FGI Industries - Q1 2024

Transcript

Operator (participant)

Good day and welcome to the FGI Industries Ltd. First Quarter 2024 Results 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. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jae Chung, Vice President of FGI Industries. Please go ahead.

Jae Chung (VP of Investor Relations and Corporate Development)

Thank you. Welcome to FGI Industries 2024 First Quarter Results Conference Call. Leading the call today are President and CEO David Bruce and Chief Financial Officer Perry Lin. We issued a press release after the market closed yesterday detailing our recent operational and financial results. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factors section of our latest filings with the SEC.

Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the press release issued yesterday and in the appendix of this presentation, which is available on the company's website. Today's call will begin with a performance review and strategic update from Dave Bruce, followed by a financial review from 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.

David Bruce (President and CEO)

Thank you, Jae. Good morning, everyone, and thank you for joining our call today. I'm delighted to share our positive first quarter results reflecting the strategic investments we've made in our organic growth initiatives across our brands, products, and channels, or BPC strategy. While the industry outlook anticipates modest declines in the R&R segment, we remain confident in our ability to outpace market trends through innovative products and programs. During the first quarter, we witnessed growth across most of our businesses, primarily fueled by volume and sustained demand from end markets alongside gradual normalization of inventory levels. Notably, our sanitaryware and shower businesses demonstrated year-over-year growth. While our bath furniture segment faced subdued demand due to a shift towards lower-priced offerings, we are excited about our upcoming bath furniture assortment that is more aligned to new market pricing and design trends.

Additionally, our shower systems business benefited from new customer program introductions, while the pro-sanitaryware business rebounded as inventory levels stabilized and order flow improved. We are particularly pleased with our operational performance, reporting a total revenue of $31 million for the quarter, marking a robust 13.2% increase year-over-year. Our gross margin also improved to 27.4%, reflecting our sustained focus on higher-margin products. As we continue to invest in our growth initiatives, we are encouraged by the positive momentum witnessed in the first quarter. Furthermore, our geographic expansion plans in India and the United Kingdom hold significant promise for driving growth. In India, we are optimistic about leveraging new distribution partners to establish our presence in the burgeoning bath market. We are also excited about the imminent launch of Isla Porter, our high-end custom kitchen cabinetry business based on an innovative digital platform.

With its emphasis on premium, trendsetting products, and cutting-edge AI software, Isla Porter is poised to redefine cabinetry personalization, convenience, and design. Our strategic growth initiatives are progressing well and are expected to fuel above-market organic growth in the future. I commend our FGI team for their dedication to our long-term objectives, positioning the company for success in 2024 and beyond. With that, I'll hand it over to Perry for a more detailed financial review.

Perry Lin (CFO)

Thank you, Dave, and good morning, everyone. I will begin by providing additional details on the quarter. Next, I will update you on our current liquidity and balance sheet. Finally, I will conclude with our guidance for the full year 2024. For the first quarter 2024, revenue totaled $31 million, an increase of 13.2% compared to the first quarter of 2023, driven by continued momentum in our shower system business and the rebound in our pro-sanitary business. Our bath furniture business continues to be weak but is showing signs of improvement. As Dave mentioned, the bath furniture market continues to be impacted by weak demand and a trade-down to lower-priced offering. In response, we are launching mid-tiered products to better address the current demand environment. Demand trend in the shower category remains steady. We continue to expect our new program and products to continue driving growth in 2024.

Gross profit was $8.4 million in the quarter, an increase of 16.8% year-over-year driven by growth in our higher-margin products. Gross margin improved to 27.4% in the quarter compared to 26.5% the prior year. Our operating expense increased to $8.7 million from $7.2 million the prior year due to the inflation and ongoing investment in our growth initiative, including marketing spend for Flush Guard, Isla Porter, and kitchen cabinetry. GAAP operating income was $-0.3 million in the quarter, down from break-even year-over-year. Higher operating expenses due to investing in our growth initiative accounted for the loss as overall revenue and gross margin were higher in the quarter. Moving to our balance sheet, at the end of the first quarter, FGI has $17.8 million of total liquidity, which we believe is more than sufficient to fund our growth initiative.

The decline in total liquidity from year-end 2023 was largely driven by an increase in working capital requirement, which is seasonally highest in the first quarter of the year. We are leaving 2024 guidance unchanged, with revenue in the range of $115 million-$128 million, adjusted operating income in the range of $2.8 million-$3.8 million, and adjusted net income in the range of $1.2 million-$2 million. Please note that the guidance for adjusted operating income and adjusted net income excludes certain non-recurring items. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time. Our first question comes from Greg Gibas with Northland Securities. Please go ahead.

Greg Gibas (Senior Research Analyst)

Hey, good morning, Dave and Perry. Thanks for taking the questions. Congrats on the results. Just, I guess, first, if we could touch a little bit more on kind of your outlook remaining unchanged. Curious if any changing expectations kind of implicit in that maintained range, kind of drivers of where there was some upside in Q1 and maybe if anything's changed on a quarterly cadence basis relative to your expectations.

David Bruce (President and CEO)

Sure. Yeah, it's a good question and good morning, Greg. Yeah, Q1 went as expected. I think we've talked previously as we entered the year, we did expect some organic rebound. We didn't want to mention the word destocking anymore, and I think we've gotten past that. So we saw a nice rebound in our pro sanitaryware business. We're also seeing the results of some new implementation of our new shower program rollouts that we have mentioned on some previous calls. So the momentum going into Q2 is as expected. It aligns with the guidance that we've put in place. That's why we haven't made any adjustments. We continue to look forward to some of the additional new programs, rollouts that we expect that will be executed primarily in the second half.

As of now, I would say the order cadence and pipeline are positive, and we're looking forward to continuing in Q2.

Greg Gibas (Senior Research Analyst)

Okay, got it. And you alluded to it a little bit in your pro channel, but wondering if you could just kind of discuss high-level trends that you're seeing in your key channels, whether anything is kind of standing out or changing favorably or unfavorably?

David Bruce (President and CEO)

Yeah, I think what we're seeing we're seeing and hearing things. So we're starting to see a moderation of inventory levels, which is the bright spot. Again, we talked a lot last year about the heavy inventory positions that our customers faced throughout the year, and a lot of that is moderated for the most part. And I think I mentioned on our last call, there's still some pockets in the market with individual customers or individual areas that may still be persistent. But for the most part, that's not going to be material on our business. And so what we're seeing is we are seeing a more organic rebound on the pro side. And there's some optimism there as well. The pros are looking at the builder side of the business, especially in the second half, going into Q4 as positive.

Some of the builders have discussed that in some of their reporting as far as their confidence in building recovery. We're feeling some of that momentum on our pro business. I would say just generally on the sanitaryware side, I think the momentum due to the lack of the destocking now is going to rebound. Again, that's something that we have in our guide because it was sort of expected as we entered Q1 and Q2.

Greg Gibas (Senior Research Analyst)

Perfect. Appreciate the color there. As it relates to maybe your gross margin expectations or how those expect to trend relative to Q1, should we think about kind of continued expansion just due to that product line shift trend?

David Bruce (President and CEO)

Yeah, we believe we will maintain our gross margins. We're pretty confident based on a lot of the new business that we see coming our way that we'll be able to maintain those margins. And we've talked about this before. We will accelerate our overall gross margin dollars as we scale a lot of the higher-margin businesses like shower, which we're doing, but particularly kitchens, not only the Covered Bridge kitchens, but also the new digital venture with Isla Porter. So as those scale, you're going to see continued margin dollar growth. And I think we've also mentioned as pro business rebounds and as we grow our sanitaryware business, while the sanitaryware business has lower gross profit percentages overall, we would expect, which is our midterm and long-term goal, is to grow our EBIT percentage on our dollars, our gross margin dollars, right?

So as you combine the dollars from the sanitaryware business along with the higher gross profit percentages from our kitchens, we think we're going to be able to have a healthy growth in the short to midterm.

Greg Gibas (Senior Research Analyst)

Great. Appreciate the color. Thanks, guys.

David Bruce (President and CEO)

Sure.

Operator (participant)

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

David Bruce (President and CEO)

Thank you for the time and interest today. We appreciate your continued support of FGI. Stay well, and if we don't connect during the quarter, we look forward to speaking with you on our next quarterly call.

Operator (participant)

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