Good morning, and welcome to the FGI Industries, Inc. Third Quarter 2023 Earnings Call. 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 Third 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 your 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 are beginning to see some signs of normalization in inventory levels and order patterns in certain categories. However, inventory destocking continues to impact our results with recent macro headwinds prolonging the expected inventory recovery as well as impacting overall demand across our categories. While our top line results are facing challenges, we continue to see the benefits of our margin improvement initiatives during the third quarter with gross margin improving 530 basis points from last year. As a result, our gross profit declined only 3% during the quarter despite the 22% drop in revenues. We could see some short-term variability in our gross margins as we invest in our growth initiatives and see a rebound in our pro channel and bath furniture business, but we believe our improved gross margin profile should be sustainable longer term, owing to our strategic focus on higher-margin categories and improved operating scale. As we have discussed in recent quarters, the industry-wide inventory correction that began in the back half of 2022 has persisted into 2023 with uneven demand in the R&R channel and macro uncertainty adding another layer of pressure. This has caused many key industry players to take a very cautious stance on inventory levels, with many participants looking to reduce inventories to levels below historical averages. This has prolonged the destocking headwinds, particularly in the pro channel. In addition, our European business, centered in Germany, has faced pressure due to a combination of destocking headwinds along with macroeconomic pressures in that country. Despite these near-term headwinds, we remain bullish on the long-term outlook for our industry and FGI in particular. The median age of owner-occupied homes is roughly 40 years in the United States. Home equity levels remain high and homeowners are staying longer due to the high interest rates. All of this provides a favorable backdrop for long-term remodeling demand. As a result, while market demand may be uneven in the near term, we remain focused on our brands, products, and channel growth strategy, which we are confident will enable us to drive above-market growth in the coming years. And we remain steadfast in our efforts to continue our strategic investments. Our confidence in our long-term value creation formula has not changed. As a reminder, our long-term strategic plan is focused on 3 key initiatives, which include driving organic growth using our BPC strategy, operational improvements, and efficient capital deployment. I am very excited by the progress we made against these strategic initiatives during the third quarter, so I would like to look through some of our key accomplishments. As it relates to our BPC program and our organic growth initiatives, we continue to execute on recently awarded new programs. We were awarded an important expansion on our recent partnership, and we continued our geographic expansion during the quarter. First, we are very excited to have extended our licensing agreement for an industry-leading overflow toilet technology into Canada. We look forward to launching new sanitary wear products utilizing this technology at the 2024 Kitchen & Bath show. Second, we continue to expand our geographic footprint, building on the recently signed agreements providing entry into India, Eastern Europe, Australia and the U.K. During the third quarter, we initiated a partnership with our first distribution partner in India, while our products were approved for use in large commercial projects for a new national construction company partner. Third, I'm excited to announce that we are unveiling an exciting collaboration with Vurtu.uk, a highly regarded bath distributor in the U.K. Under this exclusive arrangement, FGI will be the sole supplier of sanitaryware, featuring a range of new toilets and sinks, including the company's innovative rimless technology toilet. Vurtu.uk will showcase FGI's products on popular e-commerce platforms such as ManoMano, Home Base, and B&Q, as well as extending this exceptional offering to their entire customer base. Fourth, we won a significant award for new business with a major U.S. retailer that has agreed to expand their in-store bath furniture assortment with FGI. Several new collections consisting of over 20 new bath furniture items will be added, featuring brand new and exciting finishes, styles, and configurations that will roll into stores in the second quarter of 2024. Next, FGI was awarded a new toilet program at a major national U.S. wholesaler. This program will include unique product updates to current toilet offerings at this customer, while also adding the recently announced new overflow toilet to the program. We expect this program will begin shipping in Q1 2024. Finally, our custom cabinetry business continues to grow rapidly with our premium Covered Bridge brand adding 93 new dealers thus far in 2023, bringing the total active dealer count to 198 at the end of the third quarter. We also continue to make progress on our new digital custom kitchen cabinetry investment, which is expected to formally launch in early 2024. We plan to have a large display at the 2024 Kitchen & Bath show that showcases its Covered Bridge custom kitchen cabinetry line. We are very excited by our progress on our strategic initiatives, and we remain confident that this 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 are pleased to have once again reported another quarter of strong year-over-year gross margin improvement, driven in large part by our strategic decision to focus on higher-margin categories. Finally, our third focus is on efficient capital deployment. We have made meaningful progress in recent quarters in reducing our working capital usage, which has resulted in improved free cash flow conversion and lower net debt levels. This further bolstered our solid liquidity position and financial flexibility. While debt repayment and investment in organic initiatives has been our main priority, we continue to evaluate strategic bolt-on acquisition opportunities. The demand environment remains uneven, which is prolonging the destocking headwinds that have impacted our results over the last year, with several industry forecasters predicting mid- to high single-digit declines in home improvement industry spending in 2024. While we have faced headwinds in our end markets, I'm proud of the continued progress we have achieved on our strategic growth initiatives, and we have several exciting programs that should contribute to improved growth opportunities in the coming quarters. We have indicated on previous calls that we plan to continue to invest in our business despite the recent market weakness, and we have, in fact, increased our investments during 2023 relative to our initial expectations, which we feel demonstrates our confidence in our growth opportunities. However, the incremental growth investments, including a strategic investment we made with a major retail customer in Q3 that is expected to lay the groundwork for future growth opportunities, have impacted our outlook for 2023. Softening consumer demand, coupled with continued destocking and investments for future growth, have caused us to revise our full-year outlook. As a result, we now expect full-year 2023 revenues of $115 million to $120 million, adjusted operating income of $2 million to $2.8 million, and adjusted net income of $1 million to $1.5 million. While we are disappointed by our recent revenue results, we are excited about our BPC growth initiatives, and we remain committed to our efforts to continue our strategic investments in this promising direction. We believe our execution of the BPC strategy, coupled with our strategic investments, will allow us to outpace the negative market predictions and should enable FGI to drive organic growth in the coming year. 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 detail on the quarter, give an update on our liquidity and balance sheet, and wrap it up with our full-year 2023 guidance. Revenue totaled $29.9 million during the third quarter of 2023, a decrease of 22% compared to the prior year due to continued inventory destocking as well as some other weakness in the broader home improvement market. We continue to see large customers take a cautious stance regarding inventory level, given sluggish demand trends, which is prolonging the inventory correction. Looking at our business lines, sanitaryware revenue was $20.7 million during the third quarter, down from $25.5 million during the prior year period due to the destocking headwinds, particularly in the pro channel and more muted demand trends. However, our sanitaryware revenue increased 10.2% sequentially from the second quarter of 2023, the second consecutive quarter of sequential revenue gains as some customers are beginning to return to more normal order patterns, and new customer programs are benefiting results. Bath Furniture revenue was $2.5 million during the third quarter, down from $5.6 million in the prior year period. The broader bath furniture market continues to be one of the product categories most impacted by the macro headwinds. Our product mix in bath furniture is more focused on the higher-end price point, which is causing additional challenges given the more pronounced weakness in the higher ticket items as a result of recent market change. We are expanding our product offering in the mid-tier category to better address current demand. Shower system revenue was $4.9 million during the third quarter, down from $5.4 million last year, but up 15% sequentially from the second quarter of 2023. While the shower business has experienced some modest inventory destocking, demand trends remain steady, and recently launched programs are gaining momentum. These new programs include the online shower door program with a large Canadian retailer as well as the new shower wall systems rollout at as many as 300 locations of a large U.S. retailer. We continue to expect recently awarded new programs to drive improved trends in the back half of 2023 and into 2024. Other revenue, which consists primarily of our custom kitchen cabinetry business, was $1.7 million during the third quarter, down modestly from $2 million last year. Momentum in the business remains strong as we continue to add new dealers to the network, and the new kitchen cabinetry initiative we have discussed is on track for launch in early 2024. Gross profit was $7.8 million during the third quarter, a decrease of only 2.6% compared to last year due to a shift in revenue mix toward higher-margin products, lower logistics costs, and the full benefit of pricing actions taken during 2022. As a result, gross margin improved to 26.2%, up 530 basis points from the prior year. Our operating expenses increased to $7.3 million during the third quarter, up from $6.4 million last year. We continue to invest in our growth initiatives. The higher operating expense reflects marketing spending for the recently launched overflow toilet product line, expenses tied to new custom kitchen cabinetry business development opportunities, as well as the strategic investment with a large major retailer that Dave discussed. GAAP operating income was $480,000 during the third quarter, down from income of $1.7 million in the prior year. Excluding certain nonrecurring expenses, adjusted operating income was $600,000 during the third quarter. The decline in operating income was a result of the revenue decline and the continued investment in operating expenses tied to growth initiatives, partially offset by the improved gross margin. As a result, adjusted operating margin was 2% during the third quarter, down from 4.5% in the same period last year. GAAP net income was $340,000 or $0.04 per diluted share during the third quarter of 2023 versus net income of $1.3 million or $0.13 per diluted share in the same period last year. Excluding certain nonrecurring items, adjusted income for the third quarter of 2023 was $0.4 million or $0.05 per diluted share. Now turning to the balance sheet and our liquidity. As of September 30, 2023, the company had $5.4 million in cash and cash equivalents and total debt of $8 million. At the end of the quarter, we had $15.6 million available under our credit facility, net of letters of credit. Combined with cash, total liquidity was $20.9 million at quarter-end. We believe we are in a good solid liquidity position that is more than sufficient to fund our growth initiatives. Finally, turning to guidance. As Dave detailed, our incremental growth investment combined with the macro headwinds that are pressuring industry volumes have led us to lower our outlook for the full year. Our revised range calls for revenue in the range of $115 million to $120 million, adjusted operating income in the range of $2 million to $2.8 million, and adjusted net income of between $1 million to $1.5 million. Please note that the guidance for net income and operating income is being provided on an adjusted basis and excludes certain nonrecurring items. In addition, our guidance includes approximately $0.5 million in expenses for our new kitchen cabinetry initiative, incremental marketing spend for our new overflow toilet technology opening, as well as the increased investment during the third quarter in support of a major retail customer that we expect to lead to attractive incremental growth opportunities in the upcoming quarters. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

And the first question today will come from Reuben Garner from Benchmark.

Maybe let's start with what you're seeing and hearing from your customers. So it sounds like maybe a little bit conflicting. There's still some destocking going on, but some customers are showing signs of returning to normal order patterns. Can you kind of talk us through that in a little more detail? Is it dependent on the channel? Is it dependent on the product? What are you seeing there?

Yes, that's a great question, Reuben. We have a broad product base across our categories and a wide category offering. As we mentioned, the moderation of inventory destocking has been uneven for us. Bath Furniture, in particular, has been a challenge because of our extensive range of cabinetry, which has been more impacted due to our high-end selection. Many of our customers are adapting with us, and we're reengineering many of these assortments, which is taking longer than expected. In terms of shower and sanitaryware, as Perry noted, we're beginning to see growth on a quarterly basis. Those inventory levels are stabilizing, and they are also influenced by the variety we offer in those categories. We are optimistic as we exit Q4 and move into next year, expecting to see a more consistent order pattern that aligns with the normal levels we experienced before these destocking issues.

Okay. And it seems like there are 3 buckets of items that impacted this year's results. I was hoping you could quantify them for me, so we can try to parse out what's not going to be negatively impacting next year. So you had the destocking piece. You had investments tied to future revenue opportunities that you didn't realize in 2023, so a cost element. And then the potential benefits of those investments that didn't come this year but will come next year. Can you kind of walk us through those 3 buckets with maybe some numbers behind it?

Sure. I won't go into specific numbers, but I can share that as we approach 2024, the investments we made in 2023 are intended for 2024 and beyond. We expect to begin seeing returns on many of those investments in 2024. We've mentioned our digital kitchen initiative, which is set to launch in the first quarter. We've also talked about our new toilet technology, which will debut at our KB show in February. Regarding the inventory situation you raised, we believe there will be a natural recovery.

Pardon me, this is the conference operator. We've lost audio from our main presenting location. Please stand by. Mr. Bruce, can you continue? Okay, your line seems to be cutting out a little bit there. Please proceed.

Hello, Reuben, are you still there?

I am here. You cut off kind of early in the answer. So if you wouldn't mind...

I apologize for the technical issue we are experiencing. We fully expect that as we head into next year, we will see several developments. The investments made in 2023 are not only for next year but also for the future. From an inventory standpoint, we anticipate a return to a more typical order cadence as we approach 2024, which will create a natural growth opportunity as we shift back to a more normal pace. We have already experienced sequential quarterly growth in sanitaryware and showers. Additionally, we have identified new opportunities that we believe will add to our growth despite current market predictions. The R&R market is expected to decline by mid- to high single digits according to industry experts, but we are confident that our new programs, kitchen initiatives, the ongoing expansion of the Covered Bridge business, and growth in our shower segment will enable us to surpass any negative market trends in 2024.

Okay. In a situation where markets may be down mid-single digits or more, are you also experiencing a decline or a smaller decrease? How should we consider the margins for next year? I understand it’s early and you’re not providing guidance, but what factors should we consider as we try to understand that?

No, it's a great question. We're actually quite excited about it. If you look back to when we went public a couple of years ago, we set goals to achieve margins in the near to mid-term within the range of 25% to 30%. We're already above 25% now. Many of the opportunities we've discussed, both this quarter and in prior quarters, are centered around higher-margin businesses. For instance, our kitchen segment is starting to scale in a way that positively impacts our margins. We're also investing in technologies and businesses like our shower and digital kitchen sectors, which have higher margins. While some of our professional business may experience fluctuations, particularly in mid-priced vanity segments, this will contribute to our overall gross margin dollar growth, impacting our EBIT targets. We've mentioned aiming for our EBIT margins to reach the mid- to high single digits. We fully expect that the combination of higher-margin categories and margin dollar growth will help us reach those previously discussed goals.

And just to be clear, I mean those mid- to high single digits. Is there a certain revenue level or volume level you need to reach to achieve that, or can it be done in a revenue environment that could potentially be flat or down next year?

Well, Reuben, this is Perry. I think it's a mix to us because we are working on the volume, we are working on the margin in different product categories and channels. But our goal because of our scale, so the more gross margin dollar that we can generate, the higher operating margin that we can see in the bottom.

The next question is from Greg Gibas from Northland Securities.

It seems like assuming a little bit of a recovery in Q4 implied in guidance, and I just wanted to get a sense of maybe your underlying assumptions there and how destocking trends have continued into Q4.

You can draw some conclusions based on our guidance and what you've observed in the first three quarters. We hope to see a slight recovery. As we mentioned last quarter, we've started to receive new orders for some of the new programs we've discussed, though most will come next year. Some orders have already come in, as we've indicated, alongside a continued moderation in inventory destocking. However, we don't expect to see the larger orders in the end of Q4 that we've historically observed. Since we source 75% of our products from Asia, we typically experience a significant spike in December due to Asian holidays at the start of the year. We don't anticipate a spike as large as in the past, but that will depend on inventory levels and the direction of end markets and macroeconomic conditions. If you want to make inferences based on our new guidance and the quarter, as we enter Q4, we feel fairly optimistic about what we're observing, but we still have some time ahead of us.

Got it. Makes sense. And then curious, like if you're seeing any movement on pricing or margin pressure? I mean, it looks like gross margins are still holding up pretty well. And just a little surprised that as a result of the lower inventory levels or basically destocking reducing demand levels, just a little surprised that we didn't really see much movement on margins as a result.

Yes, we have been strategic in our approach and made necessary pricing adjustments. Much of our focus has been on the bath furniture sector, which has the widest range of products in our offerings. Our retail and wholesale partners are working to optimize that business due to the numerous products in the market. When inventory issues arose, our assortments became more concentrated on higher-end products, although we do offer a range from good to best. We are adjusting many of those programs. I mentioned that one of our major retail customers awarded us a significant contract to introduce new collections next year, which supports our strategy. During this time, we've also been growing our higher-margin businesses in showers and kitchens, which are starting to significantly impact our overall margin and product assortments. This trend is expected to continue into next year, contributing to our stable margins, and I commend our teams for their efforts.

And ladies and gentlemen, once again, we have a little bit of an audio loss there. Mr. Bruce, we just lost you. I think we're back now. Please proceed.

Greg, I apologize.

Dave, no problem. I think we've kind of got the full answer out. I think you're just kind of summarizing at the end, but very helpful, and it makes total sense. Lastly, curious, I know it's still early, but if you could discuss the opportunity in India. Great to see that you initiated your first distributor partnership there. How should we think about maybe the rollout in that market and how you're thinking about expanding into it?

Our initial entry into India will focus mainly on our sanitaryware business, which presents a significant opportunity given that it's one of the largest markets in the world. The sanitaryware category is expanding there, supported by local government incentives akin to the rebates in the United States for low-flow toilets. Our strategy involves partnering with a strong distributor to introduce our products into showrooms, local building projects, and hospitality venues. Concurrently, we're collaborating with larger construction companies that have approved our products for their specifications, enabling us to penetrate larger commercial projects like airports, new apartment complexes, and large hotels. While there is still much work ahead, we have successfully overcome preliminary challenges. We have meetings scheduled in Q4 with our distributor to finalize plans for launching this initiative as we move into next year, and we are enthusiastic about this venture.

And ladies and gentlemen, 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 the time and interest today. We appreciate your continued support of FGI. Please note that we will be attending the Benchmark Discovery Conference on December 7. Stay well. And if we don't connect during the quarter, we look forward to speaking with you on our next quarterly call.

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