Good morning, and welcome to the FGI Industries, Inc. Third Quarter 2023 Earnings Call. [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 Third 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 your 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 are beginning to see some signs of normalization in inventory levels and order patterns in certain categories. However, inventory destocking continues to impact our results. With the recent macro headwinds prolonging the expected inventory recovery as well as impacting overall demand across our categories. While our top line results are facing challenges, we continue to see the benefits of our margin improvement initiatives during the third quarter with gross margin improving 530 basis points from last year. As a result, our gross profit declined only 3% during the quarter despite the 22% drop in revenues. We could see some short-term variability in our gross margins as we invest in our growth initiatives and see a rebound in our pro channel and bath furniture business, but we believe our improved gross margin profile should be sustainable longer term, owing to our strategic focus on higher-margin categories and improved operating scale. As we have discussed in recent quarters, the industry-wide inventory correction that began in the back half of 2022, has persisted into 2023 with uneven demand in the R&R channel and macro uncertainty, adding another layer of pressure. This has caused many key industry players to take a very cautious stance on inventory levels with many participants looking to reduce inventories to levels below historical averages. This has prolonged the destocking headwinds, particularly in the pro channel. In addition, our European business, centered in Germany, has faced pressure due to a combination of destocking headwinds along with macroeconomic pressures in that country. Despite these near-term headwinds, we remain bullish on the long-term outlook for our industry and FGI in particular. The median age of owner-occupied homes is roughly 40 years in the United States. Home equity levels…

Thank you, Dave, and good morning, everyone. I will provide some additional detail on the quarter, give an update on our liquidity and balance sheet and wrap it up with our full year 2023 guidance. Revenue totaled $29.9 million during the third quarter of 2023, a decrease of 22% compared to prior year due to continued inventory destocking as well as some other weakness in the broader home improvement market. We continue to see large customer take a cautious stance regarding inventory level, given sluggish demand trends, which is prolonging the inventory correction. Looking at our business lines, sanitaryware revenue was $20.7 million during the third quarter, down from $25.5 million during the prior year period due to the destocking headwinds, particularly in the pro channel and more muted demand trends. However, our sanitaryware revenue increased 10.2% sequentially from the second quarter of 2023, the second consecutive quarter of sequential revenue gains as some customers are beginning to return to more normal order patterns and new customer programs are benefiting results. Bath Furniture revenue was $2.5 million during the third quarter, down from $5.6 million in the prior year period. The broader bath furniture market continues to be one of the product category most impacted by the macro headwinds. Our product mix in bath furniture is more focused on higher end price point, which is causing additional challenges given the more pronounced weakness in the higher ticket item as a result of recent market change. We are expanding our product offering in the mid-tier category to better address current demand. Shower system revenue was $4.9 million during the third quarter, down from $5.4 million last year but up 15% sequentially from the second quarter of 2023. While the shower business has experienced some modest inventory destocking, demand main trends remain…

[Operator Instructions] And the first question today will come from Reuben Garner from Benchmark.

Maybe let's start with the -- what you're seeing and hearing from your customers. So it sounds like maybe a little bit conflicting. There's still some destocking going on, but some customers are showing signs of returning to normal order patterns. Can you kind of talk us through that in a little more detail? Is it dependent on the channel? Is it dependent on the product? What are you seeing there?

Yes. No, it's a great question, Reuben. And yes. So as you know, we have a relatively broad product base within each of our categories, and we have a broad category offering. So I think we mentioned the inventory moderation or the moderation of inventory destocking is uneven for us. In many cases, I think we've highlighted that Bath Furniture in particular has been more of a sore spot in the sense that we have such a broad assortment of cabinetry, and cabinetry has been a little bit more affected due to our high-end assortment. So many of our customers are shifting with us. We're reengineering a lot of those assortments and it's taking longer. If you look at shower and sanitaryware, as Perry mentioned, we're starting to see sequential quarterly growth. Those inventory levels are moderating, but it also is impacted due to the fact that we have broad assortments within those categories. So we're confident going into -- as we exit Q4 into next year, that we're -- we would fully expect to see a more improved order cadence getting back to more normalized levels that we were used to prior to these destocking issues.

Okay. And it seems like there are 3 buckets of items that impacted this year's results. I was hoping you could quantify them for me, so we can try to kind of parse out what's not going to be negatively impacting next year. So you had the destocking piece. You had investments tied to future revenue opportunities that you didn't realize in 2023, so a cost element. And then the potential benefits of those investments that didn't come this year but will come next year. Can you kind of walk us through those 3 buckets with maybe some numbers behind it?

Sure. Well, I'm not going to get into very specific numbers, but I can tell you that our feeling about entering 2024 is that -- not all of the -- first of all, the investments that we made in 2023 are not just for 2024. They are for 2024 and beyond. But we will start to realize a return on many of those investments in 2024. We've talked about our digital kitchen venture, which is going to launch in Q1. We've discussed our new toilet technology, which is going to be launched at our KB show in February. And going back to the inventory situation that you mentioned that we were talking about destocking, we sort of feel there's going to be almost a natural organic [Technical Difficulty]

Pardon me, this is the conference operator. We've lost audio from our main presenting location. Please stand by. Mr. Bruce, do you there? Okay, your line seems to be cutting out a little bit there. Please, proceed.

Hello, Reuben, are you still there?

I am here. You cut off kind of early in the answer. So if you wouldn't mind...

I apologize, we must have a technical issue. So yes, we fully expect going into next year that we're going to see a couple of things. So regarding the investments, the investments in 2023 are obviously not just for next year. They're for next year and beyond. And then from an inventory perspective, we -- as I sort of mentioned, we would expect to start to see more normal order cadence as we enter 2024. And that's going to be sort of almost a natural organic growth opportunity for us just to get back to more normal cadence. As I mentioned, we've seen sequential quarterly growth quarter-over-quarter in the sanitaryware and in the shower already. And again, we've mentioned new opportunities that are going to be incremental despite where market predictions are right now. And as we've -- I think we mentioned in the release, the R&R market is by many industry insiders predicted to be down mid- to possibly high single digits, but our incremental new programs that we're discussing, our new kitchen opportunities, the continued growth of the Covered Bridge business, our shower expansions, we would fully expect to be able to outpace any negative market momentum in 2024.

Okay. And in that kind of backdrop where maybe markets down mid-single digits or more, you guys are maybe down or down less than that? Like what -- how do we think about what margins look like for next year? I know it's early and you're not giving guidance, but what are kind of the puts and takes we have to think about when we're trying to put that together?

No, it's a great question. And we're pretty excited about it actually. If you go back to when we first went with the IPO a couple of years ago, we talked about our goals to get our margins to -- in the near to midterm to in the range of between 25% and 30%. We're already above 25% now. And a lot of the opportunities we've mentioned, not only this quarter but in previous quarters, are focused on the higher-margin businesses, right? So there was a -- kitchen is starting to scale itself to a degree that it's having a larger impact now on our margins. We're investing, like we spoke about, in technologies and businesses such as our shower and the digital kitchen business, which is higher margin. So at the same time, as some of our pro business may come back in some more mid-priced vanity business, we may see some of that gross profit percentage to have some dips here and there, but that's going to contribute to larger gross margin dollar growth, which will impact our EBIT targets, which again, we've discussed getting our EBIT margins into the mid- to high single digits. And we would fully expect, with the combination of the higher-margin categories along with the margin dollar growth, that we're on our way to those goals as we had previously discussed.

And just to be clear, I mean those mid- to high single digits -- is there a certain revenue level you need to get there, a volume level? Or can you do it kind of in that flattish to down revenue environment potentially next year?

Well, Reuben, this is Perry. I think it's a mix to us because we are working on the volume, we are working on the margin in different product categories and channels. But our goal because of our scale, so the more gross margin dollar that we can generate, the higher operating margin that we can see in the bottom.

[Operator Instructions] The next question is from Greg Gibas from Northland Securities.

It seems like assuming a little bit of a recovery in Q4 implied in guidance, and I just wanted to get a sense of maybe your underlying assumptions there and how destocking trends have continued into Q4.

Well, you can make some inferences based on our guidance and what you saw in the first 3 quarters that we would hope to expect, to your point, a little bit of recovery. We've had -- I think we've mentioned last quarter that we're going to start -- we've started to see some new orders come in for some of those new programs we discussed. The majority will come next year. But some have trickled in as we would -- as we had mentioned, continued moderation of inventory destocking. I don't think -- I think what we won't see, which we've historically seen, is larger orders in the end of Q4 in preparation for -- as you know, we source 75% of our products is outsourced over in Asia and due to the Asian holidays at the beginning of the year, we historically have had a larger spike in December. We don't think we'll see as large a spike as we used to, but that is still remains to be seen depending upon, again, where those inventory levels are and also where end markets go, right, and where the macro levels go. So I think if you just want to -- you could make your inferences based on our new guidance and the Q. But as we've entered Q4, I could say that we feel pretty good about what we're seeing, but we still got some time to go.

Got it. Makes sense. And then curious like if you're seeing any movement on pricing or margin pressure? I mean, it looks like gross margins are still holding up pretty well. And just a little surprised that as a result of the lower inventory levels or basically destocking reducing demand levels. Just a little surprised that we didn't really see much movement on margins as a result.

Yes. Well, we've been pretty strategic about that. And we have made adjustments where necessary in regards to price. But most of that focus, I hate to go back to this constantly, but a lot of that focus has been on our bath furniture side. That bath furniture assortment that we've had in the market is probably the most broad product category that we have from a SKU perspective and a collection perspective. And our partners, our retail partners and wholesale partners are really trying to rightsize that business. There were so many offerings out in the marketplace. And then when inventory became an issue within price. At a certain point, I think Perry mentioned, most of our assortments have been focused on the higher end. Again, we ran the gamut from good, better, best, but it was mostly focused on the best. So we're rightsizing a lot of those programs. I think I mentioned one of our big retail customers just -- we've won a big award there to add new collections going in the next year. That's part of that strategy, right? So while that's happened, we've been expanding the higher-margin businesses. The shower business, the kitchens, like I said, are starting to scale to a size where it's having more impact to our overall margin and our assortments. And that's going to continue. We absolutely expect that to continue as we enter next year. So that's part of the reason why the margins have held up well. I think our teams have done a fantastic job helping our customers [Technical Difficulty]

And ladies and gentlemen, once again, we have a little bit of an audio loss there. Mr. Bruce, we just lost you. I think we're back now. Please proceed.

Greg, I apologize.

Dave, no problem. I think we've kind of got the full answer out. I think you're just kind of summarizing at the end, but very helpful and then makes total sense. Lastly, curious, I know it's still early, but if you could discuss the opportunity in India. Great to see that you initiated your first distributor partnership there. How should we think about maybe the rollout in that market and how you're thinking about expanding into it?

Yes. So our initial foray into India is going to be focused primarily on our sanitaryware business. There's a large opportunity. You could only imagine. I mean, obviously, it's one of the largest markets in the world. Sanitaryware is a growing category there with a lot of expansion. There's some local municipal and national government incentive similar to what the United States have done with low flow toilets, for example, when there were rebates given to convert from higher flow. So that's our main focus. And we're looking at it right now as sort of a two-pronged fork. We're partnering, as we mentioned, with a very formidable distributor that will take our products into the market into showrooms and local -- I'll call it, local building opportunities and some hospitality opportunities. And at the same time, we're aligning ourselves with, at least initially so far, larger construction company that is specking our product and has approved our product for spec to expand into larger commercial projects such as airports, new apartment buildings, larger hotels, national programs. So there's a lot of leg work still to do. But we've made those initial -- we've broken down those initial barriers, so to speak. And we have upcoming meetings in Q4 with our distributor to set the plans in place to execute this program as we enter next year. So we're excited about it.

And ladies and gentlemen, 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 the time and interest today. We appreciate your continued support of FGI. Please note that we will be attending the Benchmark Discovery Conference on December 7. 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, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.