FGI Industries Ltd. Q4 FY2023 earnings call

• BPC strategy progress: Continued progress on new programs and products, including FlushGuard anti-overflow toilet designs winning awards at the Kitchen & Bath Show. Channel expansions into Europe, India, etc. - Kitchen & Bath Show: Unveiling of latest designs and tech, including FlushGuard, which garnered accolades. - Gross margin improvement: Focus on higher margin products led to strong year-over-year gross margin improvement, with full-year 2023 gross margin at 27.4%, up nearly 800 basis points from 2022. - Growth initiatives: Covered Bridge custom cabinetry added 203 new dealers in 2023; Isla Porter digital custom kitchen cabinetry soft launched with official launch in spring 2024. - Operating efficiency: Focus on margin expansion through higher margin categories. - Capital deployment: Progress in reducing working capital usage, evaluating strategic bolt-on acquisitions.

In the fourth quarter, total revenue ended down 2.6%. Sanitaryware revenue was $20.6 million, up 1.8% year-over-year. Bath Furniture revenue was $2.5 million, down from $6.1 million in the prior year period, impacted by demand weakness. Shower Systems revenue was $5.7 million, up 55% from $3.7 million last year. Other revenue (custom kitchen cabinetry) was $2.1 million, up from $1.7 million last year. Fourth quarter gross margin increased roughly 550 basis points to 29.2%, the highest quarterly gross margin as a public company, driving a 20.1% increase in gross profit.

• 2024 revenue expected in range of $115 million to $128 million. - Adjusted operating income expected in range of $2.8 million to $3.8 million. - Adjusted net income expected between $1.2 million to $2 million. Guidance excludes certain non-recurring items.

Q: So a pretty strong outlook from a topline perspective this coming year despite what seems to continue to be kind of a sluggish environment, at least on the retail front. Can you talk about what your end market assumptions are within this outlook? And then you've got a lot of moving pieces with new business and new geographies and new customers. Like is there any way to quantify just how much you have kind of within your control over the next 12 months?

A: Yes. We've been talking about our ability to grow organically with new products and channel expansions. The market has R&R market forecasted flat or down low to mid-single digits, but our new programs should allow us to outpace this by taking share and new business opportunities.

Q: If I could follow-up on the gross margin side. Really nice, I mean, I think you said highest gross margin in the company's public history, 550 basis points year-over-year. What were the primary drivers of that improvement? And do you view those improved margins as sustainable? Or do you kind of see upside from here? Just kind of wondering how you expect those to trend and where you're seeing maybe opportunities for improved margins?

A: Primary drivers include focus on higher margin categories like kitchens and showers. We expect to continue improving margins as growth from higher margin categories scales, with industry sanitaryware shakeout moderating contributing to dollar side growth.

Q: I wanted to follow-up. I know you talked about this for several quarters now, but where categories – or I guess, exactly what categories are you seeing, destocking maybe persist longer than you anticipated or even worsen, but maybe where are you seeing some improvements? Just wondering if you could address those dynamics.

A: We don't see material impact from destocking this year. Destocking has normalized, with retail and wholesale having more conservative inventory levels but no major abnormality in ordering.

Q: Lastly, just to follow-up on your commentary on strategic bolt-on opportunities. What types of opportunities are you thinking about or evaluating? And do valuation multiples make sense in a way or are reasonably attractive?

A: Looking at opportunities related to bath and kitchen industry, tied to our categorical dominance. Valuation multiples are being evaluated with industry experience and financial review, with hope for wise decisions on bolt-on acquisitions.