Thank you for standing by. This is the conference operator. Welcome to the FGI Second Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there’ll be an opportunity to ask questions. I would now like to turn the conference over to Paul Bartolai, Managing Director. Please go ahead.

Thank you. Welcome to FGI Industries second 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 and in the appendix to this presentation. 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. We generated another quarter of solid operating results with second quarter revenue and adjusted operating income coming in ahead of our expectations. As we forecasted, we have seen some moderation in the broader R&R market as a result of some of the headwinds facing the housing market. So I’m very proud of our ability to generate continued strong revenue growth and sequential margin recovery, despite the slower market growth. We remain encouraged by the organic growth outlook for our business, as our portfolio of innovative high-quality products continues to be received favorably by consumers and the solid order momentum we experienced during the first half is continuing into the third quarter. As a result, we believe we will remain on track to achieve our full year financial guidance. Demand trends remained steady across our key product categories during the second quarter, with total revenue increasing by 13% on a year-over-year basis, driven by a strong demand for Sanitaryware and continued growth at our newer product categories. Our Sanitaryware business grew over 50% in the second quarter, with both the wholesale and retail channels generating strong growth, while our Other product category, which is primarily our Shower Systems and Custom Kitchen Cabinetry business grew 35% in the quarter. As I mentioned, we have seen some moderation in the broader R&R market with our Bath Furniture segments seeing the biggest impact within our product portfolio. Our Bath Furniture business was also negatively impacted by continued order delays due to supply chain issues and some pockets of elevated channel inventory. However, we remain encouraged by the broader trends in our Bath Furniture business and expect improved results in coming quarters. Overall, a strong growth in the quarter highlights the resilience of our key product categories our ability to grow through broader market softness as a result of market share gains, growth in our new products and expansion into new product categories. Based on our resilient end markets portfolio of innovative products and encouraging new organic growth initiatives, we expect our organic growth momentum to continue to the back half of the year. As we have highlighted on past calls, it is important to remember that roughly 80% of our revenue was tied to the repair and remodel market, which tends to be more stable and predictable than the new construction market. While June new home sales fell 17% year-over-year, the R&R market has remained more stable. We continue to make good progress in our efforts to offset elevated supply chain costs through pricing initiatives and other efficiency measures. While our adjusted operating margin was down year-over-year in the quarter, we saw roughly 150 basis points of sequential adjusted operating margin improvement from the first quarter of 2022 and we expect to see continued margin improvement in the back half of the year, as a result of ongoing pricing actions, increased scale, improved mix, and efficiency gains. While we continue to monitor the macro environment, our focus is 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 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 second quarter are as follows. First, our VPC strategy, which stands for brands, products, and channels is the key driver of our organic growth strategy. We are pursuing a number of potentially meaningful organic growth programs that can be significant contributors to organic growth over the near- and medium-term. One area I would like to highlight is our Custom Kitchen Cabinetry business, which includes our Covered Bridge and Craft and Main cabinetry brands. As a result of rapid growth in our dealer base, as well as ongoing discussions with large customers for future growth, we have invested in manufacturing capacity to address the current and future growth needs of this business, which as we have stated before, generates higher incremental gross margins than the FGI average. We are making progress with our channel expansion as well, as we recently expanded our relationship with the Hajoca Corporation, one of the largest wholesalers and building products and industrial supplies in the United States. We have significantly expanded the number of products available through Hajoca and we are excited to expand our relationship with this important partner. Second, our focus is on driving margin expansion. We continue to make progress offsetting the margin headwinds caused by supply chain disruptions and inflationary pressures. We generated strong sequential operating margin improvements during the second quarter, despite the negative impact on mix. We continue to expect sequential 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. Finally, our dedication to efficient capital deployment, as we stated last quarter, our primary focus will continue to be on deploying capital towards organic growth strategies in the near term. We have several exciting programs in development and believe this is currently the best use of capital, as highlighted by our manufacturing investment in our Custom Kitchen Cabinetry business. Meanwhile, we continue to actively pursue bolt-on opportunities and are engaged in conversations with potential targets, although we do not have clarity on the timing of when a potential transaction could occur. 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 benefits, and wrap it up with our full-year 2022 guidance. Revenue totaled $47.8 million during the second quarter 2022, an increase of 12.5% compared to the prior year, driven by strong volume growth and the continued benefit of our strategic pricing action, offset by negative mix. Looking at our business line, Sanitaryware revenue was $32 million during the second quarter of 2022, an increase of 56% compared to the prior period, driven by strong volume growth in both our wholesale and retail channels, as well as the benefits from our price increase. Bath Furniture revenue was $7.7 million during the second quarter, a decrease of 52% compared to the prior period. There were a couple of factors that impacted the segment result in the quarter. First, we continue to experience some pushback in orders from key customers during the quarter due to supply chain challenges and elevated channel inventories, and we expect this issue to normalize in the back half of the year. Second, we have seen some slight moderation in demand trends in the broader Bath Furniture market. Overall, we remain encouraged by the outlook of our Bath Furniture business. So the biggest impact in the second quarter was the timing of orders, which we expect to normalize in the coming quarter as this issue works through the system, resulting in improved results. Other revenue was $7.9 million during the second quarter of 2022, an increase of 35% compared to the prior period, driven by volume growth of our Custom Kitchen Cabinetry business and our Hajoca shower system coupled with pricing gains. Gross profit was $8.4 million during the second quarter 2022, a decrease of 8% compared to the prior period. Solid revenue growth was offset by supply chain disruption and elevated freight costs, as a result, gross profit margin was 17.6% during the quarter, down from 21.6% in the prior year period. While gross margin was down year-over-year, it outperformed in the first quarter as we continue to make progress offsetting the elevated costs through price increases and other cost reduction efforts. We are seeing good capture on our pricing increases and we continue to implement additional pricing actions that will benefit us in the back half of the year. Our progress on our margin recovery initiative was somewhat masked by the effect of negative mix in the second quarter. Negative mix was particularly impactful as we sold fewer bags, while we are increasing sales of Sanitaryware. While we also had some useful comparison within the Other segment, last year one of our customers pulled forward a large volume of a shower product, which was not repeated this year. We remain confident in our margin trend and look forward to expect to generate continued sequential gross margin improvement in the back half of the year. GAAP operating income was $1.7 million during the second quarter 2022, down from $3.3 million in the prior year period. Strong revenue growth was offset by gross margin pressure, investment in our organic growth initiatives, and the public company costs. As a result, operating margin was 3.6% during the second quarter, which was down from 7.8% in the same period last year but up about 200 basis points sequentially from the first quarter of 2022, as our pricing action continued to take hold. GAAP net income was $1.2 million or $0.10 per diluted share during the second quarter of 2022, down from $2.5 million or $0.36 in the same period last year. The reduction reflects the decline in operating income as well as an increase in our diluted share count. Now turning to the balance sheet and our liquidity. As of June 30, 2022, the company had $3.1 million of cash and cash equivalents and a total debt of $14.7 million. At the end of the quarter, the company had $3.3 million of availability under our credit facility, net of letters of credit. Combined with cash, total liquidity was $6.4 million at June 30. We are in a solid liquidity position that is more than sufficient to fund our growth initiatives. Our current working capital level remains elevated, but we expect this to work down over the next three to six 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. We have started to see some slowing in demand in the broader industry, which has been relatively in line with our expectations at the start of the year, and we continue to believe it is prudent to assume that the industry has operated down modestly from the volume perspective in 2022. 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 in the range of $6.5 million to $7.5 million, and net income to be in the range of $5 million to $6 million. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Thank you. Our first question comes from Reuben Gardner of Benchmark. Please go ahead.

Thank you. Good morning, everybody.

Good morning, Reuben.

Good morning.

So inventory drawdown in the broader building product space has been a big topic of late, and I think, Perry mentioned that there is too much inventory in the channel and I think your own inventory is a little bit elevated. Can you talk about what your assumptions are for the second half in terms of how much inventory drawdown is baked into your guidance and what the underlying volume growth excluding that drawdown or volume decline, whatever it is, looks like excluding the inventory adjustment?

Yeah. I can talk a little bit about that first. This is Dave. So, yeah, we, obviously, knew this going into the beginning of the year, because we had the higher inventory levels entering Q1, and we’ve been drawing down that inventory slowly. A good majority of our inventory spikes were based on a couple of things: the slower Bath Furniture sales, but also a new bath shower wall program and shower base program with one of our larger retail customers. But that’s slowly drawing down, and the sales of that product at the POS level have been quite strong. So we fully expect to continue to draw that inventory down as the year goes on and as we continue to penetrate new customers and take smaller market share with that product as well. So we’re not as concerned about that continuing as we enter the second half. Reuben?

Okay.

Okay.

Yeah. Regarding inventory, we have already reduced our pick time from $21 million to $18 million during the year-end first quarter, and we fully expect this trend to continue for the second half of 2022.

Okay. So, just to be clear, at the customer level, how much excess product do you think they have today compared to where they’ll want to be at the end of the year?

Well, again…

We’ve been working. Yeah.

Sorry. Go ahead, Reuben.

Go ahead.

No, I was going to say we’ve seen this already from the beginning of the year. We’ve been working very closely with our customers on their inventory levels and what we have. Bath Furniture, for example, which has been our biggest challenge in the first half of the year, is already starting to show some improvement in the second half. We’re beginning to see some movement now as replenishment needs arise, especially as we approach Q4 and everyone prepares for the upcoming year. Despite market demand, there will be a necessity to restock products from the Bath Furniture side as we move into the second half. Regarding our other product categories, the demand for inventory on Sanitaryware and showers continues to be strong, so we didn’t encounter as many issues there. As I mentioned, this situation regarding inventory has been evident since the start of the year, and we anticipated it, understanding that the first half would present challenges. However, we’re already beginning to see positive momentum, especially on the Furniture side as we head into Q3.

Perfect. And you mentioned in the one of the slides and the press release talks about ocean rates coming down but expected to remain above pre-COVID levels kind of through the end of the year and into next year. What…

Yeah.

Can you explain how those cost reductions will impact your profit and loss statement? While I understand it's just part of the business, what kind of benefits do you anticipate, and is this expected to occur more in 2023 before you begin seeing those cost savings?

Not necessarily. We have included some freight reductions in our guidance for the second half of the year, but a larger portion is likely to impact us in 2023. As we receive products at better freight rates in our distribution centers, we are averaging those costs, leading to a gradual decrease in overall inventory expenses. Additionally, for many of our customers, we have shipped ocean containers directly, covering freight costs ourselves, which means those expenses are also decreasing immediately. As these changes take effect, they will influence our performance in the second half of the year, potentially more than anticipated. We mentioned before that this could provide an unforecasted upside for our second half guidance. If the trend continues downward, we can expect a significant impact in 2023 as well.

Okay. Great. Can you give us a sense of the impact that the Custom Cabinets edition you mentioned could have on your business as we move into next year? Also, last quarter, you hinted at a potentially larger opportunity regarding new products. Is that related to the Cabinets business or something else you have in the pipeline?

There are several initiatives underway outside of Cabinets, but the Cabinets segment is experiencing rapid growth and presents significant opportunities for next year. We have seen substantial progress in our Cabinet business, particularly with a remarkable increase since the fourth quarter. In the last quarter, we achieved a 720-basis-point improvement, especially within our Covered Bridge cabinetry line, and we expect that momentum to continue. Additionally, the high-end Kitchen sector not only offers sales potential but also comes with higher gross margins. Therefore, we anticipate ongoing growth in the latter half of this year and substantial growth next year as we launch new programs with new customers in this area.

Okay. And any way for us to quantify that, I mean, new customers or, well, how did these products go to market or the new customers, is there a lot of little ones or is there one or two larger ones? How do we frame this?

The business has traditionally been marketed to the dealer network across the country, including both single-unit and multi-unit kitchen dealers. However, we have been in discussions with a few larger national customers that we believe we can collaborate with on programs that would significantly surpass our current dealer base operations.

Okay. Great. I’ll leave it there. Congrats on…

Yeah.

… the solid results and look forward to going forward, guys.

Great. Thank you.

Our next question comes from Greg Gibas of Northland Securities. Please go ahead.

Hey. Good morning, Dave and Perry. Thanks for taking the questions and congrats on the quarter.

Thank you.

Thank you.

I just wanted to, I guess, first to see if there’s maybe any different trends across your customer base categories or segments that you’re seeing, whether it’s e-commerce versus large retailers or others?

Yeah. I would say, as we entered Q1 and we talked about the first quarter, the Pro business and the Do It For Me business, particularly on the Sanitaryware side, has continued to be extremely strong and we really see no ending sight at least for the balance of this year at this point. And that’s broad-based across all the Sanitaryware categories, sinks, toilets, from a range of price points, all the way through the whole program in North America and in Europe. The Shower side has done the same thing. We’ve seen not only growth with current customers, but we continue to expand and add customers in the Shower Systems business. And the same has happened, I just mentioned with Kitchens, how that’s grown too. So, I would say, the only real softening, and we mentioned this last time, the softening that we have seen has been on the Bath Furniture side, but that was really more of an effect of the backchannel inventories that piled up at the end of 2021 and into the beginning of 2022, and we’re starting to see that eventually flush out. So I would say that our strongest channel consistency has come from that Pro Do It For Me business, particularly in the Sanitaryware side. Right now we see that continuing easily through the balance of the year. We know that a lot of these customers are going into multifamily. We do a lot of multifamily business, relatively speaking, when it comes to our builder business, we do have and we’re seeing that continue as, even though the housing market is softening, there’s still a lot of housing shortage and there are a lot of projects that have been out there that still have to be completed. So we just really started to see no end to that through the end of this year at this point.

Great. Very helpful. And I apologize if I miss your commentary on this, but I think you were saying, you don’t expect similar trends with the mix in the back half and just wondering if you could maybe go over your assumptions on why we would see gross margin improvement in the back half. I know part of it is pricing you talked about and then some…

Yeah.

... of the supply chain disruption easing. I'm curious about what factors could potentially lead to higher margins.

Our mix in Q2 was skewed due to a significant purchase from a large national retailer in our Shower business, which distorted the numbers. Regarding margin growth, the programs we mentioned, like Kitchens and Shower, typically bring higher incremental gross margins. Although the margin percentages for Sanitaryware are lower, the total dollar amount is higher due to large volumes. Our goal is to capture those gross margin dollars by year-end. We implemented pricing actions in the first half and, as we noted in our last call, additional pricing actions are currently being put into place for the second half. We're confident in this approach. More importantly, we are gaining market share organically through these products. We've maintained our resilience throughout COVID and supply chain challenges, with customers seeking our assistance across all product categories as they face difficulties in sourcing products. Our strategy includes pricing actions, new product introductions, and strong inventory management. We're in an excellent inventory position and have consistently supplied from our factory partners, which has helped us gain additional market share and attract new customers.

Got it. Thanks for the call there.

Yeah.

I guess, if I could lastly, or I guess, two more…

Yeah.

I am wondering if you could address your comfort level with the existing liquidity balance or cash balance. And then, I guess, has the M&A strategy changed at all, and are you seeing attractive targets there and how have maybe valuations sort of trended?

Okay. Yeah.

Yeah. Let me address the facility of working capital first. First half of 2022, we used a lot of cash for our organic business program, not just on the inventory program costs that is our end. We believe right now the working capital is very sufficient. We kind of start recovering our working capital back in the back half of this year.

We have been active in mergers and acquisitions as mentioned in our release. There is significant activity for those looking to make changes. However, some of the asking prices seem a bit high to us, as they are likely based on strong past performance and possibly unrealistic future expectations. We maintain a high threshold for potential deals, as we stated during our roadshow and in Q1, and have high expectations for any companies we consider for acquisition. Several factors must align for us to proceed. The good news is that we've gained valuable experience examining potential acquisitions, which will help us refine our focus. We're confident that we will be able to act on some opportunities soon, contingent on market conditions and the viability of the deals.

Right. Makes sense. Sounds good guys.

Yeah.

Well, thanks again and congrats.

Great. Thank you.

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

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

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.