Greetings. Welcome to the FGI First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Paul Bartolai. You may begin.

Thank you. Welcome to FGI Industries first quarter 2022 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, including the final prospectus from our initial public offering. Additionally, please note that you can find reconciliations of the historical non-GAAP financial measures discussed during our call in the press release we issued yesterday. Today's call will begin with the 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.

Thanks, Paul, and good morning to everyone. Our first full quarter as a public company got off to a solid start as we exceeded our initial expectations for both revenues and adjusted operating income, highlighting the strength of our overall business model and key strategic initiatives, including the strength of our product portfolio, our commitment to our channel partners and consumers, our ongoing margin recovery and the stability of our key end markets. Our first quarter revenue increased by 20% on a year-over-year basis, driven by volume growth across both our Sanitaryware and Bath Furniture categories, as well as continued strong momentum in our newer product lines, such as our custom kitchen cabinetry and shower systems business. We generated first quarter adjusted operating income of $0.9 million, which was down from $2 million in last year's first quarter, as our strong organic revenue growth was offset by supply chain issues, inflationary pressures and public company costs. As Perry will discuss shortly, we have a strong plan in place to recover most of these cost headwinds, and we made good progress against these initiatives in the first quarter, as we generated nearly 300 basis points of sequential gross margin improvement from the fourth quarter. We remain confident that our gross margins will continue to improve in the second half of 2022. And longer term, we continue to expect margin expansion through increased scale, improved mix and efficiency gains. Despite the near-term market uncertainty driven by rising rates and inflation, underlying market fundamentals within our core kitchen and bath markets remain solid in 2022, highlighting the stability in spending for these important areas of the home. Homeowners consistently ranked the kitchen and bath as the highest priority areas for home improvement spending. So we are not surprised to see these segments of the home improvement market hold up better during times of uncertainty. Our view is supported by recent leading indicators of remodeling activity forecasts published by the Joint Center for Housing Studies at Harvard University, which calls for homeowner expenditures on improvements in repairs to grow throughout 2022 and into 2023 at solid double-digit rates. It is also important to remember that roughly 80% of our revenue is tied to the repair and remodel market, which tends to be more stable and predictable than the new construction market. The R&R market has consistently grown in the 3% to 5% range over the last several decades with the only exception being during the Great Recession of 2007 to 2009. During times of rising rates, when new and existing home sales may slow due to higher cost of ownership, the existing homeowner typically continues to invest in their home. In fact, we often see consumers increase investments in their existing homes during times of higher rates, as it's more financially feasible for a family to upgrade a kitchen or bathroom than step into a new higher-cost mortgage. As we look at the long-term drivers of our business, we continue to be encouraged by the consumer spending outlook and underlying demand trends in the housing market. The demographic fundamentals remain supportive of long-term growth in home improvement spending, driven by growth in home sales activity, strong household incomes with declining household debt and an aging housing stock. While we remain cognizant of the potential risks to demand trends in the near term, our teams are focused on driving above-market growth and creating value regardless of the market environment. Consistent with our long-term strategic plan to compound our growth rates significantly above industry averages, FGI intends to drive value creation through a balanced focus on product innovation, organic growth, operational improvements and efficient capital deployment. Some of our key accomplishments against these initiatives during the first quarter are as follows. First, beginning with our commitment to product innovation. During the first quarter, we continued to expand our Jetcoat Shower wall systems product line through the launch of a number of decorative tile patterns that will complement any bath decor and will also be accompanied by our new Craft & Main ADA shower bases and thermostatic shower valve collection. Additionally, we also launched our new Contrac Pro series Sanford 2-piece high-efficiency toilet, as well as our Toilet Sense touchless flush tank which can be integrated with some of our most popular Contrac toilet bowls. These are just a few examples of our innovative product introductions that we expect will contribute to continued organic growth in the coming quarters. Second is our BPC strategy, which stands for Brands, Products, and Channels, and is the key driver of our organic growth strategy. We are pursuing exciting product categories within our core Kitchen and Bath markets where we have very limited or no existing presence, including categories we recently entered such as Shower Systems and Kitchen Cabinetry. We continue to see positive consumer acceptance of our Shower Wall System and Kitchen Cabinetry products, and we will continue to expand in these new product categories, as well as other verticals within Kitchen and Bath where we do not currently participate. We have a lot of exciting programs in development that we believe could drive meaningful organic growth for FGI, and we look forward to updating the market as these initiatives continue to develop. Third is our focus on driving margin expansion. Headwinds from supply chain disruptions and inflationary pressures have negatively impacted recent margin performance. However, we continue to make progress offsetting these margin headwinds through price increases and other efficiency measures. And the company generated strong sequential gross margin improvements during the first quarter despite lower seasonal revenues. We are confident we will generate continued sequential gross margin improvement in the back half of 2022, and longer-term, we believe we have an opportunity to further expand margins through a more profitable mix, efficiency gains, and operating leverage. To help accelerate this process, we are planning an SAP implementation starting in Q3 or Q4 of this year. Finally, is our dedication to efficient capital deployment. Our primary focus will continue to be on deploying capital towards organic growth strategies. We have exciting new initiatives in development and hope to be able to make further announcements in the near term. At the same time, we continue to pursue bolt-on opportunities, although we think any bolt-ons may be shifted into 2023 and beyond as we balance our numerous growth opportunities. We are excited by the early progress on our strategic priorities, and we look forward to continuing to update the investment community on our progress against these important goals. With that, I will turn it over to Perry for a more detailed review of our financials.

Thank you, Dave, and good morning everyone. I will provide some additional details on the quarter, give an update on our liquidity and balance sheet, and wrap it up with our full year 2022 guidance. Revenue totaled $43.6 million during the first quarter 2022, an increase of 20% compared to the prior year, driven by 3% volume growth and a 17% benefit from price mix. Revenue benefited from volume growth in both Sanitaryware and Bath Furniture. However, a less favorable mix resulted in a decline in overall Bath Furniture revenue in the quarter. We continued to experience favorable customer responses from our newer products, resulting in strong growth in our Other revenues. Revenue trends were strong across our core US and Canada markets with revenue up 24% and 29%, respectively, while Europe was down modestly. Looking at our business lines. Sanitaryware was $28 million during the first quarter of 2022, an increase of 24% compared to the prior period, driven by 3% volume growth and a 21% benefit from price mix. Volume growth during the quarter was driven primarily by continued strength in our pro channel. Bath Furniture revenue was $10 million during the first quarter 2022, a decrease of 12% compared to prior period, as volume growth was offset by less favorable mix. We experienced some order push-out from key Bath Furniture customers during the quarter due to warehouse logistics issues and supply chain challenges, which should reverse in the second quarter. While the timing of orders negatively impacted revenues in the first quarter, the underlying demand trend in the business remained solid. Other revenue was $5.3 million during the first quarter 2022, an increase of 153% compared to the prior period, driven by volume growth of our Jetcoat Shower Wall System and the improved price mix. Gross profit was $7.5 million during the first quarter 2022, an increase of 3% compared to prior year period, as strong revenue growth was offset by supply chain disruptions and inflationary pressures. As a result of these factors, gross profit margin was 17.3% during the quarter. While this was down from 20.1% in the prior year period, it was up nearly 300 basis points from the fourth quarter, as we are starting to see traction on our initiatives to recover the lost margin from the supply chain and inflationary headwinds. We are seeing good capture on our pricing increases, and we will look into implementing further pricing actions as needed. We remain confident in our margin plans, and fully expect to generate continued sequential gross margin improvement into the back half of the year. GAAP operating income was $0.7 million during the first quarter 2022, down from $1.9 million in the prior year period. Excluding one-time IPO bonuses and stock-based compensation expenses of $0.2 million, adjusted operating income was $0.9 million during the first quarter, compared to adjusted operating income of $2 million in the prior-year period, as strong revenue growth was offset by gross margin pressure, higher selling, distribution costs, and public company costs. As a result, adjusted operating margin was 2.1% during the first quarter, down from 5.5% in the same period last year. GAAP net income was $0.5 million, or $0.05 per diluted share, during the first quarter 2022, down from $3 million or $0.42 in the same period last year. Excluding the after-tax impact of IPO bonuses and stock-based compensation expenses of $190,000, adjusted net income was $0.7 million or $0.07 per diluted share versus adjusted net income of $1.7 million or $0.24 per diluted share last year. Now, turning to the balance sheet and our liquidity. As of March 31, 2022, the Company had $8.8 million of cash and cash equivalents and total debt of $16.3 million. At the end of the quarter, the Company had $1.7 million of availability under our credit facility, net of letters of credit. Combined with cash, total liquidity was $10.5 million at March 31. Our current liquidity position together with our strong free cash flow conversion is more than sufficient to fund our growth initiatives. We benefit from a capital light business model with relatively low capital expenditure needs. We have a lean inventory management system that has resulted in limited working capital investments even during the recent challenges. Our current working capital levels are elevated, but we expect this to work down over the next 3 to 6 months. We expect our capital spending needs to remain around 1% of revenue. As we look into the remainder of 2022, we remain confident in our growth trajectory and execution on our margin recovery initiatives. Additionally, we continue to believe it is prudent to assume the industry is flat to down modestly from a volume perspective in 2022 based on the current market backdrop. As a result, we are reaffirming our financial guidance for 2022, which calls for revenue in the range of $182 million to $189 million, operating income to be a range of $6.5 million to $7.5 million, and net income to be in the range of $5 million to $6 million. This completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Operator instructions. Our first question is from Reuben Gardner with The Benchmark Co. Please proceed with your question.

Thank you. Good morning everybody.

Good morning.

Maybe to start, very strong growth in both the US and Canada in the quarter. Can you just maybe talk about the trends that you're seeing more recently on the top line? I think that the rate move and concerns with the consumer probably started very, very late in Q1. So, anything you could comment on early in Q2 would be great.

Yeah. I mean, this is Dave, by the way. We're still seeing a very consistent order pattern from our customers at this point. We've been very happy with what we've seen so far through the beginning of Q2 without getting into a lot of detail. We've already baked in sort of a 5% reduction in our home improvement spend going forward, that was already in our guidance, and we're realizing incremental share gains on a lot of the new products that we're launching. So, we have a lot of confidence in the continued demand that we're seeing and the ability for us to gain share as we move forward.

And Dave, just to clarify the 5% number that you're assuming on a year-over-year basis 2022 that the home improvement industry is off 5%, or can you just...

Yeah. No, no. We've been conservative in the home improvements side. I think Perry mentioned the cabinet business has been more flat than it was previously because there were such high sales last year. There have been supply chain issues that have affected the Cabinetry a little bit more than the balance of our businesses, and our Cabinetry is primarily a DIY side of our business, the R&R side, obviously. So yeah, we baked in a small decrease for that business going forward. Our pro business, as we have already outlined, has been really strong at the end of last year, particularly going into this year, even going through the second quarter at this point at which we also don't expect to see much of a let up as we go through all of 2022.

Got it. Okay. Thank you for that. So good progress on the gross margin front. Can you tell us where you stand now on a year-over-year basis for price and cost? Are you offsetting the costs on a dollar per dollar basis, and the year-over-year margin contraction is just from higher revenue dollars and mix, or is there still room to run on catch up from an inflation standpoint?

Yeah. I mean, we're still - there's price adjustments that we're still implementing. We've probably captured maybe, I would say, roughly around 75% of our cost inflation impact, I should say, whether that be raw material or freight. But there are some actions that we're still taking in Q2, which will impact that further. You can see the sequential margin improvement we had from Q4 into Q1, and we fully expect that to continue as we roll through not only Q2, but as we enter the second half of 2022 particularly.

Okay. And can you talk about maybe your thoughts on a lot of discussion about R&R. I think some of your investments maybe are geared towards longer term going more into the wholesale channel within the US. Did the rise in mortgage rates or anything else going on in the economy change plans there, or do you feel good about the long-term picture and so you'll continue to invest in that endeavor?

Yes, no, that's a good question. Regarding rates, we've never really had a correlation between rising rates and a real decrease in our business. I think we talked about it, as rates rise, and maybe people back off on new home purchases, the reverse happens is they start to reinvest back into their house, so we capture all that market activity. And just to go back, if you want to go back to the Great Recession, our business, even through 2007 to 2009, which was the Great Recession, our business from peak to trough only dropped 16%, right, and that was extreme. So, even in the market like now when the rates are rising, our demands and our order patterns are still very, very steady. We don't see really any impact on rising rates. I would caution, and I think I mentioned in the opening remarks that we're cautious with the macro environment of course. There's still COVID issues over in Asia, we know what's going on in Europe. But as of right now, we still are optimistic about what the balance of the year looks like for us at this point.

Great. And then last one for me, you kind of just touched on Europe, but can you maybe provide a little bit more color into what you saw in the first quarter? Are those trends something that you expect to persist as we move through the year, just given the uncertainty? Or was there something one-time in nature there?

A little bit of both. We've had some of the key retail customers in Europe placed very large orders in the back half of 2021 in anticipation of potential further COVID disruption in Asia. So, they received that product at the end of the year and the beginning of Q1. And obviously, that shifted out their demand for POs later in Q1. So they didn't place as many orders in Q1 as were expected. There is to some degree, let me go back to that. Part of that as well, so a mix shift. We - some of those customers also were looking for what we'll call opening price point or lower priced goods that we didn't want to supply there, because we've been making a shift to a higher margin product mix in Europe, which will be reflected as we go into the second half of the year. So, those two things changed the volume in Q1, but we don't expect - and the third part is there is a bit of obviously uncertainty in Europe with what's going on in Ukraine. But we don't expect right now that that's going to have a dramatic impact. The bigger impact that you saw in Q1 was due to the order cadence based on concerns about what was going on in China at that point.

Great. I said last one; I'm going to sneak one more in if I can. You made me think of something…

Sure…

So what's - I guess it’s a two part question. What's the inventory like in North America right now for your products? Is it still running extremely lean or have the retailers been able to catch up? And then what, I guess if anything, are you hearing from your customers about expectations for the summer and the rest of the year?

Yeah, the inventory situations were we'll call it clogged in Q1 to some degree because of a bullwhip effect of a lot of orders coming in later in the year and the beginning of Q1, but we're starting to see a flush out of that. Just as an example, and particularly in our wholesale builder business up in Canada, we saw a large flush out of inventory as the season started to break. But we absolutely expect to see the same thing happen in the US. We've been watching our shower business just accelerate very quickly, and that's been pulling a lot of inventory. So as we - we had expected that by the beginning of Q2, we would see that easing and a pull on the inventory, and that's exactly what we've seen. So based on what we've seen so far, we would fully expect by the middle of the year. We're going to hopefully get back to what we consider like a normal order cadence that is no longer dependent on the last two years of the COVID roller coaster, so to speak.

Got it. Thanks for taking the questions, guys.

No problem. Thank you.

Thank you. Our next question is from Greg Gibas with Northland Securities. Please proceed with your question.

Hey. Good morning, Dave and Perry. Thanks for taking the question.

Good morning.

Good morning.

I guess if I could follow-up on guidance. I was wondering if you could maybe first talk kind of high level of visibility on orders. You talked about Q2 being off to a solid start, but do you kind of generally have visibility into the back half? I guess along with that, does your guidance kind of assume the same levels of volume growth versus pricing increases. I think it was 3% this quarter on the volume side and then 17% from the pricing mix?

Yes, so it's a great question. First of all, our visibility. We have at least 3 to 6 month visibility, I’ll call solidly, going out based on data that we have from our customers. However, our largest customers, we work with them on one year out forecasting, that's rolling 12, so we're constantly updating and looking at that. We feel very confident right now on the demand side so far, based on what we're seeing on the order patterns that are coming. At the same time, you have to understand that this sort of was a flip reversal of what happened last year. Last year, in Q4, we had a lot of orders come in only because the shipping delays were so massive in 2021, and our margins were much, much lower at the end of last year. I think we outlined that on the last call. And then as we moved forward this year, the volumes were a little bit lower at the beginning of the year, and our margins are starting to improve. So, we essentially built in a relatively conservative back half forecast for volume, because traditionally, without these COVID interruptions and supply chain interruptions, traditionally, Q4 is our smallest quarter. But based on what we're seeing, that may change. In our guidance, I think we talked about this on the last call, we want to get through Q2, which has always been and traditionally has been our largest quarter. And based on what we see, we're very optimistic with our current guidance right now. We have a lot of confidence in the current guidance we have out there. But once we get through Q2, we will make determinations about whether we need to update that guidance based on the optimism that we have so far entering into Q2.

Great. Very helpful. If I could I guess follow-up on the supply chain pressures. I was wondering if you could maybe high level comment on whether you're seeing those improve or I guess lessen or if they're worsening, or maybe just kind of staying steady? And I guess maybe the degree to which you would expect gross margins to kind of improve going forward?

Yeah, regarding the supply chain, we're starting to see some cost improvement from China on the shipping containers. We haven't seen too much of that from the rest of Southeast Asia. We would expect that that would follow. Regarding the cadence of shipments, that really has kind of stayed the same. We're learning obviously, I think I mentioned this also before, we're learning how to deal with the longer lead times. The lead times are getting a bit consistent. In a sense, they're still longer, but we're working with those lead times now that we know where they've been. So I don't know if I can tell you right now when we're going to get a big change in the logistics portion where the lead times start to shorten. But we do expect and hope that we're going to see some reduction in the cost of the shipping as we move into the second half. Can you just, I apologize...

Gross margins.

The gross margin. Okay, gross Margin, yeah. So, we've been taking pricing actions as we've mentioned. We've had that sequential gross margin jump from Q4 to Q1. We expect to see that going into the second half of 2022. So we expect, I mean, our expectation, based on what we're seeing so far, what we've implemented, and what's coming with the actions that we're taking, is that we would get back to close to where we were with our gross margins at the beginning of 2021.

Got it. Very helpful. If I could follow up on your comments relating to not expecting any bolt-ons I guess until 2023 and beyond. Is that primarily just uncertain market driven or is that maybe you're not seeing the opportunities you were hoping for? Or maybe on the liquidity side, kind of preserving liquidity? Any thoughts there? And maybe it's just you want to focus on kind of those organic growth capital deployment initiatives, so if that's maybe the case, could you expand on maybe what you're seeing there in terms of those strategies?

Sure. Yes, it's definitely not due to lack of opportunity on the bolt-ons. We are actively looking. We have opportunities right now on our plate. The reason we sort of said that maybe it wouldn't happen in 2023 is we also have some very large potential organic growth opportunities that are close to coming to fruition, which we can't really get into much detail now. But those will be potentially quite large and will take up a lot of obviously our time and investment but would be quite fruitful for the business, obviously. So, it doesn't mean that we're not entertaining bolt-on. Our guess is that if all of the things that we’re involved with right now, the opportunities we're talking about, come to fruition quickly, it would probably just naturally push some of that stuff out, but it has nothing to do with liquidity. It has nothing to do with the opportunities not being available at all.

Got it. Thanks for the color.

Sure.

Our next question is a follow-up from Reuben Gardner with The Benchmark Co. Please proceed with your question.

Thanks. Dave, I couldn’t help but jump back on that last one. Any incremental color you can give us on that potential large organic opportunity? Is it new product, new customer, new geography? Any kind of insight and maybe thoughts on timing of when we will know more?

Yeah. It’s a couple of different things. It’s not new product, necessarily, outside of what we do today. I really can’t get into too much of the detail at this point. There’s a lot of detail to go over. But it follows our BPC strategy. We’ve been talking about our BPC strategy, expanding our brands, expanding our products and our channels. So, I would say that it fits right in the strategy that we’ve been sort of out there talking about, and once we have a little more detail, we’ll be able to share some of that with the Street.

Understood. Thank you for that. Appreciate it, guys.

Sure.

We have reached the end of the question-and-answer session. I will now turn the call over to David Bruce for closing remarks.

Thank you for the time and interest today, everybody. We appreciate it, and we appreciate your continued support of FGI. Stay well, and we look forward to connecting with you on our next quarterly call. Thank you very much.

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.