Good day, and welcome to FGI Industries, Inc. Second Quarter 2025 Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Jae Chung, Chief Financial Officer. Please go ahead.

Thank you. Welcome to FGI Industries 2025 Second Quarter Results Conference Call. Leading the call today are Chief Executive Officer, David Bruce; and Chief Financial Officer, Jae Chung. 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 Jae Chung. 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 second 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 $31 million in the quarter, representing a year-over-year increase of 5.5%. Gross profit was $8.7 million, a decrease of 2.9% compared to the prior year. Gross margin was 28.1% compared to 30.5% in the second quarter of 2024, a decline of 240 basis points due primarily to the ongoing tariff environment. FGI was impacted by an industry-wide pause during the quarter as customers evaluated the impact of tariffs on their businesses. FGI and our customers continue to evaluate a China Plus One strategy to diversify and broaden our geographic sourcing. The industry outlook remains uncertain due to tariffs, but our strategic investments in our brands, products, and channels have driven revenue growth well above the market. FGI's second quarter revenue increased compared to the second quarter of 2024 due to the growth in our Sanitaryware, Bath Furniture, and Covered Bridge cabinetry businesses, while Shower Systems revenue declined. Revenue declined 0.4% in the U.S. and grew 2% and 36.7% in Canada and Europe, respectively. Sanitaryware revenue increased 4.3% year-over-year in the second quarter compared to the prior year period. Our Bath Furniture revenue increased 2.7% year-over-year as our shift to market-aligned program pricing and design drove new business wins. The Shower Systems business reported a decrease in revenue of 11.2% even as demand trends remain positive. Other revenue, primarily from Covered Bridge, increased 67.7% in the quarter driven by continued order momentum, expanded geographies, and a higher dealer count. Isla Porter, our digital custom kitchen joint venture, continues to establish relationships with the premium design community with on-trend products via an AI-backed digital sales platform. Our geographic expansion in Europe and India holds 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 2025 and beyond. Before I hand it over to Jae, I want to say a few words about tariffs. The increasing tariff environment in 2025 remains fluid. FGI is working with our suppliers and customers to support one another as we navigate the new normal together. We went through a similar process during the first Trump administration's tariff increases, so this is not new to us. We are confident that we can work through what comes given the close relationships we have cultivated over the years with our vendors and customers. We are seeing the order pipeline recovering even as some customers remain cautious due to the continued tariff uncertainty. With that, I'll hand it over to Jae 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 2025. As Dave mentioned, for the second quarter 2025, revenue totaled $31 million, an increase of 5.5% compared to the second quarter of 2024. Gross profit was $8.7 million in the quarter, a decrease of 2.9% year-over-year. Our gross margin declined to 28.1% in the quarter compared to 30.5% in the prior year. Our operating expenses increased 1.3% to $9.5 million from $9.4 million in the prior year due primarily to investing in initiatives related to our BPC growth strategy, including Isla Porter in India and one-time costs related to optimizing our warehouse operations. GAAP operating loss was $0.8 million in the quarter, down from a negative $0.5 million in the prior year. Lower gross margin and higher operating expenses due to investing in our growth initiatives accounted for the loss. Moving to our balance sheet. At the end of the second quarter, FGI had $16.4 million in total liquidity, which we believe is more than sufficient to fund our growth initiatives. We are maintaining our 2025 guidance as follows: Our revenue guidance is $135 million to $145 million. The adjusted operating income guidance is negative $2 million to a positive $1.5 million. The adjusted net income guidance is negative $1.9 million to a positive $1 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 interests. That concludes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

The first question comes from Reuben Garner with Benchmark.

Thank you. Good morning, guys. Let's see, you referenced your customers kind of pausing for tariffs. I'm curious, is that more so they're concerned about demand degradation from the consumer itself? Or is it about just kind of the moving target on the tariff front and not wanting to buy inventory at tariff levels that could potentially come lower? Or is it a combination of the two?

Yes. So that's a great question. And as we sit here in August, this tariff pause took place back at the beginning of the quarter. If you remember, the tariffs that were originally announced were quite large and substantial and then subsequently had been reduced. Because of that tremendous uncertainty, there was a pause because everyone was trying to determine at the time whether they had brought product in with those larger tariffs, which would have been impacted dramatically. So due to the uncertainty, there was a length of time, several weeks where orders were pulled and that obviously impacted the quarter. But since then, we've been feeling really good about our order pipeline and how it's been moving along. We don’t feel that we're going to see something like that again. But as you have also watched the more recent news regarding tariffs, some things are still unsettled. China tariff discussions were paused again for another 90-day reprieve. So I think there'll still be some caution in the marketplace, but not to the extreme that we saw at the early part of Q2, which impacted our numbers in the quarter.

Okay. And the China Plus One strategy you referenced, is that in all segments of your business, including Sanitaryware? I know that's a place in the past that's been heavily sort of reliant on China?

Yes, you're 100% correct. And yes, it will be impacting all of our businesses. There are some things we won't be able to reveal quite yet, but we are extremely active right now in diversifying our global sourcing base. As I've said to a lot of people more recently, there will be a completely different picture from a global sourcing footprint map this time next year than you've seen today from our company. There will be impacts across all product categories for FGI.

Okay. And I know we have limited history with you guys being a public company, but it looks like your operating expenses historically were higher in the second quarter than the first, and they were lower. Just curious if that was kind of a temporary pullback on your end tied to the uncertainty. How should we expect, I guess, both gross margin and operating expenses to trend in the second half? What's embedded in the guidance?

Yes. I mean, we understood and took action based on what we saw occurring in the quarter. We were very diligent in watching our expenses. We have some expense levers to pull to do that. In our margins, I think we had said when our margins got substantially higher previously, we didn't expect them to remain that high, but we still saw a realistic picture in the upper 20s to continue. We still believe that based on, again, the pipeline and particularly what we've talked about, the growth of new programs and new introductions, which is where most of the growth is coming from at this point.

Yes. I mean as far as the expenses are concerned, I think it was very prudent to try to keep a very careful eye on where we're spending our expense dollars. So we've cut where we could without sacrificing growth for the future. I would expect that we would continue that process throughout the year and into 2026.

Okay. Just a clarification for me, and this is my last question. The upper 20s that's a gross margin comment. And is that the back half we think we can get there even with the tariff situation?

Yes. I mean, we have pretty good confidence that the new businesses that we continue to implement. I say that positively because those were some of the things that were paused a bit in Q2. Those new programs should allow us, if all goes well and as planned, to achieve those margin levels.

The next question comes from Greg Gibas with Northland Securities.

David and Jay. I wanted to, I guess, follow up on your ability to navigate the effects of tariffs with vendors and customers and then kind of how maybe the negotiations have gone, if you touch on maybe how that's played out as expected to date? And just kind of how those discussions have gone?

Yes, I believe the situation has been somewhat different this time compared to the past. We've experienced this before, particularly back in 2018 when the initial impact of tariffs was relatively contained. The uncertainty surrounding those tariffs was minimal, which allowed us to proactively work with customers on pricing adjustments and collaborate with our suppliers. Currently, the environment is much more fluid, and the size of the tariffs has limited what suppliers and factories can do. However, we have continued to work closely with our customers and suppliers, adjusting pricing where possible to help our customers maintain value. The focus is on sustaining value within a certain price range for specific products and categories. We've observed market shifts where investment efforts have changed, with some products losing value and becoming more difficult to price for end consumers. This trend is likely to persist into next year, leading to an increase in better value products that offer fair prices and quality. Our private label offerings have been performing well, often providing better value than some established brands. The significant difference this time is the heightened uncertainty and the prolonged nature of it, compounded by the lack of clear final tariff adjustments globally, which has made navigating these challenges tougher. Nonetheless, we have seen that our strategies with customers are effective, and new business opportunities and market share gains are continuing, albeit with some delays. We have execution plans in place to drive these results as we move into Q3 and Q4.

Great. That's helpful. And totally makes sense regarding your commentary about the most severe impact of the tariffs and at least the kind of lag or pauses on decision-making taking place at the beginning of the quarter. You noted you feel good about the order pipeline and kind of how it's improved. I wonder if you could kind of maybe provide a little bit more color on the degree of the improvement, maybe since the beginning of Q2 to maybe where we are today in terms of those pauses and kind of uncertainty on decision-making?

Yes. I would say that we were on a positive trajectory going into this pre-tariff impact. We had, like I mentioned, newer programs that were scheduled to launch. Some of that got delayed; obviously, that wasn't canceled, and orders were paused. So everything was sort of just a big slowdown all at one time that had a more precipitous impact in a short period. For the most part, we're back to feeling that same momentum that we had prior to this, and there are peaks and valleys there with some little one-offs of individual customers or products that we're still trying to get our hands around. Of course, we're still navigating the global tariff environment. I think the added differential is the acceleration that we've had with our global sourcing initiatives, which will start to impact our business this year, but we'll have a much more dramatic impact overall next year, especially when you look at our global footprint compared to what it was at the beginning of this year. I think the offering that we're going to be able to bring to our customer base as far as global sourcing options and derisking their sourcing in China particularly will be pretty dramatic for us.

Got it. And I know it's had effects on quarters in the past. Anything worth calling out in terms of the timing of product programs, either favorable or unfavorable in the quarter in any way?

No. As I mentioned, we had new product launches planned for the summer with certain customers, some of which were smaller and others larger. However, the tariffs that were introduced in April caused some delays. We're now focusing on initiatives for Q3 and early Q4. The overall impact this year was somewhat less than expected, but as we noted at the end of last year, we accounted for these tariffs in our guidance since we anticipated their occurrence. It was difficult to predict the exact timing of the impact when the tariffs were announced, and we did not foresee how significant they would be at that point. Fortunately, our pipeline seems to be recovering more quickly than we had anticipated. Overall, things have balanced out, and we feel quite confident about our current position.

Okay. Got it. And I guess lastly, just another clarification question on gross margins. Did you kind of provide any specifics in terms of what's embedded in your guidance for the back half or simply kind of a return to improvement in the back half versus what we saw in Q2?

Yes. You can infer from our numbers that we are maintaining our guidance because we anticipate a rebound aligning with our original plan. Even with some delays, we expect to see an impact in 2025 from the new programs, though slightly lower. However, we have strategically accounted for this when we set our guidance, as we anticipated the tariff impact would occur in one form or another. Thank you for your time and interest today to everyone. We really 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 call. Thank you.

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