Good morning and welcome to the FGI Industries, Inc. Fourth Quarter 2022 Earnings Call. This event is being recorded. I would now like to turn the conference over to Paul Bartolai. Please go ahead.

Thank you. Welcome to FGI Industries fourth quarter and full year 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. Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the press release issued yesterday and in the appendix of this presentation. Today's call will begin with a performance review and strategic update from David Bruce, followed by a financial review from 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. Good morning to everyone and thanks for joining our call today. 2022 was an exciting year for FGI. It was our first year as a public company and I am extremely proud of our strong execution throughout the year despite what turned out to be a very challenging operating environment. We made important progress against our strategic priorities and performed extremely well operationally and, as a result, we are well positioned to continue to execute on our value creation strategy in the coming years. During the year, we continued to make critical progress at our BPC initiative, which stands for brands, products, and channels, and is the key driver of our organic growth strategy. I will provide more specifics later in my comments but we further ramped key new product programs, expanded existing product categories, and launched several brand initiatives during 2022 which should enable us to gain market share, expand our market penetration, and drive strong organic growth in the coming quarters and years. In addition, we continue to make significant gains on our margin-recovery initiatives with our fourth quarter gross margin up meaningfully, both versus last year and from the third quarter. Our gross margins are well above the pre-pandemic levels and we expect continued strength in our gross margins going forward. FGI and the building products industry as a whole faced a number of challenges during 2022, including persistent inflation, ongoing supply chain disruption, global unrest, and widespread customer destocking. However, thanks to the hard work and dedication of our team members across the organization, we continued to focus on what we could control and, as a result, we believe we are in an attractive position as we enter 2023. We will likely continue to face some industry headwinds, especially in the early part of the year, but I am very encouraged by the outlook for FGI. Now turning to the quarter. Our fourth quarter results were once again negatively impacted by inventory destocking at key customers which caused our revenues to come in below our expectations and declined nearly 40% from last year. We had expected some moderation in the inventory adjustments we had been seeing but the impact was more significant than we expected during the fourth quarter. We expect destocking to continue to be a headwind into the early part of 2023 but we have started to see customers' inventory levels begin to normalize with order cadence slowly improving during the first two months of 2023. This is more evident within the DIY channel, as we expect destocking within our pro customers to extend further into the second quarter. While it is early in the year and the market environment is very fluid, with the ongoing momentum in our internal growth initiatives, we are well positioned for a return to organic growth once channel inventory levels normalize. While our revenue performance was challenged, we've made significant progress on our margin initiatives during the fourth quarter. Our fourth quarter gross margin came in at 23.7%, up from 14.5% in the same period last year and up to 180 basis points sequentially, driven by pricing benefits, a more favorable mix, and lower freight costs. As a result, we were able to report gross profit that was basically flat from last year despite the significant revenue headwinds. Our gross margins are now above the levels we enjoyed prior to the supply chain disruptions and inflationary headwinds that pressured our results and are back in our targeted range. Our goal is to at least maintain the gross margin levels we achieved in the back half of the year with a focus on further expanding our operating margin as volumes recover and we enjoy the benefits of improved scale. That said, as we continue to grow our higher-margin new product categories and see a rebound in our Bath Furniture business, we do see additional potential positive gross margin drivers in the future. While our revenues have come under pressure in recent quarters due to customer destocking, end-market demand has held up relatively well across our key product categories. We have seen some pressure in our bath furniture business, as we have discussed on prior calls, but overall, the repair and remodel market is performing as we would expect during this period of market uncertainty. The new housing market is seeing considerable pressure with new home sales down more than 20% in recent months, but the repair and remodel market has been more stable. As we look into 2023, still elevated interest rates are a headwind for new home construction and existing home sales which does have some impact on our business. In addition, persistent inflation is a headwind for consumer spending in general, impacting our business as well. On the flip side, with new home sales under pressure, homeowners are likely to stay in their current homes longer, often leading to increased investments into updating or refreshing their existing homes with kitchens and baths often being a key priority. And it is also important to remember that nearly 40% of homes don't have a mortgage, and 85% of homes are locked into mortgage rates below today's rate. So higher mortgage rates have little impact on a significant percentage of homeowners and their repair and remodel spending. Putting all this together. While we remain optimistic on the long-term outlook for our industry, we do see some reason to be cautious regarding the outlook for 2023. We expect the current industry headwinds, such as elevated mortgage rates, inflation pressures, and macro uncertainty, to result in our overall markets declining in the mid- to high single digits during 2023. We continue to focus our energy on the things we can control in an effort to drive long-term growth above the market and create value regardless of the market environment. Consistent with our long-term strategic plan, we remain focused on our three key initiatives which includes driving organic growth using our BPC strategy, operational improvements, and efficient capital deployment. We made important progress against these strategic initiatives during 2022, positioning us to pursue profitable growth during 2023 and beyond. Some of our key accomplishments during 2022 were as follows: we made nice progress through our BPC program, with continued growth on our key new product initiatives, expansion of existing brands and products, and further penetration of some of our key channels. Some key highlights include: first, we meaningfully expanded our custom kitchen cabinetry business under the Covered Bridge brand, generating strong growth in our dealer network which increased to 135 at the end of 2022, up from 71 at the start of the year. This strong momentum has continued into 2023 with 14 additional dealers added in January. As we have discussed previously, we have invested in new manufacturing capacity to support the anticipated business development opportunities for our kitchen cabinetry business, both in the dealer network and with large national customers. Second, we also continued to see growing momentum in our Shower Systems business. In the fourth quarter, we launched our co-branded program at Lowe's which combined our Jetcoat line with their private label brand and will be called the Allen and Roth shower wall system by Jetcoat. We believe the initial reception has been very positive and will now lead to further initiatives to enhance the program, new finishes and styles, as well as new in-store merchandising displays. Third, during 2022, we launched several new product lines and brand initiatives across the company's entire geographic footprint, including new products under FGI's flagship Craft and Main brand, the launch of a Jetcoat shower wall line to the Canadian wholesale market, and a major sanitaryware product launch in Germany that should help drive a new cycle of innovation and product development. Fourth, we expanded our geographic footprint during the year, adding locations in the United Kingdom and Australia. We are excited by the tremendous opportunities we see in these markets and we'll look to leverage our existing product and operational base to successfully grow into these new geographic regions. Our new sanitaryware program for Bunnings, the largest home-improvement retailer in the Australian market, will feature new two-bidet toilet suites that will enhance Bunning's offering and will continue to improve our overall product mix with higher-margin, higher-ticket products. We are extremely excited by our continued execution against our organic growth programs under our BPC strategy and we remain confident that these initiatives will help us drive above-market organic growth as market conditions normalize. The second focus of our value creation strategy is on operating efficiency and driving margin expansion. We clearly made significant progress on our margin recovery initiatives during 2022 as we exited the year with a gross margin of 23.7% during the fourth quarter. Our ability to quickly return to the gross margin levels witnessed prior to the supply chain disruptions in just over a year gives me confidence in our ability to continue generating profitable growth in the future. Finally, our focus on efficient capital deployment. Following the challenges caused by the supply chain disruptions and inflationary pressures, we made meaningful progress in reducing our working capital usage in the recent quarters, which has resulted in improved free cash flow conversion. This further bolstered our solid liquidity position and financial flexibility. As a result, we have ample capacity to invest in our organic growth initiatives. Our strategic priorities will remain much the same during 2023. We will continue to pursue our BPC strategy to drive organic growth, including continued investments in our shower systems and Covered Bridge kitchen cabinetry business. Additionally, I'm excited to announce that we will be investing in a new venture targeting the kitchen market. We are very excited about this opportunity to add to our rapidly growing kitchen business and look forward to providing more details as soon as we are able. We will also maintain our focus on operational execution to drive operating margin improvement and strong free cash flow generation, with the goal of expanding our operating margin to the high single-digit range longer term. Finally, we will maintain our disciplined approach to capital allocation. The primary use of capital in the near term will continue to be investments in our organic growth initiatives. However, we continue to evaluate bolt-on acquisitions and other strategic opportunities with potential partners, such as the new kitchen venture I just highlighted. Overall, 2022 was a successful and important year for FGI. While we fell short of the financial targets we set at the beginning of the year, we executed well despite an extremely volatile and unpredictable market environment and I am confident we are well positioned to execute on our strategy and drive strong financial results as market conditions stabilize. 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 2023 guidance. Revenue totaled $31.8 million during the first quarter of 2022, a decrease of 39% compared to the prior year due primarily to ongoing inventory destocking as well as some softening in customer demand. Looking at our business lines, sanitaryware revenue was $20.2 million during the fourth quarter, a decrease from $34.2 million during the prior year period. The revenue decline was largely the result of the channel inventory reduction by key partners, particularly in the pro channel, end customer demand has remained relatively stable, so we continue to expect volume to rebound as inventory levels are adjusted. Bath Furniture revenue was $6.1 million during the first quarter, down from $12.6 million last year. The bath furniture business also continued to see pressure from destocking. The inventory correction in bath furniture started earlier than some of our other categories, so we were expecting to see this trend begin to normalize in the back half of 2022. But we continue to see inventory reduction pressure revenue through the first quarter. Other revenue was $5.4 million during the first quarter of 2022, essentially flat from the prior period, as order timing in our shower business was offset by continued momentum in our kitchen cabinetry business. We expect the growth in our shower system business to resume in 2023 as we look to expand our co-branding program with Lowe's and continue our expansion into Canada. Gross profit was $7.5 million during the first quarter of 2022, basically flat from last year as the significant progress we made on our margin recovery initiatives largely offset the revenue decline. Gross margin improved to 23.7% during the first quarter, up from 14.5% last year and 20.9% in the third quarter of 2022. The improvement in our gross margin is a result of a more favorable mix, pricing gain, and the reduction in freight cost versus the elevated level experienced last year. We expect this positive factor to remain in place during 2023, allowing us to maintain gross margin at current levels, with the opportunity for further upside driven by a potential volume recovery. GAAP operating income was $1 million during the fourth quarter, up from $0.7 million in the prior year period. Excluding $0.3 million in charge during the fourth quarter of 2022, adjusted operating income was $1.3 million, up $0.6 million or 89% from the prior year, driven by the improved gross margin performance and lower selling and distribution expenses, partially offset by the lower revenue. As a result, adjusted operating margin was 3.2% during the fourth quarter, up from 1.4% in the same period last year. GAAP net income was $0.7 million or $0.07 per diluted share during the fourth quarter of 2022, down from $1 million or $0.15 in the same period last year, excluding one-time items in both periods. Adjusted net income for the fourth quarter was $1 million or $0.11 per diluted share, up from $0.7 million or $0.10 last year. Now turning into the balance sheet and our liquidity. As of December 31, 2022, the company had $10.1 million of cash and cash equivalents and total debt of $9.8 million. At the end of the quarter, we had $13.7 million of availability under our credit facilities. Net of a letter of credit, combined with cash, total liquidity was $23.8 million at the year-end. We are pleased with the continued improvement in our working capital level during the quarter, which had been elevated in recent quarters, owing to the supply chain challenges. The reduction in working capital drove the strong free cash flow conversion in the quarter. We expect our capital spending needs to remain around 1% of revenue. We believe we are in a solid liquidity position that is more than sufficient to fund our growth initiative. Finally, turning into guidance. Despite the challenging market environment, we were able to make significant progress in our margin recovery initiative during 2022 and we expect this positive trend to continue into 2023. However, as Dave has already highlighted, we expect the repair and remodel market to face some headwinds during 2023, which we expect to result in overall R&R industry volume declining in the mid- to high single-digit range during 2023. We expect inventory destocking to continue into the first half of the year which, combined with the expected decline in R&R industry volumes, will likely result in a challenging revenue backdrop for 2023. We remain confident in our organic growth initiative and expect to outperform the market once inventory levels adjust. In addition, our guidance reflects the investment related to our new kitchen program that Dave described which will total roughly $0.5 million in 2023. With this factor as a backdrop, we are providing 2023 financial guidance as follows: Revenue in the range of $145 million to $163 million, adjusted operating income in the range of $6 million to $6.8 million, and adjusted net income in the range of $4.2 million to $4.7 million. Please note that guidance for the net income and operating income is being provided on an adjusted basis and exclude nonrecurring items. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Our first question comes from Reuben Garner from The Benchmark Company.

Wondering just if we could square up the outlook a little bit on the top line. So you mentioned R&R down I think mid- to high single digits as a market. Would the destocking impact be incremental to that mid- to high single digits? And if so, is there any way you could kind of quantify what kind of hit you're anticipating that to have on the first half of '23?

Thank you, Reuben. To provide a full overview, Q3 of last year marked a significant impact from destocking that began in the middle of that quarter and continued into late Q3. This was initially observed in the retail sector and then extended to the professional side of our business. We fully expect that this was the major factor affecting us in Q4, and we are continuing to see these effects as we progress into the first half of this year. In comparison to the market decline, the impact of destocking is more pronounced, but it’s worth noting that we are still gaining market share, have not lost any market programs, and are actively pursuing new business opportunities. We have several prospects lined up for the second half of the year. Essentially, destocking remains the primary issue, though we are observing a slight easing in order trends as we start Q1, particularly on the retail side. For the professional segment, we anticipate that challenges will persist until about mid-year, but we expect to see more normal conditions in the second half regarding the effects of destocking. Concerning the R&R market, we have taken into account our expectations, along with certain opportunities we know we can capitalize on, in addition to others that we are quite confident about for the second half of the year.

Okay. So just to be clear. The mid- to high single-digit market declines would not include the impacts of destocking that would be incremental to you?

Yes, that's correct. Yes. That's obviously, assuming all things were equal going into Q1, for example, if there was no destocking, we would definitely anticipate a softening in the market. But our expectation would be that we'd be able to outpace that with market gains that we're seeing with new business opportunities.

Perfect. Regarding the kitchen investment, I understand you don't have a lot of details at the moment, but I do have a question. Is there any revenue benefit included in this year's guidance from that investment, or is 2023 primarily an investment year with costs expected to have a significant impact?

Yes, you're exactly correct. So we anticipate that there'll be no revenue. We did not make any revenue into the guide for that new investment. But we did build in the anticipated and expected investment for 2023 and we would see the benefits of that next year.

Could you discuss the pricing in light of the destocking environment and consumer trends from the past couple of years? Are you experiencing any pushback related to that? Are costs influencing your pricing decisions, or have you noticed significant deflation allowing you to reduce prices?

Yes, I think we've actually noticed some positive effects. To provide a broader overview, last year we faced significant inflationary pressures throughout the year. As I mentioned in previous calls, we adjusted prices for our customers during that time, with most of these adjustments made by the end of Q4. Therefore, the full impact of these changes would be felt this year. Currently, we don't expect additional inflationary pressures. We've seen growth in sales for our brands, but our proprietary private label brand remains a significant part of our business. We're observing a shift in consumer behavior, with more customers moving from premium-priced brands to private label options, especially in retail. Our strategy in the private label space offers a range of products from good to better to best. This gives us a slight advantage and a positive trend because we expect strong customer sentiment toward private label brands to continue. We view this as a supportive factor as we progress through the first half and into the second half of the year.

The next question comes from Greg Gibas from Northland Securities.

Could you elaborate on the timing this year regarding your expectations for inventory destocking to return to normal in the second half? Specifically, what are you anticipating in terms of quarterly performance or between the two halves within your guidance?

Yes. We initially expected that destocking would conclude more swiftly, but our perspective has changed slightly based on geography. In Canada, we observed a quicker rebound in the wholesale or pro market, with some recovery evident early in the first quarter. In the U.S., we expect the pro market to return to normal conditions around the middle of the year, potentially towards the end of the second quarter. In retail, we have already noticed some improvements in order patterns; however, I would not describe it as a consistent trend yet, rather just the initial signs of reduced inventory levels among our customers. For instance, many of our customers entered the fourth quarter last year with inventory levels 40% to 70% above normal, and normalizing those levels will take time. Therefore, we anticipate retail normalization by mid-year, with more typical order patterns developing in the second half. Similarly, we expect some normalization in the pro market, though it may be more unpredictable due to the housing market and new construction forecasts. While new construction is a small part of our overall business, it’s an aspect we will need to monitor closely.

Got it. Very helpful. This makes a difference. And if I could follow up. I mean you spoke to kind of what you're seeing destocking relative to each channel. And I think it was kind of DIY and then pro channel to the most as of late. Wondering if you could just kind of cover the other channels in terms of maybe, relatively speaking, how they're being impacted from destockings.

Yes. Well, it's very similar. A lot of our e-com channels are linked or related to brick-and-mortar, right? They're brick-and-mortar customers that sell online and it's the same effect as far as the destocking goes. We're seeing the same on our hospitality distributors that we deal with as well, although that's actually picked up a bit. We are seeing, since our Kitchen and Bath show that we were at in January, we've seen a little bit more activity on the hospitality side than we have on our typical pro-business. So yes, I mean, I think it's industry-wide sort of overall average. I don't think one channel has particularly outperformed another. I would just say, in general, that retail seems to have broken first, in a sense, than more of the pro or commercial side of our business.

Got it. That's helpful. And I wanted to ask you on gross margins. Nice to see strong performance there despite the lower revenue. And I think in your prepared remarks, you mentioned some other drivers of gross margin expansion going forward. It doesn't sound in the near term but could you maybe elaborate on what those factors could be?

We've seen significant growth in our shower systems and kitchen businesses. When we went public in early 2022, we highlighted our BPC strategy and anticipated that these higher-margin categories would be key growth areas. We're actively working on optimizing our product mix across all areas, including cabinetry and sanitaryware, to enhance our brands, product quality, price points, and margins. The growth in shower systems and kitchens has already contributed to improved margins, and we expect this trend to continue for the rest of the year.

Okay, understood. I guess the last one for me. I just wanted to see if you can speak to the impact that you're still seeing from the supply chain disruptions. I'm trying to get a sense of whether they're changing at all or if they're kind of the same over the last several quarters.

Yes. I would say that things have stabilized significantly. There are always occasional issues with the supply chain, but at this moment, I would say we are nearly back to the level of disruptions we experienced before the pandemic. We now have a much better rhythm in our ordering and deliveries. So, this is no longer a concern for the year.

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

Well, 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.

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