FGI Industries Ltd. Q2 FY2023 earnings call

Key Points

• Focused on long-term strategy including BPC growth, operational improvements, and efficient capital deployment.
• Added new licensing agreement for sanitaryware technology and partnerships for geographic expansion into India and Eastern Europe.
• Achieved record second quarter gross margin of 27.4%, driven by focus on higher-margin categories and strategic initiatives.
• Made progress on BPC initiatives with new programs and partnerships, and continued growth in custom cabinetry with premium brand adding dealers.
• Reduced working capital usage, improving free cash flow and liquidity.

In the second quarter of 2023, revenue totaled $29.2 million. Sanitaryware revenue was $18.8 million (down from $32.3 million prior year), accounting for approximately 64.4% of total revenue. Bath Furniture revenue was $4.8 million (down from $7.7 million prior year). Shower Systems revenue was $4.3 million (down from $6.5 million prior year). Other revenue (custom Kitchen Cabinetry) was $1.3 million (essentially flat from prior year). Gross profit was $8 million, with gross margin improving to 27.4% (up 980 basis points from last year).

Guidance

• Lowered full year 2023 guidance: revenues expected to be $120 million to $130 million, adjusted operating income $3.5 million to $5 million, adjusted net income $2 million to $3 million.
• Inventory destocking and macro uncertainty led to the guidance adjustment.
• Anticipate stabilization of inventory trends and improvement in housing data as drivers for future growth.

Risks

• Industry-wide inventory correction lingering into 2023, impacting revenue growth.
• European business in Germany facing destocking headwinds and recessionary pressures.
• Concentration risk with large customers, which can significantly impact financial results.

Q: Clarify destocking, pro vs retail channel impact A: Destocking is seen in both pro and retail channels, moderating but with a lag. The company has a high concentration of large customers in both channels, and their adjusted inventory levels and softening demand are dragging out the destocking process.

Q: Margin performance, gross margin sustainability, OpEx spending A: There is expected leverage from investments. While OpEx spending is significant this year, investments are for long-term growth. Gross margin improvement is sustainable due to focus on higher-margin categories and strategic initiatives.

Q: Order cadence, improvement, channel impact A: Order cadence is improving slightly but not back to regular. The pro and retail channels, especially large customers, have had a major impact on order cadence, with the company still not at a regular order cadence as expected earlier.