FGI Industries Q2 2024 Earnings Report

FGI Industries EPS Results

• Actual EPS: $0.05
• Consensus EPS: $0.15
• Beat/Miss: Missed by -$0.10
• One Year Ago EPS: N/A

FGI Industries Revenue Results

• Actual Revenue: $29.37 million
• Expected Revenue: $31.30 million
• Beat/Miss: Missed by -$1.93 million
• YoY Revenue Growth: N/A

FGI Industries Announcement Details

• Quarter: Q2 2024
• Date: 8/7/2024
• Time: N/A
• Conference Call Date: Thursday, August 8, 2024
• Conference Call Time: 9:00AM ET

FGI Industries (NASDAQ:FGI) supplies kitchen and bath products in the United States, Canada, Europe, and internationally. The company sells sanitaryware products, such as toilets, sinks, pedestals, and toilet seats; wood and wood-substitute furniture for bathrooms, including vanities, mirrors, laundry, medicine cabinets, and other storage systems; shower systems; and customer kitchen cabinetry and other accessory items under the Foremost, avenue, contrac, Jetcoat, rosenberg, and Covered Bridge Cabinetry brand names. It sells its products through home center retailers, online retailers, distributors, and independent dealers. The company was incorporated in 2021 and is headquartered in East Hanover, New Jersey. FGI Industries Ltd. is a subsidiary of Foremost Groups Ltd.

FGI Industries Q2 2024 Earnings Call Transcript

Key Takeaways

• Revenue grew 0.6% year-over-year to $29.4 million in Q2 2024 while gross profit rose 11.9% and gross margin improved 310 basis points to 30.5%, despite SAP implementation and import logistics delays that will be fulfilled in H2.
• Sanitary ware declined 8% but management remains optimistic about Flush Guard, while bath furniture is shifting to mid-priced offerings and shower systems jumped 37% on new customer programs.
• Custom kitchen cabinetry saw a 66% revenue increase driven by dealer expansion, and the I La Porter digital JV is preparing for launch to target premium designers with an AI-backed platform.
• FGI opened an office and showroom in India, engaged new distribution partners, and views its geographic expansion in Europe and India as key drivers of above-market organic growth.
• Operating expenses rose due to growth investments, causing a GAAP operating loss of CNY 5.1 million, but liquidity remains strong at $17.4 million and full-year 2024 guidance was reiterated.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the FGI Industries Inc.'s second quarter 2024 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Jae Chung, Vice President of Investor Relations at FGI Industries. Please go ahead.

[Jae Chung, VP of Investor Relations at FGI Industries Inc]

Thank you. Welcome to FGI Industries' 2024 second quarter 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.

[Jae Chung, VP of Investor Relations at FGI Industries Inc]

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 questions. With that, I'll turn the call over to David.

[David Bruce, President and CEO at FGI Industries Inc]

Thank you, Jae. Good morning, everyone, and thank you for joining our call today. I am pleased to share our second quarter results reflected the strategic investments we've made in our organic growth initiatives across our brands, products, and channels or BPC strategy. FGI reported total revenue of $29.4 million in the quarter, representing a year-over-year increase of 0.6%. Gross profit was $9 million, reflecting growth of 11.9% compared to our prior year. Gross margin improved to 30.5%, an increase of 310 basis points compared to the second quarter of 2023. The industry outlook remains relatively flat overall, with our customers forecasting minimal growth in 2024.

[David Bruce, President and CEO at FGI Industries Inc]

During the second quarter, some of our shipments experienced extended lead times and delays, due in part to our transition to SAP enterprise software and continued industry-wide import logistics challenges. This impacted our second quarter results. Freight rates have more than doubled since December 2023, and we are closely tracking prices for the remainder of 2024. We expect to fulfill the delayed shipments in the second half of the year. Sanitaryware revenue declined 8% year-over-year in the quarter. We remain optimistic about Flush Guard in the second half of 2024. We continue to shift towards lower-priced offerings in our bath furniture segment and are excited about our assortment and new programs that are more aligned with market pricing and design trends.

[David Bruce, President and CEO at FGI Industries Inc]

The shower systems business benefited from new customer programs, reporting an increase in revenue of 37% compared to the same period last year. In custom kitchen cabinetry, Covered Bridge revenue increased 66% in the quarter, driven by continued strong dealer and customer expansion across the U.S. Isla Porter, our digital-only custom kitchen joint venture, is setting the stage for its official launch. Isla Porter aims to establish a relationship with the premium designer community with on-trend products via an AI-backed digital sales platform. Our geographic expansion plans in Europe and India hold significant promise of driving growth. During the quarter, we opened an office and a showroom in India and engaged new distribution partners in the burgeoning bath market. Our strategic growth initiatives are progressing well and are expected to fuel above-market organic future growth.

[David Bruce, President and CEO at FGI Industries Inc]

I commend our FGI team for their dedication to our long-term objectives, positioning the company for success in 2024 and beyond. With that, I'll hand it over to Perry for a more detailed financial review.

[Perry Lin, CFO at FGI Industries Inc]

Thank you, Dave, and good morning, everyone. I will begin by providing additional details on the quarter, followed by an update on our current liquidity and balance sheet. Finally, I will conclude our guidance for the full year 2024. For the second quarter of 2024, revenue totaled $29.4 million, an increase of 1% compared to the second quarter of 2023. As Dave mentioned, FGI experienced delayed shipment, due in part to our transition to SAP enterprise software and ocean freight disruption. We expect to fulfill delayed shipment in the second half of the year. Gross profit was $9 million in the quarter, an increase of 11.9% year-over-year, driven by our higher-margin products. Our gross margin improved to 30.5% in the quarter, compared to 27.4% in the prior year.

[Perry Lin, CFO at FGI Industries Inc]

We expect some moderation in the gross margin as delayed shipment of lower-margin product are fulfilled in the second half. Our operating expenses increased to $9.4 million from $7.4 million in the prior year, due to inflation and ongoing investment in our growth initiatives including the marketing spend for Flush Guard, Isla Porter, Covered Bridge kitchen cabinetry, and our Canadian wholesale business. We expect operating expense to decline in the second half of the year, as certain expense in the first half will now recur in the third and fourth quarter. GAAP operating income was -$0.5 million in the quarter, down from $0.6 million the prior year. Higher operating expenses due to investing in our growth initiative accounted for the loss, as overall revenue was largely flat and the gross margin were higher in the quarter.

[Perry Lin, CFO at FGI Industries Inc]

Moving to our balance sheet. At the end of the second quarter, FGI had $17.4 million in total liquidity, which we believe is more than sufficient to fund our growth initiative. Total liquidity declined slightly from $17.8 million in the prior quarter.We are leaving 2024 guidance unchanged, with revenue in the range of $115 million-$128 million. Adjusted operating income in the range of $2.8 million-$3.8 million, and adjusted net income in the range of $1.2 million-$2 million. Please note that the guidance for adjusted operating income and adjusted net income exclude certain non-recurring items. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Reuben Garner of Benchmark. Your line is already open.

[Reuben Garner, Equity Research Analyst at Benchmark]

Thank you. Good morning, everybody.

[David Bruce, President and CEO at FGI Industries Inc]

Hey, good morning, Reuben.

[Reuben Garner, Equity Research Analyst at Benchmark]

Good morning. So, just a quick one on the SAP enterprise switch. When did that happen? Can you quantify what the impact was? And then, any comments on how that may be beneficial to you guys going forward?

[David Bruce, President and CEO at FGI Industries Inc]

Yeah, we implemented SAP at the end of Q1. Technically, Q2, May 1, was our official implementation date. We're, we're excited about what it's gonna do for us. We were using a very old, outdated ERP system at the company, and we're already seeing benefits of the rollout, and the efficiencies it's gonna bring to our business. But, but of course, like many companies have experienced on a new rollout, there were some hiccups, and it did absolutely impact our domestic shipments, as well as some of our, our direct import shipments for the quarter. But, those are not lost sales. Those are. Those, that's business that will, we expect to fully spill over into Q3.

[Reuben Garner, Equity Research Analyst at Benchmark]

Okay. And then, I understand you guys have been moving down price points a little bit. We've heard that there's been a little bit of weakening in the consumer, particularly at the entry level. Are you seeing any signs of that? We've seen a couple of categories where there's been destocks take place, not exactly related to you guys, but just in the broader big box channel. Any risk there? How do you feel about where inventory is and that consumer in particular?

[David Bruce, President and CEO at FGI Industries Inc]

Sure. No, it's a great question. I think I mentioned at the—I think it was on the Q4 call, you know, we didn't really anticipate talking about destocking this year as an issue, and that's still the case. I think we went through most of our pain last year, going into this year. Our inventory position has increased a bit, only because we're backing up for a lot of new program launches that are anticipated in the second half, and I think I mentioned that last time. From a customer perspective, we actually are in... Our customers are in a very good position with us on the majority of our product categories.

[David Bruce, President and CEO at FGI Industries Inc]

And I think that I've mentioned before that the most affected category that we had when it came to destocking and, as far as trade down, was the bath furniture. But we've actually now, finally, I've talked about how we've been implementing, and we debuted a lot of our newer, more mid-priced, product strategy at the Kitchen and Bath Show in February, and that's now taking effect, so we're starting to place that product. And we're starting to see a little bit improved order cadence from our larger customers as it relates to bath furniture going into the second half. So I think, to answer, go back to your destocking question, no, we're not seeing that. We're actually seeing the exact opposite. We've already hit the floor, and I think we're only gonna see improvement from here.

[Reuben Garner, Equity Research Analyst at Benchmark]

Okay, very helpful. And then, in terms of next year, I guess R&R market aside, we can kind of take our best guess at that. Can you, can you remind us on what you have within your control between new products, new customers? Any, any way to quantify that yet, or is it still too kind of early to, to kind of get a, an idea of what that might look like?

[David Bruce, President and CEO at FGI Industries Inc]

Yeah. If I, if I could quantify 2025, I'd, I'd be a genius, I think, Reuben. But I. We feel good. Here's. Let me say this, we feel really good about the momentum we have right now as we're in Q3, going into Q4. Many of the newer program launches that we talked about are in play right now. We're actually. They're actionable items for our sales teams as we speak. We like the fact that, on the bath furniture side, we're starting to see a turnaround. We really like what we're seeing in our kitchen business. Our kitchen business is really moving full steam ahead, probably its fastest momentum in many years, since we've had the program.

[David Bruce, President and CEO at FGI Industries Inc]

So I think that would, that would sort of imply that our, our, you know, heading into 2025, outside of macro issues, obviously, which we'd have to monitor, but we're, we're excited where things are going right now. We're finally, you know, it's been a lot of discussion about these new programs and new customers coming on board, but now that they're sort of starting to be executed, you know, as of now, I mean, it's very early to talk about next year, but we're, we're, we're cautiously optimistic about next year as well. Again, let's, let's see the macro issues, how they affect things, but, you know, our expectation would be to, you know, outpace any of those issues in the first place with our new business opportunities.

[Reuben Garner, Equity Research Analyst at Benchmark]

Great. Congrats, guys, and good luck going forward.

[David Bruce, President and CEO at FGI Industries Inc]

Thank you.

[Operator]

Your next question comes from Greg Gibas of Northland Securities. Your line is already open.

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

Hey, good morning, David, Perry. Thanks for taking the questions.

[David Bruce, President and CEO at FGI Industries Inc]

Hey, Greg. Good morning.

[Perry Lin, CFO at FGI Industries Inc]

Good morning.

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

You know, given, I guess, you reiterated guidance, sorry, anything that surprised you, you know, positively or negatively in the quarter, and maybe into Q3? Just trying to get a sense of puts and takes on, you know, maintaining expectations for the remainder of the year.

[David Bruce, President and CEO at FGI Industries Inc]

Yeah, I mean, I think the, you know, maintaining our guidance sort of gives you an idea about sort of what we expected. We know that from an expense perspective, we know that our first half is heavily weighted on our OpEx, and generally, our sales tend to have a spike in the second half, normally. And then, as we had spoken about, a lot of our newer businesses coming in the second half of this year, so we weren't really too surprised. I think what... We did mention the some of the shipping delays in the SAP. That definitely impacted to some degree, and we don't know specifically. I mean, again, we're not really worried about it because we know it's trailing over, but, you know, that, that would have impacted Q2 numbers.

[David Bruce, President and CEO at FGI Industries Inc]

We probably could have shown a better Q2, had we not had those issues, but that's just a short-term blip. We're really not nervous about it. So yeah, I mean, that's why we reiterated the guidance. We kind of are moving along sort of as expected. I think for us, one of the positives is, despite macro issues, you know, you hear a lot of our peers are talking about flat business or down single digits. R&R was looking like it was gonna rebound in Q4, maybe not as much, but it's not gonna... We don't feel that's going to affect us as much because a lot of our business is gonna be new incremental sales. And that's something we've preached for quite a while, which is outpace that, that market, right? Despite, you know, these single-digit declines.

[David Bruce, President and CEO at FGI Industries Inc]

So we're feeling pretty good about it. And, yeah, so to go back to your original question, I don't think there was anything completely unexpected, that we've seen through the first half at this point.

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

Great. Appreciate the color there. And I guess, you know, regarding, you know, what you're seeing with freight rates, you know, how is... I guess, is that trending in Q3? Do you expect a similar impact in Q3 relative to what you saw in Q2? Just curious, I guess, your outlook on that, and then whether you expect it-

[David Bruce, President and CEO at FGI Industries Inc]

Yeah

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

... to maybe improve or kind of stay the same.

[David Bruce, President and CEO at FGI Industries Inc]

Yeah, yeah. The freight, the freight business is always sort of a guessing game. You know, it was a lot different, a couple of years ago when things went off the wall, which was, you know, very unusual. We're not, we're not in that situation now. I think we're, we're definitely seeing continued rate climbs. There's mixed conversation in the industry as to when they're gonna come down. You know, some of that, some of the, the industry insiders that we've been talking to have been saying late Q3 into Q4. Some have been saying early, 2025. So we're monitoring it. We're not particularly concerned. We have to be very careful, you know, as our inventory mix starts to be affected by higher landed cost product. We'll have to take a look to see how do we protect our margins.

[David Bruce, President and CEO at FGI Industries Inc]

Again, you know, a lot of our customers handle their own freight. They, you know, we ship them directly from Asia, so we're, we don't have to worry too much there, but we have to be competitive in the marketplace, right? So we'll, we'll always be competitive, and we'll always monitor costs. And, and as of now, we're not in any sort of, you know, worry mode. I think it's just a monitor, wait and see approach to see where the market goes.

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

Got it. That's fair. Great, and I know we've talked about the, you know, Indian market in the past. Curious, you know, kind of the updated outlook on penetrating that market. You know, I saw you open an office there.

[David Bruce, President and CEO at FGI Industries Inc]

Yeah.

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

Just curious if you could just address that opportunity and, you know, maybe the next steps in that market?

[David Bruce, President and CEO at FGI Industries Inc]

Sure. So, I think I mentioned on one of the calls, you know, our strategy initially is to secure some key distributors in some key markets. We've already secured one. We have two just about ready to close, and those distributors will begin the process to see the dealer and builder market for us in the north and the south of India. But one of the key components of that was us registering in India as a company, which we did, and opening our office/showroom. It's primarily a showroom with a small office, and the showroom is critical because it allows us to, for the first time, invite in the architects, the designers, the builders, the dealers to see our product, and we will have an official sort of company launch there sometime this fall.

[David Bruce, President and CEO at FGI Industries Inc]

It's not quite ready on the date yet, but the showroom should be ready September, October timeframe. So, you know, before year-end, we'll have that launch. And what that's gonna do is gonna really get our name out into the market. It's gonna help us seed the market, and once we do that, we expect a lot more speed and growth. And we'll be able to talk more about that as we go into next year, about, you know, we'll get into a little more detail, maybe in each particular market that we're in.

[Greg Gibas, VP and Senior Research Analyst at Northland Securities]

Great. Appreciate it, Dave.

[David Bruce, President and CEO at FGI Industries Inc]

Sure.

[Operator]

There are no further questions at this time. I would hand over the call to David Bruce for closing comments. Please go ahead.

[David Bruce, President and CEO at FGI Industries Inc]

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

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Participants

Executives

• David Bruce, President and CEO
• Jae Chung, VP of Investor Relations
• Perry Lin, CFO

Analysts

• Greg Gibas, VP and Senior Research Analyst at Northland Securities
• Reuben Garner, Equity Research Analyst at Benchmark