Good morning and welcome to the FGI Industries, Inc., First Quarter 2023 Earnings Call. All participants will be in 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, Vallum Advisors. Please go ahead.

Thank you. Welcome to FGI Industries first quarter 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. 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 questions. With that, I’ll turn the call over to Dave.

Thanks, Paul. Good morning to everyone and thanks for joining our call today. We were very pleased with our strong operational execution and continued progress against our strategic initiatives during the first quarter, despite what remains a very challenging market environment. Even with the destocking headwinds pressuring our revenues, we were able to generate meaningful first quarter gross margin improvement, while our consistent focus on our organic growth initiatives should position the company to return to profitable growth as inventory conditions normalize. We reported a first quarter gross margin of 26.5%, which was up 925 basis points compared to the prior year period, and up 285 basis points versus the fourth quarter, despite the ongoing customer inventory correction and uneven demand trends in the repair and remodel market witnessed during the quarter. While our gross margins were helped by lower freight costs and the benefit of last year’s pricing actions, the biggest factor has been our focus on higher margin product categories and our good, better, best product strategy, which has resulted in a significantly improved product mix. While the first quarter gross margin levels are likely not sustainable for the long term, the favorable gross margin drivers remain in place and we expect strong gross margin improvements for the full year 2023 compared to last year. The inventory correction that has been a headwind to our revenue growth over the last year has persisted into 2023, with the macro uncertainty adding another layer of pressure as many large customers are taking a very cautious stance and looking to reduce inventories to levels below historical averages. This caused our first quarter revenue to decline 38% compared to last year. The more cautious inventory strategy by many of our large customers is expected to prolong the destocking headwinds, particularly in the…

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 2023 guidance. Revenue totaled $27.2 million during the first quarter of 2023, a decrease of 38% compared to prior year, primarily due to continued inventory destocking as well as some softening in customer demand. Currency was headwind during the quarter and negatively impact revenue by 1.1%. Looking at our business line, sanitaryware of revenue was $15.4 million during the first quarter, down from $26.8 million during the prior year period. The revenue decline was driven by channel inventory reduction at key partners, particularly in the pro channel, as customers are becoming increasingly cautious regarding inventory levels, with some large customers reducing their inventory level to below normal historical levels. There have been some pocket of softness, but overall end customer demand has remained relatively steady. Bath Furniture revenue was $5 million during the first quarter, down from $10.1 million last year. The Bath Furniture business also continued to be negatively impacted by elevated channel inventory levels, which has been prolonged by some modest weakening of demand. Shower System revenue was $5 million during first quarter 2023, down from $6 million last year. The decline in Shower System revenue is expected to be temporary as momentum in the business remains strong, highlighted by several awards with national retail partners that will begin rollout in second half of 2023. Other revenue was $1.8 million during the first quarter of 2023, up from $700,000 last year, driven by growth in our custom kitchen cabinetry business. Gross profit was $7.2 million during the first quarter, down only 4.3% from last year, as the revenue decline experienced during the quarter was offset…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Greg Gibas with Northland Securities. Please go ahead.

Hey, good morning, David and Perry. Thanks for taking the questions. Congrats on the nice execution in the challenging environment. I wanted to ask, I guess, given the revenue performance in Q1 seemed a little bit below your expectations and perhaps the ongoing destocking was maybe worse than you anticipated too. What kind of gives you confidence that you can maintain that full year revenue outlook?

Thanks, Greg. It’s Dave. Yeah, there’s a couple of things. So as definitely we have seen the destocking extend, part of that is also due to the softening of the R&R like we mentioned, which is extending that destocking period. And, I think, I also mentioned some of our larger customers are also looking at reduced inventory levels as a base, as they move forward, as a cautionary move, right, because they want to make sure that inventory levels are more in line with where the market and demand is. With that said, though, we fully expect that in the second half, you’re going to see what I used to call a bullwhip effect, which is going to be now customers are going to have a need for inventory and need to replenish. I think I mentioned on our last call that we’ve seen that trickling in from the retail side. We’ve seen more of the destocking pressure on the pro business. But as you heard, we’ve seen and heard some more positive comments from the builder side of the business, and we would expect the second half for that to ease. Secondly, as I mentioned on today’s call, we have a lot of new programs more than what you just heard, but the three that I mentioned today, or four [ph] the additional growth in our shower business as well as our kitchen business, we fully expect to execute those and execute more new incremental business, despite where the market is for the second half. So when you take the lighter Q1, a lot of that business, those initiatives, many of them were not baked into our guidance. So we actually have a good expectation that we would be able to continue to meet our revenue guidance for the year. For sure, we would expect that we’d probably be getting closer to the low end of that guidance depending on how far that destocking goes out. But that bullwhip effect of destocking ending and reordering coupled with new incremental sales gives us that confidence.

Great. That’s extremely helpful, Dave. I wanted to follow-up, I guess, on that gross margin improvement. How much was maybe a result of the price increases versus the mix shift and maybe versus the result of lower freight costs year-over-year? And I also wanted to…

Yeah, that’s a good question. Go ahead.

I guess, I think your comment was also around – it’ll be difficult to maintain these levels of gross margins going forward. I just wanted to get a sense of why you’re thinking about that?

Yeah, I want to clarify that. So we’ve been seeing a rapid improvement in our margins for various, first, I’ll tell you why. We have had impact, obviously, from freight reductions. A large part of our change, though, has to do with the pricing actions we took and also with mix shift. You can see where our shower business has grown to a sizable portion of our business now, kitchens continues to grow, and those were all higher margin businesses for us. And we fully expect, like Perry had mentioned, we’re going to improve our margin meaningfully as we move along compared to prior years. And we fully expect to get we’re not deviating from our guidance of saying longer term – mid-term, really, mid- to high-single-digit EBIT margins as we move forward with our BPC strategy. So that’s still in place. And I think when I mentioned can’t maintain these longer-term, we still expect to see further margin improvement as we go through these quarters. And then what most likely will happen is as we expect to get more demand and order activity from the pro side, especially when we talk about some of the more lower margin product categories on some of the promotional product in sanitaryware. The margin percentages will come down some, but the dollars will increase, and that’ll add obviously to our overall gross margin dollar accretion. So we fully expect that our margins longer term will continue. I think when I mentioned it today, we were really referencing more the fact that the speed that our margins are growing now, as the revenues are lower, our margins will improve. Part of that is mix, right, because we’re not going to see some of the more lower margin product categories, which create a lot of the volume. But overall, as a business, as we grow out and execute that BPC strategy, like I mentioned today, with shower and kitchen growth, those margins will continue to grow.

Okay, great. That’s helpful. I guess, last one for me. We did want to follow-up on your commentary on those several new product programs with your retail partners, great to hear that those are coming in. And, I guess, first question around those would be the timing, I think, you said the back half of this year was maybe when those would start to see effect. Just trying to think of maybe how much Q3 versus Q4 four? And, I guess along those lines, I think, you talked about maybe three of the key ones there, you said there’s more. Just trying to get a sense of the magnitude or how much of a needle mover there’ll be on organic growth in the back half or into next year?

Yeah, I mean, they’ll be meaningful. The timing in our business is – anybody’s business, but timing with us, with shipping from Asia and understanding when things are arrived, some of that is up to us that’s completely finalized things with our retail partners as far as store sets and operational issues that go on domestically here. So if we do it, that’s why I mentioned the second half, Q3, Q4, sometime we would expect some bit could trickle over into Q1 of 2024 and, of course, next year we would have more of a straight-line knowledge of that business month-by-month. But I would just say to you that these are meaningful opportunities. Other ones in the hopper, too, as I would say, they’re all meaningful and material to the business in a meaningful way. And again, the ones I mentioned to you today, I brought up because they will start to impact our top-line in our margins in the second half for sure.

Okay, great. I appreciate the color.

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

Thank you for your 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. The conference of FGI Industries has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.