Q4 2023 FGI Industries Ltd Earnings Call

Good day and welcome to the STI Industries' fourth quarter 2020 theory conference call. All participants will be in 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.

That's 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 Paul part of life Managing director Alan.

Paul: Vallum advisors. Please go ahead.

Paul: Thank you.

Paul: Welcome to <unk> Industries' fourth quarter and full year 2023 results conference call.

Paul: Leading the call today are president and CEO, David Bruce Chief Financial Officer, Barry Lind.

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

Paul: I'd 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.

Paul: Although these forward looking statements are based on management's current expectations and beliefs actual results may differ materially.

Paul: 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.

Paul: Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the press release issued yesterday and independent of this presentation, which is available on the company's website.

Paul: Today's call will begin with the performance review and strategic update from David Bruce followed by a financial review from Mary Lynne.

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

David Bruce: Thanks, Paul Good morning, everyone and thank you for joining our call today.

David Bruce: I'm extremely pleased with our solid fourth quarter results and improve the momentum as we enter 2024, we have seen inventory levels normalize and we experienced improved order trends across our key businesses during the fourth quarter due in large part to the investments we made in our organic growth initiatives throughout the year.

David Bruce: <unk> under our brands products and channels or BPC strategy.

David Bruce: The improved order momentum has carried into the early months of 2024 further bolstered by the resoundingly positive reception from customers to our groundbreaking products and engaging presentation at the recent kitchen and Bath show in Las Vegas, the largest event of its kind in North America.

David Bruce: This recent success has not only reaffirmed our standing as a leader in the industry, but has also propelled us to new heights, our participation in the kitchen and Bath show was marked by the unveiling of our latest designs and technological breakthroughs, including our flush guard anti overflow toilet designs, which garnered accolades by winning two prestigious.

David Bruce: Awards.

David Bruce: Enthusiastic response from attendees at KBS has sparked considerable interest in anticipation further cementing our reputation for innovation and excellence.

David Bruce: These recent events gives me continued confidence we are on track for significantly improved results in 2024.

David Bruce: We experienced solid growth trends across most of our business portfolio during the fourth quarter driven by improved order momentum generally stable end market demand and normalization of inventory levels. Each of our business segments showed year over year growth during the fourth quarter other than a bath furniture segment, which continues to be impacted.

David Bruce: The demand weakness and a trade down to lower priced offerings total revenue ended down two 6% in the fourth quarter.

David Bruce: Our ongoing focus on higher margin products drove another quarter of strong gross margin improvement with fourth quarter gross margin, increasing roughly 550 basis points to 29, 2% our highest quarterly gross margin result, as a public company. This drove a 21% increase in gross profit during the fourth quarter.

David Bruce: While the inventory Destocking headwinds had been obscuring much of the progress during 2023, we continue to make progress on our growth initiatives. It is very exciting to see these efforts begin to show through in our results during the fourth quarter and we expect to see more of this in the coming quarters.

David Bruce: On our first call as a public company two years ago I introduced our long term strategic plan to drive shareholder value that was based on driving organic growth through our BPC strategy enhanced margin performance and efficient capital deployment, while we face many headwinds during 2023 I am very proud of our <unk>.

David Bruce: Continued focus and execution against our strategic goals during the year.

David Bruce: I would like to take this opportunity to walk through some of our key accomplishments during the fourth quarter and highlight some of our key strategic priorities for 2024.

David Bruce: As it relates to where our BPC program and our organic growth initiatives. We continued to make solid progress on our recently launched programs and new product offerings during the quarter.

David Bruce: As we have discussed on recent calls we entered into a licensing agreement that provides us access to an industry, leading overflow toilet technology, which we recently announced will be marketed as flush guard overflow technology.

During the fourth quarter, we were awarded product placements at several large customers, including two of the largest commercial distributors in North America, we exhibited a new line of retail and commercial sanitary Ware products, featuring flushed guard at the 2020 for kitchen and Bath show. Additionally, F. G. I won first place at the highly coveted designed bites competition at cadence.

David Bruce: <unk> 2020 for it as the industry innovation with the biggest bite Fritz flush of our technology.

David Bruce: Second we continue to focus on initiatives to expand geographically with agreements providing entry into India, Eastern Europe, Australia, and the U K and the U K, we landed our first new customer partners in 2023, and we continue to build on these relationships with several major customer awards on the horizon in the U K germ.

David Bruce: Many in India across both our retail and wholesale channels in the last months, we have entered into agreements with three new distributor partners in India and we are we are excited by the opportunity to grow our product penetration with these partners and take advantage of the vast growth potential of the Indian market. We look forward to continue.

David Bruce: Moving to grow our presence in these markets in the coming quarters and years.

David Bruce: Third we continued to execute on our recently announced program awards, including the online shower door program for an existing large Canadian retail partner that commenced in June 2023, and the rollout of our industry, leading shower world program into as many as 300 locations of a large U S retailer or a new jet boat.

David Bruce: Tower wall products worth it among the cable show attendees. We expect these programs to continue to ramp up in 2020 for driving further momentum into the new year.

David Bruce: Fourth during the third quarter, we announced an in store promotion with a large U S retailer that did not previously carry any of our sanitary ware products to lay the groundwork for future growth IMAX.

David Bruce: I'm excited to report that following a successful promotion we placed several new sanitary Ware skus with this retailer, which featured the new flush guard overflow technology.

David Bruce: Look forward to continued growth with this new partner in the coming years.

David Bruce: Finally, our custom cabinetry business continues to grow rapidly our premium covered bridge brand added 203, new dealers during 2023, bringing our total active dealer count to 302 at the end of the year, we had a large display at the 2020 for kitchen and Bath show that showcased our covered bridge.

David Bruce: Kitchen Cabinetry line and the enormously positive feedback we received at the show gives us confidence that covered bridge has increasingly strong growth momentum all while contributing to the highest average gross margins across any of our product segments.

David Bruce: We are also pleased to announce that I look quarter, our new digital custom kitchen Cabinetry business has recently announced its soft launch with an official launch anticipated in the spring of 2024.

David Bruce: By leveraging industry, leading AI software with our existing custom kitchen operations infrastructure and an unmatched commitment to premium on trend products. We believe I look quarter will reach new heights in terms of catheter tree personalization convenience and design.

David Bruce: We are very excited by our progress on our strategic growth initiatives, which we expect to be a key driver of our improved results in 2024 and should help us drive above market organic growth in the coming years.

David Bruce: The second focus of our value creation strategy is on operating efficiency and driving margin expansion, we reported another quarter of strong year over year gross margin improvement driven by our strategic decision to focus on higher margin categories.

David Bruce: For the full year 2023, we reported gross margin of 27, 4% up nearly 800 basis points from 2022, despite the revenue headwinds.

David Bruce: Finally, our third focus is on efficient capital deployment, we made meaningful progress during 2023, and reducing our working capital usage, which resulted in improved free cash flow conversion and lower net debt levels.

David Bruce: Debt repayment and investment in organic initiatives has been our main priority, we continue to evaluate opportunities for strategic bolt on acquisition opportunities.

David Bruce: As we survey 2024, we are excited by the growing momentum in our growth initiatives the demand environment for the home improvement market remains uneven with several industry forecasters predicting modest declines in repair and remodel spending in 2024, However, as Perry will discuss when he covers our 2024 hour.

David Bruce: Look in more detail based on the progress of our recent product launches and new programs under our BPC strategy. We are confident we can generate above market growth in 2024.

David Bruce: We faced many market headwinds during 2023 I'm extremely proud of our team and our continued focus on our long term strategic objectives. This has positioned the company for a solid year in 2024 and continued success in the coming years with that I will turn it over to Perry for a more detailed review.

Perry: New of our financials.

Perry: Thank you, Dave and good morning, everyone I will provide some additional details on the quarter.

Perry: The other day I want it creates T and balance sheet and wrap it up with our full year 2020 full guidance.

Perry: Revenue totaled 31 million during the fourth quarter of 2023.

Perry: Decrease of two 6% compared to the prior year driven by continued end market demand weakness in the bedroom furniture market.

Perry: Partially offset by borrowers to understand that total shoulder system and kitchen cabinetry looking.

Perry: Looking at our business in line tenants, how do you weigh on revenue was 26% median during the fourth quarter up one 8% from last year due to improve or to pay down as our new programs are beginning to benefit and reach out.

Perry: Furniture revenue was $2 5 million during the fourth quarter down from 6.1 media in the prior year period.

Perry: The best furniture market continue to be impacted by Michael are a headwind and a trade down to lower ticket products.

Perry: We have discussed previously we are launching product offering in the mid tier cannot go into beta address current demand and hope to see improved train and Nate you can call me at Cortez.

Perry: <unk> revenue was $5 7 million during the first quarter.

Perry: 55% from Gram and even three point say, but median last year. The main training the shallow category remains steady and our recently launched program building momentum. We continue to expect this new program to drive for improved trend into 2024.

Perry: I don't know Robin what you can say, it's a prime money all custom kitchen cabinetry business was $2 1 million during the first quarter up from $1 7 million last year due to continued data growth and new product lunches.

Perry: Gross profit was 9 million during the first quarter, an increase of 21% compared to last year driven by strong growth in our higher margin products. As a result of course of profit margin improved to 29.2 off of roughly 550 basis points from the prior year, we expect.

Perry: Our full year 2024 gross margin to be consistent with our strong gross margin performance generated during the full year 2023, our operating expenses increased to 7.8 million during the first quarter up from $6 5 million last year due to ongoing investment in our girl.

Perry: <unk> initiated including marketing spending for the recently launched fresco overthrow totally product line and paints are tied to new Hudson them teach them chemistry business development opportunity.

Perry: GAAP operating income was a 1.2 medium during the fourth quarter up 20% from income of 1 million last year.

Perry: Good and certain non recurring expenses.

Perry: Adjusted operating income was a 1.4 median during the fourth quarter. The increase in operating income was a retail although of course profit course, partially offset by higher operating expenses tied to growth in D. C. A T.

Adjusted operating margin was 4.4% during the fourth quarter flat to the same period lots of you kept the main comp was half immediate or <unk> <unk> per diluted share during the fourth quarter of 'twenty to 'twenty three.

Perry: Down modestly from the same period last year now turning to balance sheet I would equate to tee us up at December 31st 2023.

Company had decided to appoint a median of cash and cash equivalents and total debt of 7 million at the end of the court that we had a $16 6 million of availability under our credit facilities.

Perry: Often laid out of credit.

Combined with cash total liquidity was $24 4 million at quarter end. We believe we are in a solid liquidity position that is more than sufficient to fund our growth initiated years.

Perry: Finally, turning to guidance as our growth in vacuum and continued to gain momentum and inventory label has normalized.

Perry: It's back to we tend to organic growth in 2020 full despite always petition that end market offer it to them modest with it.

Perry: In addition, we expect to continue to increase our growth.

Perry: Chris you want to take advantage of.

Chris: Dave opportunity under our P. P. C strategy based on these factors we are providing initial 'twenty 'twenty full guidance for revenue in the range of 115 million to $128 million.

Chris: Adjusted operating income in the range of $2 8 million to $3 8 million and adjusted net income of between 1.2 medium two 2 million produced and note that the guidance for the name income and adjusted operating income is provided.

Chris: Databases and Skus, so it's a non returning items.

Speaker Change: That completes our prepared remarks, operator, we are now ready for the question and answer portion of our call.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Speaker Change: If you are using a speakerphone. Please pick up your handset before pressing the keys is that any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Speaker Change: Our first question comes from Reuben Garner with the benchmark company. Please go ahead.

Reuben Garner: Thank you good morning, guys.

Reuben Garner: Hum.

Reuben Garner: Yeah.

Reuben Garner: So a pretty strong outlook from a topline.

Reuben Garner: This coming year despite.

Reuben Garner: You know what what seems to continue to be tenable.

Sluggish.

Reuben Garner: Environment at least on the retail Brian can you talk about what your end market assumptions are within this all work and then.

Brian: You've got a lot of moving pieces with new build local new geography.

Brian: And our new customers like is there any way to quantify just how much you have kind of within your control.

Over the next 12 months.

Brian: Yeah.

Brian: That's a good question. Thanks.

Speaker Change: Yeah, I mean, you know we've been talking for some time about.

Speaker Change: Our ability or at least our intent to grow organically initially, especially with a lot of newer businesses you know executing the BPC strategy with newer products, which we highlighted today as an example, our recent.

Speaker Change: Technological advance and the toilet is for and is in addition to that our channel expansions, which we've talked about with the Europe and in India, and you know as far as how does that relate to what we see in the market you know as we mentioned the market Theres a lot of market forecasting right now that is <unk>.

Speaker Change: Looking at the particularly the R&R market as being flat or down low to mid single digits, but our expectation is based on the new programs that we're starting to execute which you saw.

Speaker Change: Some of the results of that in Q4 that we should be able to outpace that down or estimates moderating market.

Speaker Change: With by taking some share and instituting new programs, which will give us incremental new business opportunities and that's again some of that was sort of impacted as we if we go back to the end of the prior 2022 into 'twenty, three with Destocking right and we talked about that and we don't see that having any material impact on our business.

Speaker Change: In 2020 for them. So you know again, it's a matter of timing and execution on these new programs, which have started to impact our business positively and that's how we sort of see the balance between our organic growth with those new programs that also in the face of a.

Speaker Change: Flat to slightly down market overall.

Speaker Change: Okay, Great and then can you talk about how pricing has.

Speaker Change: I guess trended or or what the full impact of pricing was in 'twenty, three and sort of what expectation is embedded in your outlook for twenty-four yeah. We don't we don't anticipate that pricing is going to be a material impact either way in 2024 adjustments were awaiting were made in 2010.

Speaker Change: Three as we know a large.

Speaker Change: Portion of pricing in 2023 emanated from freight costs.

Speaker Change: That being said our freight has ramped up a bit so far this year, we're going to keep an eye on that.

You know our belief and our estimates are that things should even out.

Speaker Change: As we go through the middle part of the year and as you know, there's there's no way to guarantee the price won't come into play you know should should cost elevate but as of as of our you know.

Speaker Change: Our look into 'twenty 'twenty four at this point, we don't anticipate price playing a major factor either way.

Speaker Change: Okay, and then a two part question here on.

Speaker Change: Your operating expenses I I last year I think.

It was kind of viewed as a year of investment in spite of tough.

Speaker Change:

Speaker Change: End market it looks like you're if I'm doing the math correctly kind of sustaining that level of spending.

Speaker Change: This year, a am I thinking about that the right way was there any one time expenditures last year that are maybe a little bit more permanent or they're just new one time expenditures and the second part of the question is is how do we think about that.

Speaker Change: Long term in terms of you know your percentage of revenue I mean, when you first came public it was in the kind of mid teens now it's been kind of consistently in the mid Twenty's Black couple.

Speaker Change: A couple of year or last year and it sounds like going into this year is that something that will trend back lower at some point or are you more focused on kind of the investments to grow and to drive that higher gross margin than that yeah.

Speaker Change: Yeah, you just finish on what I was going to sort of lead into so you're 100% correct and you know we've cited the fact that you know our gross margin.

Speaker Change: Expansion is sort of muted when you look at the Opex impact to our gross but that's exactly what we're trying to do.

Speaker Change: We're not necessarily on a.

Speaker Change: Not necessarily targeting a percentage per se right now.

Speaker Change: The key is that we're trying to prepare ourselves for the growth that we're investing in them and we know that and I can't give you a particular number but we know we can scale this business well beyond where we're at today with the majority of the infrastructure we have in place that right. So we're sort of we're sort of prepping.

Speaker Change: [noise] ourselves for that in some sense, if you want to call that.

Speaker Change: Some of those investments are obviously tied directly to our new business opportunities expanding in Europe, expanding in India, the new digital kitchen venture for example.

Speaker Change: Marketing for our new toilet innovation. So those are things that we're gonna that we're investing in that a lot of those you won't see you know when it comes to expansion in geographical markets.

Speaker Change: As we've already pretty much dove into that there'll be marketing expenses related to that but that will all be commensurate with new business right. So so to answer the overall answer to the question is as we scale the business with the infrastructure we have in place.

Speaker Change: Percentage of the Opex will slowly drop because we believe we have a lot of elasticity between the investment right now the operator, but a lot of operating leverage between what we have in place versus wherever you can go with that yeah. I think it would have been you know why are you know we are looking at the Opex I think of the Oval go Oh go is driving that gross margin dollar or so.

Speaker Change: Maintain a reasonable all banks are spending you know the end game is a you know.

Speaker Change: Increase our operating income percentage, that's what we are doing currently in future.

Speaker Change: Great. Thanks, guys. Congrats on the close of the year and good luck.

Speaker Change: Right.

Speaker Change: Thank you.

Speaker Change: Our next question comes from.

Speaker Change: Craig give us with Northland Securities. Please go ahead.

Craig: Hey, good morning, David Perry, Thanks for taking the questions.

Craig: You know if I can follow up on the gross margin side, you know really nice I mean, I think you said.

Craig: Highest gross margin in the company's public history of 550 basis points year over year, what were the primary drivers of that improvement and do you view those improved margins as sustainable or do you kind of see upside from here I'm just kind of wondering you know how you expect those to trend and where you are seeing you know maybe opportunities for improved margins.

Speaker Change: Yeah. That's a good question. So yeah in the short term I think I mentioned in the release that you know we.

Speaker Change: We definitely anticipate that we'll be able to maintain our gross margin posture.

Speaker Change: As far as what we averaged in 2023, we did have a great.

Speaker Change: Our Q4 I'm not sure that the Q4 number as a realistic sustainable gross margin for 2024, however that being said.

Speaker Change: We do expect to continue to grow our margins because a lot of our growth is coming from higher margin categories, which we've emphasized a lot kitchens is probably the best example, that's our highest highest margin business.

Speaker Change: Business that we have we continue to expand that I mean, the reaction to our kitchen.

Speaker Change: Exhibition that caters was phenomenal our shower business continues to grow we keep adding new product are growing the margin there that as as we've talked about over the last couple of years dollars. Our gross margin dollars are a key focus for us as well as a lot of the sanitary Ware you know.

Speaker Change: Shakeout in the industry moderates as far as inventory levels and.

Speaker Change: Ordering cadence you know as we see that come back to life, that's going to contribute to the dollar side as well so as we scale. The business, we really do feel that we'll be able to improve gross margin going forward in the short and the long term.

Speaker Change: Great makes sense cool and then I wanted to follow up I know you've talked about this for several quarters now but.

Speaker Change: Categories or I guess exactly what categories are you seeing destocking, maybe persist longer than you anticipated or even even worsen, but then maybe where are you seeing some improvements I'm. Just wondering if you could address those dynamics, yes, I mean, I think I. Just briefly mentioned you know, we don't really see any material impact to our results this year from Destocking.

Speaker Change: The Destocking has pretty much normalize across the industry that being said it doesn't mean, there's local little small pockets of certain customers with certain categories, but from a material aspect to our business. It's gonna be minimal I think I think the difference this year.

Speaker Change: I think I touched upon this on last quarter.

Speaker Change:

Speaker Change: Retail and wholesale while their inventory levels have normalized there. We're also looking at a more conservative base level inventory. So you know that's just cautionary based on what I mentioned earlier is they know that the market. There their forecasts are flat to slightly down so their inventory levels are going to be looked at with a little more.

Speaker Change: Scrutiny, so I don't think youre going to see the big spikes, obviously than we saw in 2021 'twenty two.

Speaker Change: And everybody's frets over that when they when they go through something like that so but that being said, there's no abnormality to what I believe we're going to see from an ordering perspective, it's just going to be a little bit more conservative with a little bit lower inventory levels, but for the most part everybody's sort up there. So I think that was the key you know the middle of last year people weren't there yet.

Speaker Change: The Destocking was impacting order cadence.

Speaker Change: But I think as we head into the beginning but as we've headed into this year and as we go into the middle part of the year. I think you know that you're not going to hear us talk about destocking as it impacted the business.

Speaker Change: Okay sounds good and.

Speaker Change: You know I guess lastly, just to follow up on your commentary on strategic bolt on opportunities you know what.

Speaker Change: You know what types of opportunities are you thinking about or evaluating and do valuation multiples make sense in a way or a reasonably attractive.

I think it's a good question because I you know, we had a year and a half ago. There was there was a little bit more what I would call a flurry of activity with opportunities that came across our desk. We became close on one or two they didn't pan out and didn't meet the requirements that we had set for ourselves.

Speaker Change: And then I've got quiet and then I think obviously it got quiet because you know 2023 was sort of a rough year for people again with inventory Destocking and.

Speaker Change: It's just a very uneven market, but we are engaging in some more conversations today, you know and I think when you look at the multiples yeah. It's gonna you'll have to look at some historical it's been a rough couple of years to sort of gauge what the value of a company as you know so I think part of it.

Speaker Change: Our strength here is that we we are not looking to at bolt on opportunities for companies that are outside of our what I would call our categorical dominance, which is bath and kitchen right. So.

Speaker Change: Many of the companies that we might look at or related to our industry quite tight and if it's not the same product. It's a related product category, maybe in a different channel. So I think we have enough information based on our industry experience and that of course with Perry reviewing the financials and looking at you know how we're going to judge those multiples.

Speaker Change: I think we'll be able to make wise decisions as we move forward and hopefully like I said, you know we've been a little bit more involved in the last several months, so hopefully they'll something will come to fruition.

Speaker Change: Got it thanks for the color.

Speaker Change: Sure.

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

David Bruce: Thank you for the time and interest today. We appreciate your continued support of F. G I 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. Thank you.

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

Speaker Change: Yeah.