FGI Industries Ltd. Q1 FY2023 earnings call

• Organic growth initiatives: Awarded several new product programs with key retail partners, including a refresh of a large Canadian retailer's in-store sanitaryware line, growth in the custom kitchen program with added dealers, and new programs for the shower business. Continues to invest in the new kitchen cabinetry program.
• Margin improvement: Made significant progress on margin improvement initiatives, with gross margin at 26.5% in Q1, well above historical levels, driven by factors like lower freight costs, pricing actions, and mix shift towards higher margin product categories.
• Efficient capital deployment: Made progress in reducing working capital usage in recent quarters, resulting in improved free cash flow conversion and solid liquidity position, allowing investment in organic growth initiatives.

In the first quarter of 2023, revenue totaled $27.2 million, a 38% decrease compared to the prior year. Sanitaryware revenue was $15.4 million, down from $26.8 million in the prior year period, driven by channel inventory reduction at key partners. Bath Furniture revenue was $5 million, down from $10.1 million last year, negatively impacted by elevated channel inventory levels and modest weakening of demand. Shower System revenue was $5 million, down from $6 million last year, but the decline is expected to be temporary with momentum remaining strong due to new awards. Other revenue was $1.8 million, up from $700,000 last year, driven by growth in the custom kitchen cabinetry business. Gross profit was $7.2 million, down 4.3% from last year, with gross margin improving to 26.5%, up from 17.3% last year and 23.7% in Q1 2022. The revenue contribution of sanitaryware was significant, followed by bath furniture, shower system, and other revenue categories.

• Maintaining 2023 financial guidance: Total revenue in the range of $145 million to $163 million, adjusted operating income in the range of $6 million to $6.8 million, and adjusted net income in the range of $4.2 million to $4.7 million. Guidance excludes non-recurring items and reflects investment in new kitchen program and other growth initiatives.

• Market challenges: Ongoing destocking headwinds pressuring revenues, macro uncertainty adding pressure as large customers are cautious and reducing inventories, persistent inflation impacting consumer spending levels in the near-term.

Q: Given the revenue performance in Q1 seemed below expectations and ongoing destocking was worse than anticipated, what gives confidence to maintain full year revenue outlook?

A: Dave Bruce stated that while destocking has extended, they expect a bullwhip effect in the second half with customers needing to replenish inventory, new incremental sales from new programs like in shower and kitchen businesses, and many initiatives not baked into Q1 guidance, giving confidence to meet full year revenue guidance.

Q: How much was gross margin improvement a result of price increases vs mix shift vs lower freight costs? And why is it difficult to maintain current gross margin levels long-term?

A: Gross margin improvement was due to freight reductions, pricing actions, and mix shift towards higher margin businesses like shower and kitchen. Difficult to maintain current levels long-term as revenues may increase with more pro side activity, which could include lower margin product categories, but overall margins are expected to continue improving with the BPC strategy and mid-to-high single-digit EBIT margins expected in the long run.