FGI Industries Ltd. (NASDAQ:FGI) Q4 2023 Earnings Call Transcript
FGI Industries Ltd. (NASDAQ:FGI) Q4 2023 Earnings Call Transcript March 21, 2024
FGI Industries Ltd. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the FGI Industries Fourth Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai, Managing Director of Vallum Advisors. Please go ahead.
Paul Bartolai: Thank you. Welcome to FGI Industries fourth quarter and full-year 2023 results conference call. Leading the call today are President and CEO, David Bruce; and Chief Financial Officer, Perry Lin. 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 David Bruce, followed by a financial review from Perry Lin. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Dave.
David Bruce: Thanks, Paul. Good morning, everyone, and thank you for joining our call today. I'm extremely pleased with our solid fourth quarter results and improved momentum as we enter 2024. We have seen inventory levels normalize and we experienced improved order trends across our key businesses during the fourth quarter due in large part to the investments we made in our organic growth initiatives throughout the year under our brands, products and channels or BPC strategy. The improved order momentum has carried into the early months of 2024, further bolstered by the resoundingly positive reception from customers to our groundbreaking products and engaging presentation at the recent Kitchen & Bath Show in Las Vegas, the largest event of its kind in North America.
This recent success has not only reaffirmed our standing as a leader in the industry, but has also propelled us to new heights. Our participation in the Kitchen & Bath Show was marked by the unveiling of our latest designs and technological breakthroughs, including our FlushGuard anti-overflow toilet designs, which garnered accolades by winning two prestigious awards. The enthusiastic response from attendees at KBIS has sparked considerable interest and anticipation, further cementing our reputation for innovation and excellence. These recent events give me continued confidence. We are on track for significantly improved results in 2024. We experienced solid growth trends across most of our business portfolio during the fourth quarter, driven by improved order momentum, generally stable end-market demand, and normalization of inventory levels.
Each of our business segments showed year-over-year growth during the fourth quarter other than our Bath Furniture segment, which continues to be impacted by demand weakness and a trade down to lower priced offerings. Total revenue ended down 2.6% in the fourth quarter. Our ongoing focus on higher margin products drove another quarter of strong gross margin improvement with fourth quarter gross margin increasing roughly 550 basis points to 29.2%, our highest quarterly gross margin result as a public company. This drove a 20.1% increase in gross profit during the fourth quarter. While the inventory destocking headwinds had been obscuring much of the progress during 2023, we continue to make progress on our growth initiatives. It is very exciting to see these efforts begin to show through in our results during the fourth quarter, and we expect to see more of this in the coming quarters.
On our first call as a public company two years ago, I introduced our long-term strategic plan to drive shareholder value. That was based on driving organic growth through our BPC strategy, enhanced margin performance, and efficient capital deployment. While we faced many headwinds during 2023, I am very proud of our continued focus and execution against our strategic goals during the year. I would like to take this opportunity to walk through some of our key accomplishments during the fourth quarter and highlight some of our key strategic priorities for 2024. As it relates to our BPC program and our organic growth initiatives, we continue to make solid progress on our recently launched programs and new product offerings during the quarter.
First, as we have discussed on recent calls, we entered into a licensing agreement that provides us access to an industry-leading overflow toilet technology, which we recently announced will be marketed as FlushGuard Overflow Technology. During the fourth quarter, we were awarded product placements at several large customers, including two of the largest commercial distributors in North America. We exhibited a new line of retail and commercial sanitaryware products featuring FlushGuard at the 2024 Kitchen & Bath Show. Additionally, FGI won first place at the highly coveted Design Bites competition at KBIS 2024 as the industry innovation with the biggest bite for its FlushGuard technology. Second, we continue to focus on initiatives to expand geographically with agreements providing entry into India, Eastern Europe, Australia and the UK.
In the UK, we landed our first new customer partners in 2023, and we continue to build on these relationships with several major customer awards on the horizon in the UK, Germany, and India across both our retail and wholesale channels. In the last month, we have entered into agreements with three new distributor partners in India, and we are excited by the opportunity to grow our product penetration with these partners and take advantage of the vast growth potential of the Indian market. We look forward to continuing to grow our presence in these markets in the coming quarters and years. Third, we continue to execute on our recently announced program awards, including the online shower door program for an existing large Canadian retail partner that commenced in June 2023 and the rollout of our industry-leading shower wall program into as many as 300 locations of a large U.S. retailer.
Our new Jetcoat Shower Wall products were a hit among the KBIS show attendees. We expect these programs to continue to ramp up in 2024, driving further momentum into the new year. Fourth, during the third quarter, we announced an in-store promotion with a large U.S. retailer that did not previously carry any of our sanitaryware products to lay the groundwork for future growth. I'm excited to report that following a successful promotion, we placed several new sanitaryware SKUs with this retailer, which featured the new FlushGuard Overflow Technology. We look forward to continued growth with this new partner in the coming years. Finally, our custom cabinetry business continues to grow rapidly. Our premium Covered Bridge brand added 203 new dealers during 2023, bringing our total active dealer count to 302 at the end of the year.
We had a large display at the 2024 Kitchen & Bath Show that showcased our Covered Bridge custom kitchen cabinetry line and the enormously positive feedback we received at the show gives us confidence that Covered Bridge has increasingly strong growth momentum, all while contributing to the highest average gross margins across any of our product segments. We are also pleased to announce that Isla Porter, our new digital custom kitchen cabinetry business has recently announced its soft launch with an official launch anticipated in the spring of 2024. By leveraging industry-leading AI software with our existing custom kitchen operations infrastructure and an unmatched commitment to premium on-prem products, we believe Isla Porter will reach new heights in terms of cabinetry personalization, convenience and design.
We are very excited by our progress on our strategic growth initiatives, which we expect to be a key driver of our improved results in 2024 and should help us drive above-market organic growth in the coming years. The second focus of our value creation strategy is on operating efficiency and driving margin expansion. We reported another quarter of strong year-over-year gross margin improvement driven by our strategic decision to focus on higher margin categories. For the full-year 2023, we reported gross margin of 27.4%, up nearly 800 basis points from 2022 despite the revenue headwinds. Finally, our third focus is on efficient capital deployment. We made meaningful progress during 2023 and reducing our working capital usage, which resulted in improved free cash flow conversion and lower net debt levels.
While debt repayment and investment in organic initiatives has been our main priority, we continue to evaluate opportunities for strategic bolt-on acquisition opportunities. As we survey 2024, we are excited by the growing momentum in our growth initiatives. The demand environment for the home improvement market remains uneven with several industry forecasters predicting modest declines in repair and remodel spending in 2024. However, as Perry will discuss when he covers our 2024 outlook in more detail, based on the progress of our recent product launches and new programs under our BPC strategy, we are confident we can generate above-market growth in 2024. While we faced many market headwinds during 2023, I'm extremely proud of our team and our continued focus on our long-term strategic objectives.
This has positioned the company for a solid year in 2024 and continued success in the coming years. With that, I will turn it over to Perry for a more detailed review of our financials.
Perry Lin: Thank you, Dave, and good morning, everyone. I will provide some additional details on the quarter, give an update on our liquidity and balance sheet and wrap it up with our full-year 2024 guidance. Revenue totaled $31 million during the fourth quarter of 2023, a decrease of 2.6% compared to the prior year, driven by continued end-market demand weakness in the Bath Furniture market, partially offset by growth in sanitaryware, shower systems, and kitchen cabinetry. Looking at our business line. Sanitaryware revenue was $20.6 million during the fourth quarter, up 1.8% from last year due to improved order patterns as our new programs are beginning to benefit results. Bath Furniture revenue was $2.5 million during the fourth quarter, down from $6.1 million in the prior year period.
The Bath Furniture market continued to be impacted by macro headwinds and trade-down to lower ticket products. As we have discussed previously, we are launching a product offering in the mid-tier category to better address current demand and hope to see improved trends in the incoming quarters. Shower Systems revenue was $5.7 million during the first quarter, up 55% from revenue, $3.7 million last year. The main trend in the shower category remained steady, and our recently launched program is building momentum. We continue to expect this new program to drive improved trends into 2024. Other revenue, which consists primarily of the custom kitchen cabinetry business was $2.1 million during the first quarter, up from $1.7 million last year due to continued dealer growth and new product launches.
Gross profit was $9 million during the first quarter, an increase of 20.1% compared to last year, driven by strong growth in our higher margin product. As a result, gross profit margin improved to 29.2%, up roughly 550 basis points from the prior year. We expect our full-year 2024 gross margin to be consistent with our strong gross margin performance generated during the full-year 2023. Our operating expenses increased to $7.8 million during the first quarter, up from $6.5 million last year due to ongoing investment in our growth initiative, including marketing spending for the recently launched FlushGuard Overflow toilet product line and expenses tied to new custom kitchen cabinetry business development opportunity. GAAP operating income was $1.2 million during the fourth quarter, up 20% from income of $1 million last year.
Excluding certain non-recurring expenses, adjusted operating income was $1.4 million during the fourth quarter. The increase in operating income was a result of our gross profit growth, partially offset by higher operating expense tied to growth initiatives. Adjusted operating margin was 4.4% during the fourth quarter prior to the same period last year. GAAP net income was $0.5 million or $0.05 per diluted share during the fourth quarter of 2023, down modestly from the same period last year. Now turning to balance sheet and our liquidity. As of December 31, 2023, the company had $7.8 million of cash and cash equivalents and total debt of $7 million. At the end of the quarter, we had $16.6 million of availability under our credit facilities, net of letters of credit.
Combined with cash total liquidity was $24.4 million at quarter end. We believe we are in a solid liquidity position that is more than sufficient to fund our growth initiatives. Finally, turning to guidance, as our growth investment continues to gain momentum and inventory level has normalized, we expect to return to organic growth in 2024 despite our expectation that end-market are flat down modestly. In addition, we expect to continue to increase our growth investment to take advantage of attractive opportunity under our BPC strategy. Based on this factor, we are providing initial 2024 guidance or revenue in the range of $115 million to $128 million, adjusted operating income in the range of $2.8 million to $3.8 million and adjusted net income of between $1.2 million to $2 million.
Please note that the guidance for the net income and adjusted operating income is provided on an adjusted basis and excludes certain non-recurring items. That completes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.
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