Good morning and welcome to FGI Industries’ Third Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Paul Bartolai. Please go ahead.

Thank you. Welcome to FGI Industries’ third quarter 2022 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. Today’s call will begin with the performance review and strategic update from Dave Bruce, followed by a financial review from Perry Lin. At the conclusion of these prepared remarks, we will open the line for questions. With that, I will turn the call over to Dave.

Thanks, Paul and good morning to everyone. Our team continued to execute well during the third quarter, despite the uneven market conditions as we made significant progress on our margin recovery initiatives and made solid advancements on our organic growth programs. As we forecasted entering the year, we have seen some moderation in the broader R&R market demand trends owing to the headwinds facing the housing market and these pressures were exacerbated by significant inventory destocking during the last two quarters. We were able to overcome these issues in the second quarter and still generate year-over-year revenue growth. However, the level of channel inventory reduction at some of our key customers was too significant to overcome in the third quarter, causing our revenues to decline versus the prior year period and come in below our expectations. While it is difficult to predict how long the channel inventory destocking will continue, we believe based on current discussions with our customers that we should return to more normalized levels of inventory purchases in 2023. We remain focused on factors we can control, including our organic growth programs and our margin recovery initiatives, both of which we made excellent progress on in the third quarter. We remain encouraged by our key organic growth programs as evidenced by the continued strong growth in our other product categories during the quarter, which includes our Jetcoat Shower systems and covered bridge custom kitchen cabinetry business. Our growth initiatives remain on track despite the near-term market headwinds and we expect our order pattern momentum to return once channel inventory levels normalized. In addition to the progress on our organic growth programs, we made significant strides in our margin recovery initiatives as well, with gross profit margin expanding by 325 basis points on a sequential basis despite the…

Thank you, Dave and good morning everyone. I will provide some additional details on the quarter given the update on our liquidity and balance sheet and wrap it up with our updated full year 2022 guidance. Revenue totaled $38.5 million during the third quarter 2022, a decrease of 24% compared to the prior year due to volume freight air costs primarily by inventory destocking as well as weakness in the bath furniture market. These factors were partially offset by continued strong growth in our other segment driven primarily by our shower system and kitchen cabinetry business. Looking at our business lines, sanitaryware revenue was $26 million during the third quarter 2022, a decrease of 18% compared to prior period. The revenue decline was largely – the retail of a channel inventory reduction by key partners primarily in the pro channel. End customer demand has remained relatively stable. So we expect the volume to rebound us inventory level adjusted. Bath Furniture revenue was $5.6 million during the third quarter, a decrease of 63% compared to prior period. The Bath Furniture business has begun to see some pressure from destocking in recent quarters. So we were expecting to see there trends begin to normalize in the back half of the year. However, we continue to see customers reduce inventory level, which further pressure revenue in this third quarter, while we have received some modest pressure on demand chain in the broader Bath Furniture market. We remain optimistic that [indiscernible] will rebound quickly as inventory normalize. Other revenue was $7.4 million during the third quarter 2022 an increase of 61% compared to the prior period driven by strong volume growth in our custom kitchen cabinetry business and for our Jetcoat shower wall system. Gross profit was $8 million during the third quarter 2022,…

Thank you very much. [Operator Instructions] The first question is from the line of Reuben Gardner from Benchmark. Please go ahead.

Thank you. Good morning, everybody.

Good morning Reuben.

Good morning.

So maybe just start with the inventory destocking. Is there any way to gauge where inventory stands from volume standpoint today versus maybe 3, 4 or 5 years ago for you guys, I mean, it sounds like after things normalize, you’re expecting maybe volume growth or volume more in line with the market dynamics or any – seen line with – excuse me, with the sell through to return – but can you help us just understand where inventory in the channel stand today versus what is “normal”?

Sure. Yes. I mean, destocking has you’ve probably seen with other companies has been building on over a year, throughout the industry and we didn’t have too many of our customers have faced the issue with us. It’s sort of crept up on us in the middle of Q3. And that process takes a while to flush out obviously. In many cases, it will take many months, because the one part of the supply chain process that has not greatly improved as lead times, right. So there is almost an active, what I would call, a passive restocking going on, meaning there is still inventory coming in for customers that they technically don’t need, right. I mean, they are not placing seeing orders for some new inventory and they are still getting some tail end with effect of older orders that are coming in delayed. But because that started to happen in Q3, our anticipation is that a lot of that from our perspective at least in our situations will flush out as we go into the beginning of the year, we’re starting to see some change already as we enter Q4 to some degree with some of the business that have particularly in our Bath Furniture segment, which had probably was most affected by the destocking, we are starting to see a very slow improvement there heading into Q4. So again, it’s just a flush out period that we are waiting for. It is happening and most likely as we enter the Q1 of 2023, we are going to see that level off.

And is there any – I mean, what gives you confidence that there isn’t another step lower in inventory as the channel? Is it just conversations with customers? Is it where it stands relative to history? I mean anything that’s helpful there. The reason I ask is I know you had some level of destocking, the furniture piece earlier in the year, I mean, it sounds like they took it another step lower. I am just curious like, how much further is there a point where they can’t do that anymore?

Yes, there is. As as matter of fact, the good news is during this destocking phase, the end market demand is only moderately lower. We are not seeing a severe dip in end market and end user demand at this point. And the majority of the main driver behind the revenue miss is because of the destocking. So, to answer your question, why we feel pretty confident that we are not going to see dramatic, increasing the stocking there, mainly because of the moderation and the end user demand. And for us the other positive is that we are still driving new incremental sales growth and taking share within our newer product categories, our covered bridge kitchens are some of the things you have heard on my opening comments about our new toilet technology or shower system. So, even if there was a larger increase in – I should say, decrease in demand, or incremental sales growth alone would in our mind, more than offset any additional softness and the end user demand.

Okay. And then the margin recovery, obviously, pretty impressive in the face of the inventory de-stock, can you talk about, as we move into next year, how much more room there is for improvement there, what are the puts and takes other than the top line. Do you still have costs coming in and price, previous price increases flowing through that are going to help continue to drive that higher, even if volume is softer, or I guess just update us on kind of the margin progression as we move into ‘23?

Yes. Sure. So, it’s a great point. We absolutely understanding that for specifically for our merchandise that primarily comes from China or Southeast Asia, your freight rates, let’s talk about the freight rates and logistics that have, obviously been improving. But those freight rates are based on the day that the products shipped. So, obviously, in the marketplace product is being received today might be cost affected negatively with higher freight rates from three months ago, for example, right. So, we are going to see flow through our inventory carrying costs continue to reduce as we go into Q1 and Q2 next year. At the same time, as we have been mentioning, and you just touched upon, we have taken pricing access with customers throughout the year. Some of those were fairly recent. So, again, won’t have full impact until really, the sort of the middle of Q4 going into Q1 and Q2. So, we are pretty confident that our margin, we can at least maintain our margins, if not, we expect them to grow, because on top of that, although back to our VPC strategy, which I mentioned. We are focused on new incremental sales growth and particularly in our higher margin categories, right, the shower. And the kitchens for example, we expect tremendous growth there. So, you will roll all those things up together, our margin picture, we are pretty confident going into next year.

Okay, great. And then last one for me. The last couple of quarters, we have talked about potential for new products, new business wins. Just curious, there was a couple of announcements in the press release, are these related to those? Are those separated, is the thing that the opportunities that we have talked about in the past? Is that still on the come?

Yes. Absolutely. We have multiple opportunities. Now, of course, we added and we heard today, we are expanding markets as well. So, those are more, I would say global opportunities in the UK and Australia. But getting back to our current footprint was, yes, there are multiple new opportunities within multiple channels and also in all of our product categories right now. Timing is of the essence, of course, to announce those in detail. And many of those would come to fruition, most likely, probably Q4, but most likely getting pushed out into the beginning of 2023. And they cover the vast majority of our product lines and multiple channels that we are dealing with.

Okay, great. Thanks guys. I will leave it there. Good luck going forward.

Thank you.

Thank you, Reuben.

Thank you. The next question is from the line of Greg Gibas from Northland Securities. Please go ahead.

Hey. Good morning, David and Perry. Thanks for taking the question.

Good morning. Thank you.

Yes. If I could follow-up on Reuben’s first kind of line of questioning, what kind of gives you confidence that inventory maybe correct, I guess – I think you have mentioned Q4 kind of seeing a little bit of improvement. But when we think about it, would it be more of a prolonged kind of correction in 2023, or would you expect it to snap back relatively quickly? Just trying to think of the time?

Yes. I mean I think our anticipation now as we look at it here, in the month of November is, in Q1, and it also varies, I will say this, it varies a little bit by geographic region, and also varies a little bit by product category. So, for example, I see Canada, for sure, impossibly early Q1, but Q1 leveling off and having de-stocking, sort of I will call it back, get back to the normal. Here, we might have a little bit longer only because the cabinets are more of a challenge only because our cabinet program is so broad here. And it’s a much larger, much more diversified product category. But the same thing, I anticipate that with our shower business, our sanitaryware business, and even the cabinets, I believe by the end of Q1 into Q2 is where we would see things normalize. And I could see that being even earlier, when it comes to our sanitaryware, and the shower systems business. So, if anything is going to take a little bit longer, I would say the cabinetry, but Q2 would be the latest, the longest, I would see it going.

Got it. Very helpful. And I guess I also kind of wanted to ask, if we are seeing end market demand staying relatively strong, does it almost surprise you to see the level of de-stocking that you did see from your customers? And probably if I missed this in your prepared remarks, but maybe why do you think that’s happening, is it really just them being cautious?

I have seen this before, not to this degree in the years past. And what happens is when you have a tremendous logistics snag in delivery, so to speak, right. There was a lot of unknown about container availability. There was a lot of unknown about delivery times. And I don’t want to use the word panic, but there are guests, customers and ourselves, you get to a point to look, you have got to be prepared to stay in stock. And we did a very good job of that to make sure we were in stock for our customers, so they could get product. But we also deliver products to our customers directly from age on ocean containers. And it’s hard to predict, right. So, what happens is when the situation was really bad, and the anticipation of delivery was unknown, excess orders are placed in some degree and they are spread out. And then all of sudden, as things start to pick up lot of those spread out orders start to get delivered all at one time, right. So, they start to get products in, and at the same time, sometimes what happens is you start to get the wrong product and you get product you didn’t need as quickly than the product that you needed just coming later, right. So, you are always chasing products, you are always chasing trucks, you are always chasing those in containers. And I call it the bullwhip effect. By the time you see what’s happened and you start to realize what’s coming and you are like, oh, wow, now we have got to take to look at, where is our demand going, right. And like I have said, there demand only moderated slightly. It wasn’t a disaster from demand side. But when you have all that inventory come in all at one time, it creates the backlog, right. So, I think that’s the situation that you have seen the market in. Some people have experienced it earlier in the year. We experienced that a bit later. I don’t think ours is to the severity, as some of the other industries may have faced. But for sure, I think it’s a more manageable, this isn’t a disaster situation, that’s not manageable. And I believe like I mentioned, we are already starting to see some easing of it now. But realistically, it’s Q1, Q2 relief at this point.

Got it. Makes sense. And nice growth out of the other products category, just wanted to follow-up there on in terms of what product lines you are seeing more of the success in that segment, and then kind of driving that growth?

Yes. So, both our shower systems and our kitchens, I will give a little more color. So, our special with our custom kitchen business is just is just being very, very well received in the market, and I think we expanded our dealer base, more than doubled our dealer base, almost doubled it. Already this year through September, you are going to see again, we can’t announce any details, but we are in talks with a large national customer that will take on this program, which will be a game changer for us. And we have great anticipation for this program going into 2023. On the shower systems side, we are seeing – we are launching new items on our shower doors or shower bases, some exciting new shower walls. You will see a lot of this product, if you make it out to the KBIS show. We have already got placement for some of this people are pre-ordering products. So, there is a lot of excitement there. So, and again, we have always harped on our VPC strategy. And that’s part of it, right. Those new brands not only higher volume in our brands, but better quality, higher ticket, and of course, what’s maybe the most important is higher margin product for us, right. So, these are all incremental opportunities that we see going into 2023.

Okay, great. I guess last, just wanted to follow-up on your entrance into the UK and Australian markets. If you – do you expect to maybe expand that business. I guess maybe how – what’s the strategy to expanding that business and those new markets going forward?

Yes. Well, what I would say is, as a general statement, I would use our example in Germany. I think we talked about our German model, when we were doing our road shows and through some of our investor conferences. We have a very capital light model in Germany. We installed a couple people, Sales Manager, Vice President and a small team, very little overhead. And the reason that was able to work is because they were able to leverage a global product and a logistics platform that we already have in place, right. So, we have all of our manufacturing partners that we have had for a very long time. We have our product teams, our merchandising teams over in Asia. And of course, we have global teams within each of our geographic markets that work together to develop product. And one of the things that’s unique about our country, our company is that we don’t dictate product development and marketing for each region, from a central location, everything is decentralized. So, we allow the markets to create what they need. So, you can take if you looked at that German model, which went from zero to $16 million, where the business in about 8 years or 10 years, that sort of model is what we are trying to replicate in the UK, and also in the Australian market. And we think we could do that. I don’t want to say easily, nothing is easy, but we have experience at replicating and leveraging our operating experience, and our merchandising and our product experience and our quality into those markets, allowing those sales managers and those very small teams to develop what they need for their customers. So, we are extremely excited about it, because we have experienced with it from our German market. And we are just going to take what we have learned, and bring it into these new markets now.

Yes. I would like to piggyback a bit of it. Besides the successful model we have in German, we also have a very successful model in Canada. So, for UK, Australia, whatever the business opportunity over there, we have good existing model that we can replicate and the gold ticket.

Okay. Good to hear. Thanks guys.

Thank you.

Thank you. Ladies and gentlemen, as there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back to Mr. David Bruce, for any closing remarks.

Thank you for the time and interest today. We appreciate your continued support of FGI. Stay well and we look forward to connecting with you on our next quarterly call. Thank you.

Thank you.

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