Good morning and welcome to the FGI Industries, Inc., First Quarter 2023 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, Managing Director, Vallum Advisors. Please go ahead.

Thank you. Welcome to FGI Industries first quarter 2023 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. We were very pleased with our strong operational execution and continued progress against our strategic initiatives during the first quarter, despite what remains a very challenging market environment. Even with the destocking headwinds pressuring our revenues, we were able to generate meaningful first quarter gross margin improvement, while our consistent focus on our organic growth initiatives should position the company to return to profitable growth as inventory conditions normalize. We reported a first quarter gross margin of 26.5%, which was up 925 basis points compared to the prior year period, and up 285 basis points versus the fourth quarter, despite the ongoing customer inventory correction and uneven demand trends in the repair and remodel market witnessed during the quarter. While our gross margins were helped by lower freight costs and the benefit of last year’s pricing actions, the biggest factor has been our focus on higher margin product categories and our good, better, best product strategy, which has resulted in a significantly improved product mix. While the first quarter gross margin levels are likely not sustainable for the long term, the favorable gross margin drivers remain in place, and we expect strong gross margin improvements for the full year 2023 compared to last year. The inventory correction that has been a headwind to our revenue growth over the last year has persisted into 2023, with the macro uncertainty adding another layer of pressure as many large customers are taking a very cautious stance and looking to reduce inventories to levels below historical averages. This caused our first quarter revenue to decline 38% compared to last year. The more cautious inventory strategy by many of our large customers is expected to prolong the destocking headwinds, particularly in the pro channel, where the inventory correction will likely extend into the second half of the year. While the uncertain demand environment, persistent inflation, and destocking headwinds are pressuring top-line results in the near term, we are continuing to invest in our organic growth initiatives, and I’m very proud of the progress we have made on our strategic priorities during the quarter. We were awarded several new product programs with key retail partners that will be key contributors to organic growth in the coming quarters, and we continue to invest in the new kitchen cabinetry program that we discussed last quarter. We remain confident in the progress we are making on our organic growth initiatives through our brands, products, and channel strategy, or BPC. Our strong performance as it relates to our BPC strategy is a testament to our commitment to innovation and customer satisfaction, and we are confident in our ability to capitalize on these successes and continue delivering value to our customers in the future. It is during challenging market environments like the one we are experiencing now, where the strengths of our business model are evident, notably our diversified product offering and longstanding customer relationships. While many industry participants are facing challenges due to consumers trading down to lower-priced products, we are well positioned given our good, better, best product portfolio. We are seeing some pressure on our higher-end products, particularly in Bath Furniture, but this is being partially offset by stronger growth in our good, better, private label offerings. In addition, we benefit from our deep and longstanding relationships with key customers, who look to FGI for support during difficult times. And as a result, we have not suffered any product line cancellations or customer losses. Now, looking at the broader R&R market, as I discussed earlier, we expect destocking to continue to be a headwind during 2023, and we can see this extend out further given a more conservative inventory strategy by many large customers as they reduce their base level inventory requirements. While the inventory correction has been a challenge, end market demand has held up relatively well across our key product categories. Our Bath Furniture business has seen the most pressure, but overall the repair and remodel market is performing as we would expect based on the current macroeconomic environment. The new residential construction market is not a meaningful part of our business, but there have been some signs that the market is bottoming. Commentary from the public builders has been more constructive during the first quarter, with most players noting improved order trends during the key spring selling season, as it appears buyers are starting to adjust to a new normal of higher mortgage rates. Overall, the trends in our end markets are consistent with our expectations coming into the year, and we continue to expect our end markets to decline in the mid- to high single digits during 2023. While the inventory pressures were more pronounced than we expected during the first quarter based on our strong margin performance, progress on our organic growth drivers, and stable end market trends, we remain confident in the 2023 financial targets we provided to start the year. The higher mortgage rates, persistent inflation, and macro uncertainty are clearly impacting consumer spending levels in the near term, but we remain optimistic regarding the longer-term outlook for the kitchen and bath repair and remodel market and FGI’s position in the industry and, therefore, continue to invest in our business despite the current headwinds. As a result, we remain focused on our strategic plan and are dedicated in our efforts to drive long-term growth above the market and create value regardless of the market environment. As a reminder, our long-term strategic plan is focused on three key initiatives, which include: driving organic growth using our BPC strategy; operational improvements; and efficient capital deployment. We made important progress against these strategic initiatives during the first quarter, including the following key accomplishments. As it relates to our BPC program and our organic growth initiatives, we were awarded several important new programs during the quarter. First, the company secured an agreement with a large Canadian retailer for a refresh of its in-store sanitaryware line, including new toilets, with new product rollout expected to commence in September of 2023. Second, we continue to generate strong interest in our custom kitchen program. After a successful Kitchen & Baths show in January, we have added an additional 34 dealers to our portfolio, bringing the total dealer count to 159 active dealers at the end of the first quarter with additional dealer growth expected to continue. And third, we won several important programs for our shower business. We added an online shower door program for an existing large Canadian retail partner, which is expected to commence in June of 2023. Additionally, FGI is set to revolutionize the customer in-store experience with a unique program for a large U.S. retailer that enables store associates, along with the customer, to collaboratively design and immediately quote and take orders for custom shower doors. FGI’s new online shower door configuration tool will allow for a seamless shopping experience and is expected to add incremental higher margin shower door sales. Finally, we were just recently awarded a national in-stock program for our shower wall systems, as well as an online shower-based program with a large U.S. retailer, which will begin with a rollout of up to 300 locations in the second half of 2023. This program will feature new and unique finishes, which further expands the shower wall program’s industry-leading design portfolio. 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 once again made significant progress on our margin improvement initiatives during the first quarter, as we reported gross margin of 26.5%. This is well above our typical historical levels, and while we don’t expect to be able to maintain these levels longer term, we are encouraged by our strong execution and the benefits of our evolving business mix shift towards higher margin product categories. Finally, our focus is 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 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. Overall, I was very proud of our execution during the quarter. We generated another quarter of strong margin expansion, we were awarded several new business programs, and we made important progress on our strategic goals. While we were disappointed in our first quarter top-line results, we continue to invest in our organic growth strategy and remain confident that we are well positioned for improved growth in the coming quarters. 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 given an update on our liquidity and balance sheet and wrap it up with our full year 2023 guidance. Revenue totaled $27.2 million during the first quarter of 2023, a decrease of 38% compared to the prior year, primarily due to continued inventory destocking as well as some softening in customer demand. Currency was a headwind during the quarter and negatively impacted revenue by 1.1%. Looking at our business line, sanitaryware revenue was $15.4 million during the first quarter, down from $26.8 million during the prior year period. The revenue decline was driven by channel inventory reduction at key partners, particularly in the pro channel, as customers are becoming increasingly cautious regarding inventory levels, with some large customers reducing their inventory levels to below normal historical levels. There have been some pockets of softness, but overall end customer demand has remained relatively steady. Bath Furniture revenue was $5 million during the first quarter, down from $10.1 million last year. The Bath Furniture business also continued to be negatively impacted by elevated channel inventory levels, which has been prolonged by some modest weakening of demand. Shower System revenue was $5 million during the first quarter of 2023, down from $6 million last year. The decline in Shower System revenue is expected to be temporary as momentum in the business remains strong, highlighted by several awards with national retail partners that will begin rollout in the second half of 2023. Other revenue was $1.8 million during the first quarter of 2023, up from $700,000 last year, driven by growth in our custom kitchen cabinetry business. Gross profit was $7.2 million during the first quarter, down only 4.3% from last year, as the revenue decline experienced during the quarter was offset by a more favorable mix and lower freight costs. As a result, gross margin improved to 26.5% during the first quarter, up from 17.3% last year and 23.7% in the first quarter of 2022. While we expect this positive factor to remain in place during 2023, we don’t expect to be able to sustain the first quarter gross margin levels. However, we continue to expect 2023 gross margin to improve meaningfully from 2022 levels. Our operating expenses increased to $7.2 million during the first quarter, up from $6.8 million last year, as we continue to invest in our growth initiatives despite the near-term revenue headwinds. The higher operating expenses reflect marketing spending for new product initiatives, expenses for the Kitchen & Bath trade show, costs to support the Australia and UK expansion, and expenses tied to our new kitchen business development opportunity. GAAP operating income was nearly breakeven during the first quarter with an operating loss of $3,000, down from $0.7 million in the prior year period. Excluding $100,000 in one-time business expansion expenses and IPO-related legal expenses during the first quarter of 2023, adjusted operating income was $0.1 million, down from adjusted operating income of $0.9 million during the prior year period, driven by the decline in gross profit combined with the incremental growth investment. GAAP net loss was $0.3 million or $0.03 per diluted share during the first quarter of 2023, down from GAAP net income of $0.5 million or $0.05 in the same period last year. Excluding one-time items in both periods, adjusted net loss for the first quarter of 2023 was $0.2 million or $0.02 per diluted share, down from adjusted net income of $0.7 million or $0.07 last year. Now, turning to the balance sheet and our liquidity, as of March 31, 2023, the company had $7.4 million of cash and cash equivalents, and total debt of $8.4 million. At the end of the quarter, we had $15.1 million of availability under our credit facilities. Net of a letter of credit combined with cash, total liquidity was $22.5 million at quarter end. We continue to be pleased with the improvement in our working capital levels, which has been elevated during 2022 owing to the supply chain challenges. The reduction in working capital has driven strong free cash flow conversion over the last two quarters, and we currently are in a net debt position of $1 million, an improvement of $10.5 million compared to our previous net debt of $11.5 million in the second quarter of 2022. We believe we are in a solid liquidity position that is more than sufficient to fund our growth initiatives. Finally, turning to the guidance. While inventory destocking had a bigger-than-expected impact during the first quarter, end customer demand has remained largely in line with our expectations, and we continue to benefit from our margin improvement initiatives. We continue to be encouraged by our organic initiatives with several new programs set to launch in the second half of the year. As a reminder, our guidance reflects the investment related to our new kitchen program that totals roughly $0.5 million in 2023, as well as additional investment in growth initiatives. With this factor as a backdrop, we are maintaining our 2023 financial guidance, with total 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 net income and operating income is being provided on an adjusted basis and excludes non-recurring items. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Thank you. We will now start the question-and-answer session. Our first question comes from Greg Gibas with Northland Securities. Please go ahead.

Hey, good morning, David and Perry. Thanks for taking the questions. Congrats on the nice execution in the challenging environment. I wanted to ask, I guess, given the revenue performance in Q1 seemed a little bit below your expectations and perhaps the ongoing destocking was maybe worse than you anticipated too. What kind of gives you confidence that you can maintain that full year revenue outlook?

Thanks, Greg. It’s Dave. Yeah, there are a couple of things. So, as definitely we have seen the destocking extend, part of that is also due to the softening of the R&R, like we mentioned, which is extending that destocking period. And, I think I also mentioned some of our larger customers are looking at reduced inventory levels as a base as they move forward, as a cautionary move, right, because they want to make sure that inventory levels are more in line with where the market and demand is. With that said, though, we fully expect that in the second half, you’re going to see what I used to call a bullwhip effect, which is going to be now customers are going to have a need for inventory and need to replenish. I think I mentioned on our last call that we’ve seen that trickling in from the retail side. We’ve seen more of the destocking pressure on the pro business. But as you heard, we’ve seen and heard some more positive comments from the builder side of the business, and we would expect the second half for that to ease. Secondly, as I mentioned on today’s call, we have a lot of new programs more than what you just heard, but the three that I mentioned today, or four, the additional growth in our shower business, as well as our kitchen business, we fully expect to execute those and execute more new incremental business, despite where the market is for the second half. So when you take the lighter Q1, a lot of that business, those initiatives, many of them were not baked into our guidance. So we actually have a good expectation that we would be able to continue to meet our revenue guidance for the year. For sure, we would expect that we’d probably be closer to the low end of that guidance depending on how far that destocking goes out. But that bullwhip effect of destocking ending and reordering, coupled with new incremental sales, gives us that confidence.

Great. That’s extremely helpful, Dave. I wanted to follow-up, I guess, on that gross margin improvement. How much was maybe a result of the price increases versus the mix shift and maybe versus the result of lower freight costs year-over-year? And I also wanted to…

Yeah, that’s a good question. Go ahead.

I guess, I think your comment was also around – it’ll be difficult to maintain these levels of gross margins going forward. I just wanted to get a sense of why you’re thinking about that?

Yeah, I want to clarify that. So we’ve been seeing a rapid improvement in our margins for various, first, I’ll tell you why. We have had impact, obviously, from freight reductions. A large part of our change, though, has to do with the pricing actions we took and also with the mix shift. You can see where our shower business has grown to a sizable portion of our business now, kitchens continue to grow, and those were all higher margin businesses for us. And we fully expect, like Perry had mentioned, we’re going to improve our margin meaningfully as we move along compared to prior years. And we fully expect to get – we’re not deviating from our guidance of saying longer-term – mid-term, really, mid- to high-single-digit EBIT margins as we move forward with our BPC strategy. So that’s still in place. And I think when I mentioned, we can’t maintain these longer-term, we still expect to see further margin improvement as we go through these quarters. And then what most likely will happen is as we expect to get more demand and order activity from the pro side, especially when we talk about some of the more lower margin product categories on some of the promotional products in sanitaryware. The margin percentages will come down some, but the dollars will increase, and that will add obviously to our overall gross margin dollar accretion. So we fully expect that our margins longer term will continue. I think when I mentioned it today, we were really referencing more the fact that the speed that our margins are growing now, as the revenues are lower, our margins will improve. Part of that is mix, right, because we’re not going to see some of the more lower margin product categories, which create a lot of the volume. But overall, as a business, as we grow out and execute that BPC strategy, like I mentioned today, with shower and kitchen growth, those margins will continue to grow.

Okay, great. That’s helpful. I guess, last one for me. We did want to follow-up on your commentary on those several new product programs with your retail partners, great to hear that those are coming in. And, I guess, first question around those would be the timing, I think you said the back half of this year was maybe when those would start to see effect. Just trying to think of maybe how much Q3 versus Q4? And, I guess along those lines, I think you talked about maybe three of the key ones there, you said there’s more. Just trying to get a sense of the magnitude or how much of a needle mover there’ll be on organic growth in the back half or into next year?

Yeah, I mean, they’ll be meaningful. The timing in our business is – anybody’s business, but timing with us, with shipping from Asia and understanding when things are arrived, some of that is up to us that’s completely finalized things with our retail partners as far as store sets and operational issues that go on domestically here. So if we do it, that’s why I mentioned the second half, Q3, Q4, sometime we would expect some could trickle over into Q1 of 2024, and, of course, next year we would have more of a straight-line knowledge of that business month by month. But I would just say to you that these are meaningful opportunities. Other ones in the hopper, too, as I would say, they’re all meaningful and material to the business in a meaningful way. And again, the ones I mentioned to you today, I brought up because they will start to impact our top line and our margins in the second half for sure.

Okay, great. I appreciate the color.

Thank you. As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to David Bruce for any closing remarks.

Thank you for your 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.

Thank you. The conference of FGI Industries has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.