Q4 2023 FGI Industries Ltd Earnings Call

Presentation

Operator

Good day and welcome to the FGI. Industries Fourth Quarter 2023 conference call.(Operator Instructions)
Please note this event is being recorded I would now like to turn the conference over to Paul Bartolai, Managing Director, Balan at Vallum Advisors. Please go ahead.

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 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'll open the line for your questions.
With that, I'll turn the call over to Dave.

Thanks, Paul. Good morning, everyone, and thank you for joining our call today. I am 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 PPC 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 and 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 and bath show was marked by the unveiling of our latest designs and technological breakthroughs, including our flash card anti overflow toilet designs, which garnered accolades by winning two prestigious awards.
The enthusiastic response from attendees at Ciba's 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 best 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 continued 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 FlashCORE to 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 flash guard at the 2024 kitchen and bath show. Additionally, FGI won first place a highly coveted design bites competition at KB is 2024 as the industry innovation with the biggest bite for its flash guard 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 have so 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, and 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 oral program into as many as 300 locations of a large US retailer, our new jackpot shareable products where it hit among the cable 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 US 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 flash guard 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 and 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 I reported that 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 customer kitchen operations infrastructure and an unmatched commitment to premium on-trend products.
We believe either quarter 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.
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 in 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 OBPPC 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.

Thank you, Dave, and good morning, everyone. I will provide some additional details on the quarter given 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 best furniture market, partially offset by growth in sanitaryware shower system and kitchen cabinetry.
Looking at our business line, sanitary ware revenue was $20.6 million during the fourth quarter, up 1.8% from last year due to improved order pattern as our new programs are beginning to benefit results. US furniture revenue was $2.5 million during the fourth quarter, down from $6.1 million in the prior year period.
The bath furniture market continue to be impacted by macro headwinds and a down to lower ticket products. As we have discussed previously, we are launching product offering in the mid-tier category to better address current demand and hope to see improved trend in incoming quarters. Shower system revenue was $5.7 million during the first quarter, up 55% from revenue of $3.7 million last year.
The main change in the shower category remained steady and our recently launched programs are building momentum. We continue to expect this new program to drive improved trends into 2024 on a 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% of a roughly 550-basis point 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 initiatives, including marketing spending for the recently launched for Oshkosh, our Pro totally product line and expenses tied to new personal 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 nonrecurring expenses adjusted operating income was $1.4 million during the fourth quarter. The increase in operating income was a result of our gross profit dollars, partially offset by higher operating expense tied to growth initiatives.
Adjusted operating margin was 4.4% during the fourth quarter, flat 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 continued to gain momentum and inventory levels has normalized, we expect to return to organic growth in 2024 despite our expectation that a market are flat to down modestly.
In addition, we expect to continue to increase our growth in investment to take advantage of attractive opportunity under our PPC. strategy. Based on these factors, we are providing initial 2024 guidance for revenue in the range of $115 million to 1$28 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 nonrecurring items.
That accompanies our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

Question and Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)
Reuben Garner, The Benchmark Company.

Good morning, guys. So a pretty strong outlook from a top line perspective that come here 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?

Yes, it's a good question. Thanks. And yes, I mean, we've been talking for some time about our ability or at least our intent to grow organically initially, especially with a lot of newer businesses from executing the BPC. strategy with newer products, which we highlighted today. As an example, our recent technological advances in the toilet for N. is in addition to that, our channel expansions, which we've talked about with Europe and India.
And you know, as far as how does that relate to what we see in the market as we mentioned the market. There's a lot of market forecasting right now that is looking at the particularly the R&R market as being flat or down low to mid-single digits. But our expectation is based on the new programs that we're starting to execute, what you saw some of the results of that in Q4 that we should be able to outpace that down or estimated moderating market with by taking some share and instituting new programs, which will give us incremental new business opportunities.
And that's, again, some of that what sort of impact that as we if we go back to the end of the prior 2022 into 2023 with destocking, right. And we talked about that and we don't see that having any material impact on our business in 2024. So again, it's a matter of timing and execution on these new programs, which have started to impact our business positively and that's how we sort of see the balance between our organic growth with those new programs and also in the face of a flat to slightly down market overall.

Okay, great. And then, Tom, can you talk about how pricing has, I guess trended or what the full impact of pricing was in 2023 and sort of what expectation is embedded in your outlook for 2024?

Yes, we don't we don't anticipate that pricing is going to be a material impact either way. In 2024, no adjustments were weighed and were made in 2023, as we know, a large proportion of pricing and 2023 emanated from freight costs.
That being said, our freight has ramped up a bit so far this year, and we're going to keep an eye on that. And our belief and our estimates are that things should even out as we go through the middle part of the year. And as you know, there is no way to guarantee that price won't come into play, you know, should cost Elevate. But as of as of our, you know, our look into 2024.
At this point, we don't anticipate price playing a major factor either.

And then a two-part question here on your operating expenses last year, I think was kind of viewed as a year of investment in spite of plus on end market. And looks like you're if I'm doing the math correctly, kind of sustaining that level of spending on this year. Am I thinking about that the right way? Was there any one-time expenditures last year that are maybe a little bit more permanent or are there just new one-time expenditures.
And the second part of the question is how do we think about that, that long term in terms of your percentage of revenue, I mean, when you first came public, it was in the kind of mid keen now it's been kind of consistently in the mid-20s the last couple of years or last year. And sounds like going into this year. Is that something that will trend back lower at some point? Are you more focused on kind of investments to grow and to drive that higher gross margin than fast.

Yes, yes. You just finish on what I was going to sort of lead into. So you're 100%, correct. And we've cited the fact that our gross margin expansion is sort of muted when you look at the OpEx impact to our to our gross. But that's exactly what we're trying to do. We're not necessarily on I'm not necessarily targeting a percentage per se. Right now, the key is that we're trying to prepare ourselves for the growth that we're investing in.
And we know that I can't give you a particular number, but we know we can scale this business well beyond where we're at today with the majority of the infrastructure we have in place now, right? So we're sort of we're sort of prepping ourselves for that in some sense if you want to call that some of those investments are obviously tied directly to and new business opportunities expanding in Europe, expanding in India, the new digital kitchen venture, for example, marketing for our new toilet innovation.
So those are things that we're going to that we're investing in that a lot of those you won't see when it comes to expansion and geographical markets as we've already pretty much dove into that. You know, there will be marketing expenses related to that, but that will all be a commensurate with new business, right? So to answer the overall answer to that question is, as we scale the business with the infrastructure we have in place, the percentage of the OpEx will slowly drop because we believe we have a lot of elasticity between the investment right now, the operator of a lot of operating leverage between what we have in place versus where we can go with that.

Yes, I think Reuben, I mean, you know where, you know, we are looking at all banks. I think the overall goal our goal is to drive the gross margin dollar also, you know, maintain that reasonable. I'll back to spending on, you know, the end game is kind of, you know, increase our operating income percentage. That's what we are doing and currently in future.

Congrats on the close of the year and good luck in 2024.

Operator

Greg Gibas, Northland Securities.

Hey, good morning, Dave and Perrin. Thanks for taking the questions. Wondering and 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 of 550-basis points year over year. What were the primary drivers of that improvement? And do you view those improved margins are sustainable or do you kind of see upside from here on it? Just kind of wondering how you expect those to trend and where you're seeing maybe opportunity for improved margin?

Yes. That's a good question. So yes, in the short term, I think I mentioned in the release that we definitely anticipate that we'll be able to maintain our gross margin posture like as far as what we averaged in 2023. We did have a great Q4. I'm not sure that the Q4 number is a realistic sustainable gross margin for 2024.
However, that being said, we do expect to continue to grow our margins because a lot of our growth is coming from higher-margin categories, which we've emphasized a lot of kitchens is probably the best example. That's our highest margin business that we have. We continue to expand. I mean the reaction to our kitchen exhibition cables was phenomenal.
Our Shaver business continues to grow. We keep adding new product, growing the margin there than as we've talked about over the last couple of years. Some dollars of gross margin dollars are a key focus for us as well. And as a lot of the sanitaryware shakeout in the industry moderates as far as inventory levels and on ordering cadence, you know, as we see that come back to life, that's going to contribute to the dollar side as well. So as we scale the business, we really do feel we'll be able to improve gross margin going forward in the short and the long term.

Makes sense on core. And then I wanted to follow up. I know we've talked about this for several quarters now, but where categories are I guess exactly what categories are you seeing destocking maybe persist longer than you anticipated or even worsen, but then maybe where are you seeing some improvements? I'm just wondering if you could address those.

Yes. I mean, I think I just briefly mentioned we don't really see any material impact to our results this year from destocking, the destocking has pretty much normalized across the industry. That being said, it doesn't mean there's local little small pockets of certain customers with certain categories. But from a material aspect to our business, it's going to be minimal.
I think I think the difference this year, and I think I touched upon this on last quarter, you know, retail and wholesale, while their inventory levels have normalized, they're also looking at a more conservative base level inventory. So that's just cautionary based on what I mentioned earlier, as they know that the market, their forecasts are flat to slightly down. So their inventory levels are going to be looked at with a little more scrutiny.
So I don't think you're going to see the big spikes, obviously, that we saw in 2020, 2021 and 2022 and everybody's fret over that when they when they go through something like that. So but that being said, there's no abnormality to what I believe we're going to see from an ordering perspective. It's just going to be a little bit more conservative with a little bit lower inventory levels. But for the most part, everybody is sort of there.
So I think that was the key in the middle of last year people weren't there yet, and the destocking was impacting order cadence. But I think as we head into the beginning at Abbott, as we've headed into this year and as we go into the middle part of the year. I think that where you're not going to hear us talk about destocking has an impact of business.

Okay, sounds good. And you know, I guess lastly, just to follow up on your commentary on your strategic bolt-on opportunities, one, what types of opportunities are you thinking about or evaluating on and do valuation multiples make sense in a way are reasonably attractive?

Yes, I think it's a good question because I know we had a year and a half ago, there was there was a little bit more what I would call a flurry of activity with opportunities that came across our desk. We came close on one or two. They didn't pan out and didn't meet some of the requirements that we had set for ourselves and then it got quiet.
And then I think obviously it got quiet because, you know, 2023 was sort of a rough year for people again with inventory destocking and just a very uneven market. But we are engaging in some more conversations today. And I think when you look at the multiples, yes, because you have to look at some historical, it's been a rough couple of years to sort of and gauge what the value of the company is.
So I think part of our strength here is that we are not looking to add bolt-on opportunities for companies that are outside of our what I would call our categorical dominance, which is bath and kitchen right. So we many of the companies that we might look at are related to our industry quite tight. And if it's not the same product, it's a related product category, maybe in a different channel.
So I think we have enough information based on our industry experience. And then, of course, with Perry reviewing the financials and looking at how we're going to judge those multiples, I think we'll be able to make wise decisions as we move forward. And hopefully, like I said, we've been a little bit more involved in the last several months. So hopefully, Bill, something will come to fruition.

Thanks for the color.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Dave Bruce, for any closing remarks.

Thank you for the time and interest today. We appreciate your continued support of FGI. Stay well, and if we don't connect during the quarter. We look forward to speaking with you on our next quarterly call. Thank you.

Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.