Good day and welcome to the FGI Industries Third Quarter 2024 Results Conference 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 Jae Chung, Vice President of FGI Industries. Please go ahead.

Thank you. Welcome to FGI Industries 2024 third quarter 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 which is available on the company's website. Today's call will begin with a 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.

Thank you, Jae. Good morning, everyone, and thank you for joining our call today. I am pleased to share our third quarter results reflect the strategic investments we've made in our organic growth initiatives across our brands, products, and channels or BPC strategy. FGI reported total revenue of $36.1 million in the quarter, representing a year-over-year increase of 20.6%. Gross profit was a record $9.3 million, growing 18.9% compared to the prior year. Gross margin was 25.8% compared to 26.2%, a decline of 40 basis points compared to the third quarter of 2023 due in part to a higher mix of Sanitaryware and Bath Furniture and higher freight costs in the Bath Furniture and Covered Bridge segments. The industry outlook remains relatively flat overall, with our customers forecasting minimal growth in 2024, but our investments have driven revenue growth well above the market. FGI's third quarter revenue increased significantly compared to the third quarter 2023 due to growth across all our businesses and geographies. Revenue grew 21%, 9%, and 39% in the quarter for the U.S., Canada, and Europe markets, respectively. Sanitaryware revenue increased 3% year-over-year in the third quarter, reversing the decline in the prior quarter compared to the prior year period. Our Bath Furniture revenue increased 64% year-over-year as our shift towards lower-priced offerings and new programs that are more aligned with the market pricing and design trends gain traction. The Shower Systems business reported an increase in revenue of 45% as demand trends remain positive, driven by new customer programs. In custom kitchen cabinetry, Covered Bridge revenue increased 93% in the quarter, driven by continued strong dealer and customer expansion across the U.S. Isla Porter, our digital custom kitchen joint venture, is off to a strong start, establishing relationships with the premium design community with on-trend products via an AI-backed digital sales platform. Our geographic expansion plans in Europe and India hold significant promise for driving growth in the coming quarters. Our strategic growth initiatives are progressing well and are expected to fuel above-market organic future growth. I commend our FGI team for their dedication to our long-term objectives, positioning the company for success for the remainder of 2024 and beyond. With that, I'll hand it over to Perry for a more detailed financial review.

Thank you, Dave, and good morning, everyone. I will begin by providing additional details on the quarter, followed by an update on our current liquidity and balance sheet. Finally, I will conclude with our guidance for the full year 2024. As Dave mentioned, for the third quarter 2024, revenue totaled $36.1 million, an increase of 20.6% compared to the third quarter of 2023. Gross profit was a record $9.3 million in the quarter, an increase of 18.9% year-over-year. Our gross margin declined to 25.8% in the quarter compared to 26.2% in the prior year. Our operating expense increased 27.6% to $9.4 million from $7.3 million in the prior year due to ongoing investment in our growth initiative in the kitchen cabinet business which includes Cover Bridge and Isla Porter and investing in distribution for our Canada business. GAAP operating income was negative $0.1 million in the quarter, down from a positive $0.5 million in the prior year. Lower gross margin and higher operating expense due to investing in our growth initiative accounted for the loss. Moving to our balance sheet. At the end of the third quarter, FGI had $16.3 million in total liquidity which we believe is more than sufficient to fund our growth initiative. We are updating our 2024 guidance as follows: our revised revenue guidance is $127 million to $131 million compared to the previous range of $115 million to $128 million; the new adjusted operating income guidance is negative $1 million to breakeven from the previous range of $2.8 million to $3.8 million; the new adjusted net income guidance is negative $1 million to breakeven from the previous guidance of $1.2 million to $2 million. Please note that the guidance for adjusted operating income excludes certain nonrecurring items. Adjusted net income excludes certain nonrecurring items and includes an adjustment for minority interest. That concludes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

And the first question comes from Reuben Garner with The Benchmark Company.

Wondering if you could help us with the components of the growth year-over-year in the quarter? How much of the outperformance? I mean, I certainly think it was still a down market and you grew 20%. How much of that was that new product offering within the Bath Furniture? Was that a one-time kind of stocking benefit that goes away? Or is that an ongoing item? And I've got a couple of follow-ups.

Yes, sure. No problem. Good question. So no, it's not a one-time event. We had a nice revenue bounce based on what we've been talking about the last couple of quarters, which is really reengineering that assortment to meet more of the pricing trends in the market which we've talked about. Higher ticket, higher retail furniture has suffered more recently in the last year or so. And we've been working diligently to change that assortment, and we're starting to see the results. We're getting new placements. We're taking some share. We've had a couple of large customers also do the same by adding new product into the mix. And we would fully expect to see that type of growth continue as we start to comp this new business.

Can you discuss the effect on gross profit margins? In the last quarter, it was around 25.9% or 25.6%. Should we consider this as the new benchmark with the updated portfolio mix, or were there any specific factors in the quarter that caused it to decrease?

Yes. We do not expect the margins from the quarter you observed to persist. We fully anticipate returning to the levels we experienced in previous quarters. The margin changes in Q3 were influenced by a couple of factors. First, ocean freight rates increased significantly and were higher in Q3. Additionally, we had larger cabinet shipments from our kitchen business, which affected gross margin, along with the growth in bathroom furniture and other products we introduced. Freight costs contributed to this impact. Furthermore, there were some promotional expenses related to the launch of new bathroom furniture that also affected margins. However, we are very confident in our plan for Q4 and believe we will return to the gross margin range of over 27%.

Okay. Does that mean the primary difference between your profitability guidance and your revenue performance is that the profitability side is influenced by changes in the freight costs and the promotional expenses? Was the promotional aspect unexpected, or were there new wins after the last quarter that affected this?

Yes. There are two ways to approach this. First, from a gross margin standpoint, we are focused on that 25.6% number, which was 25.8%. We are confident that we will return to the 27% mark based on our product mix. With freight rates returning to normal, we don't expect them to spike as they did in Q3. Additionally, operating expenses have affected our bottom line. I believe I mentioned in a previous call that we will be able to leverage our operating costs effectively. We anticipate that in the short and midterm, we will continue to reduce our operating expense ratio, which is crucial as we maximize our investments, particularly in new ventures like Isla Porter and kitchen growth that have significantly impacted our bottom line in the short term. However, we are beginning to see positive results on the revenue side, which will subsequently boost gross margin and gross profit. Therefore, we are focused on our continued investments in key growth categories while managing promotional costs and freight, which have caused some fluctuations in gross margin.

I'm going to ask one more broad question. What feedback are you receiving from your customers right now, considering it's early but looking ahead to next year? There was a lot of optimism recently about the potential positive effects of lower rates, but it seems like rates have actually gone up instead. Is it still appropriate to take a cautious view of 2025 for the industry? Or are you detecting a growing sense of optimism among your customers?

There is a sense of cautious optimism. Muted is an appropriate term. Some of our industry competitors see growth potential for next year ranging from 0 to low single digits. For us, though, we are beginning to gain market share in several key categories. Therefore, our performance is not entirely dependent on market trends, as we are generating additional sales. In response to your question, the industry appears cautiously optimistic about potential improvements. If interest rates improve as many anticipate, it could lead to increased market activity beyond the incremental growth we expect.

Congrats on the progress.

With 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 if we don't connect during the quarter, we look forward to speaking with you on our next quarterly call.

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