FGI Industries Ltd. Q3 FY2023 earnings call

• Inventory destocking impacts results, but gross margin improved 530 basis points in Q3.
• Industry-wide inventory correction persists with uneven demand.
• Long-term outlook for industry is bullish due to favorable backdrop for remodeling demand.
• Strategic initiatives: BPC program execution, including licensing extension to Canada, geographic expansion into India, Eastern Europe, etc., partnership with Vurtu.uk, new business with U.S. retailer for bath furniture, toilet program with U.S. wholesaler, growth of custom cabinetry business with Covered Bridge brand adding dealers and new kitchen cabinetry initiative on track to launch in early 2024.
• Focus on higher-margin categories and operating efficiency to drive margin expansion.

In the third quarter of 2023, revenue totaled $29.9 million. Sanitaryware revenue was $20.7 million, down from $25.5 million prior year but up 10.2% sequentially; it contributed approximately 69.2% to total revenue. Bath Furniture revenue was $2.5 million, down from $5.6 million prior year. Shower system revenue was $4.9 million, down from $5.4 million prior year but up 15% sequentially. Other revenue (custom kitchen cabinetry) was $1.7 million, down modestly from $2 million prior year. Gross profit was $7.8 million, a decrease of only 2.6% compared to last year, with gross margin improving to 26.2%, up 530 basis points from prior year.

• Revised full-year 2023 revenue to $115 million to $120 million, adjusted operating income to $2 million to $2.8 million, and adjusted net income to $1 million to $1.5 million.
• Incremental growth investments impacted 2023 outlook.
• Expect to start seeing return on investments in 2024 from initiatives like digital kitchen venture launch and new toilet technology launch.

• Prolonged inventory destocking headwinds, particularly in pro channel.
• Macroeconomic pressures in Europe impacting European business.
• Uneven demand in R&R channel adding pressure.

Q: What's being seen and heard from customers regarding inventory destocking and order patterns?

A: Inventory moderation is uneven. Bath Furniture has been more affected due to high-end assortment, while shower and sanitaryware are seeing sequential quarterly growth with inventory levels moderating. Confident of improved order cadence returning to normal levels next year.

Q: Can you quantify the 3 buckets impacting 2023 results?

A: Investments made in 2023 are for 2024 and beyond, with return expected in 2024. Inventory destocking continues, but expecting natural organic recovery. Margins expected to improve with higher-margin categories.

Q: Thoughts on margins for next year?

A: Focus on higher-margin businesses like kitchen, shower, and digital kitchen. Expect EBIT margins to reach mid- to high single digits with combination of higher-margin categories and margin dollar growth.

Q: Underlying assumptions for Q4 recovery implied in guidance?

A: Some new orders for programs have trickled in, with majority coming in 2024. Don't expect large Q4 spikes as in history due to Asian holidays and inventory levels.

Q: Opportunity in India?

A: Focus on sanitaryware, partnering with distributor and aligning with large construction company for commercial projects. Upcoming meetings in Q4 to set plans for execution next year.