was really in the thick of.
The inventory Destocking, we didn't see that right. So this year, we would anticipate that we would see that again, because thats been sort of a normal trend for us over the course of our.
Our business through all the cycles. So that is something that we're hoping to see it again as we get into the second half.
Okay, Great and then last one for me is your margin performance has been encouraging the last couple of quarters. It looks like you're keeping back into that kind of mid single digit operating margin range that you work you years ago, but you gain there a very different way how do we think about that.
That kind of make up between gross margin and what your operating expense line looks like longer term is something in the mid to upper Twenty's from a gross margin standpoint, sustainable and will you have to continue to spend on the Opex line to get there or is there leverage to come and when volume rebounds.
Yes, that's a great question I'm glad you brought that up.
We do think there is absolutely leverage I've used the phrase before on one or two of the calls or we're not a startup company, but we're acting like a startup in a sense, but where despite some down cycles with business. We continue to reinvest to grow this business and part of what I mentioned earlier.
With our concentration risk.
Maintenance of larger customers and limited more limited channels without.
You've talked about the evergreen space, we have not only in North America and of channels, but that's why we're investing in the digital kitchen venture Thats why we are investing to move into the Indian market. That's why we've invested to try to break into the U K market and now of course, Eastern Europe and all of that is part of.
Continuing to level, the playing field for us as far as a child or BPC strategy, which again youre familiar with.
And what what essentially those those investments are going to do for us as I call. It like sort of leveling the waves in the ocean right right now.
Because we are sub scale and.
A lot of the larger customers could impact our results you know it both ways right you could say they could be impacted negatively or positively but.
We really want to grow out and scale bring more scalability to the business overall expand the markets geographically expand the channels and of course expand our product the new product mixtures that we're working on to all of our customers. So to answer the bottom line, yes, so you're going to see.
A little over $1 billion of Opex spending this year that really isn't going to break any revenue until next year right. So how do we how do we wanted to we could have.
<unk> taken that and said you know, we're not going to invest at all and we probably would've been a lot closer to our adjusted operating income adjusted net income numbers from our guidance, but really that that doesn't really do us any good in the long term right. So the long term outlook is what we're focused on and we're obviously being very diligent about what we spend but the investments are there.
And they're gonna be.
Quite lucrative we think as we move along.
Great and I'm going to sneak one more follow up and superior Oh, I think it was bath furniture, adjusting some prices to try to drive demand just kind of tying into that sustainability question on the gross margin side as you know the last few couple of quarters is that kind of.
Indicative of where we can say going into next year or youre going to have to give some back with inflation kind of coming in yeah.
Yeah, I think what we're doing a couple of things, yes. So we yes, we made some pricing adjustments that were all but more importantly, we're making mix changes within the.
Not only the tablets are sort of in all of our Assortments, obviously, but we're making some mix changes in cabinetry as the majority of our portfolio. The best furniture was focused on the high end right and obviously as the market changed at all it was a little bit more movement not initially, but there's been more movement now towards what I would call the middle range.
So we've already been working on adjusting.
The assortments to meet.
The newer customer demand and that's already in place for going into the back half of the year and obviously, we'll be debuted in a major way, but when we exhibit at a major trade show in the spring, but by that it will already be in place. So.
That's really what we meant there we did adjust some pricing and I think we had mentioned even several quarters ago as as freight cost.
Costs continue to come down we still have adjusted pricing, but with that and adjusting our mixes in our product mixes and upgrading our product mix is worth that's why we're still very confident they're going to continue to grow our margin sequentially as we move forward.
Great. Thanks, and good luck on through the rest of the year ago No problem. Thank you.
And our next question will come from Greg <unk> with Northland Securities. Please go ahead.
Great. Good morning, David Perry, Thanks for taking the question Hey, Greg how are you.
Great. Thanks.
You know I think if you were to break out the drivers of the Delta in guidance you know how much.
Imagine the vast majority is just the destocking trends continuing how much is destocking related versus perhaps other shifting dynamics that you're seeing.
Yeah. It's a good question I think they're really they're there and then hand, because destocking by itself. Let's go back historically, you know pre just up until.
2022, the industry experienced the longest period of active stocking in the last 20 years. It was 20.
26 weeks or.
Several months 26 weeks.
In a row of active stocking and then.
As we hit the Destocking wall, so to speak last year.
That was prior to really having any anticipation of.
B R&R demand dropping as well so what's happened is you've had destocking extend a bit you've had the end user market demand drop and then as I've mentioned, you've also had customers rethink what their baseline normal type of inventory levels will be so they've lowered those as well so really they work hand in hand.
<unk>.
Just sort of softened the demand side I will say, though based on conversations with customers based on industry research that we've seen based on the mood speaking to them in the market.
Inventory levels are moderating, but of course theres a lag right. So there's a lag by the time it because they want to flush out of inventory that they already have for sales.
You know are still softening from a demand perspective and then.
Those are once those levels get down they turn around in the order the order cadence comes back so are.
We have seen and I think.
Moving sort of mentioned that we have seen some of the the orders come back to some degree for example on Bath cabinetry, but it hasn't been consistent so that's what we're trying to we're still not back to what like what we would call a regular order cadence.
And that's what's been extended we thought we would be back to an order cadence or earlier and we're not so that was a large part of that and the major part of us looking at.
We had to adjust the guidance because we just you know like I said the major customers that.
We have both on the pro and the retail side.
Had that major impact on us it was very difficult to overcome at this point.
Great. That's very helpful. Dave and I think it makes sense with regarding what you're seeing but.
I guess the follow up there.
Order cadence.
Proving or is it kind of just leveled out at where we thought in Q2. Just wondering you know maybe the dynamics youre seeing in Q3 like are they improving or is it kind of consistent.
And you know along with that question, maybe what is the cadence that's implied within your guidance for Q3 versus Q4 for the remainder of the year yes.
So in a sense what were if you look at our overall guide you know why while the second half guide is is a bit lower it's more close to our original guidance than the first half right. So the first half is really we're going to take most of our hits.
From a revenue perspective.
And we would expect that those last two quarters, we would get back to that normal pace and we are we already are seeing.
Here in August for example, we're starting to see a pickup right, we're starting to see a little bit more regularity. There's some things. It's also difficult to say regulators, that's only been a month and a half, but we are starting to feel.
Field, the moods of little better there's a lot of activity like I said, you know all the all the programs that we talked about last quarter are all on schedule. The rollout. So we were gonna have a lot of incremental gain from some of the new programs as well so at.
At this point.
Took that into account.
To.
Try to forecast out that cadence and I assume based on what we're seeing and hearing that that will become more regular atwood.
Help us achieve those numbers that we that we laid out there.
Great appreciate the color there.
Yeah, I mean, I know, it's still early in the quarter, a relatively but it's kind of good to hear that.
Its not trending worse, so that's helpful and.
No.
Thank you already touched on this I'm, sorry, I got on the call a little bit later, but could you just breakout what channels maybe saw the worst of the destocking trends in which held up well.
A little better.
I would say for us.
We look at a lot of market data and this was sort of supportive with the data, but really on the pro side on our sanitary aware because of sanitary, whereas you know is the largest.
Product category for the company globally.
And then all of the divisions, obviously, so that's where we where we experienced the most.
Hit as far as Destocking was on the pro sanitary Ware side, and secondly, would've been out of our bathroom furniture on the retail side. So those are the two major impacts that.
Tough to recover from this first half.
Great I appreciate it thanks.
Okay.
And this concludes our question and answer session I would like to turn the conference back over to David Bruce for any closing remarks.
Thank you for your time and interest today, we really appreciate your continued support of STI and also please note that we will be attending the Northland capital markets Conference on September 19th.
Stay well and if we don't connect during the quarter. We look forward to speaking with you on our next quarterly call.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.