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Operator: Good day and welcome to the FGI Industries Third Quarter 2024 Results Conference 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 Jae Chung, Vice President of FGI Industries. Please go ahead.

Jae Chung: Thank you. Welcome to FGI Industries 2024 third 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.

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 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’ll turn the call over to Dave.

David Bruce: Thank you, Jae. Good morning, everyone and thank you for joining our call today. I am pleased to share our third quarter results reflect 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 $36.1 million in the quarter, representing a year-over-year increase of 20.6%. Gross profit was a record $9.3 million, growing 18.9% compared to the prior year. Gross margin was 25.8% compared to 26.2%, a decline of 40 basis points compared to the third quarter of 2023, due in part to a higher mix of Sanitaryware and Bath Furniture and higher freight costs in the Bath Furniture and Cover Bridge segments. The industry outlook remains relatively flat overall with our customers forecasting minimal growth in 2024 but our investments have driven revenue growth well above the market.

FGI’s third quarter revenue increased significantly compared to the third quarter 2023 due to growth across all our businesses and geographies. Revenue grew 21%, 9% and 39% in the quarter for the U.S., Canada and Europe markets, respectively. Sanitaryware revenue increased 3% year-over-year in the third quarter, reversing the decline in the prior quarter compared to the prior year period. Our Bath Furniture revenue increased 64% year-over-year as our shift towards lower-priced offerings and new programs that are more aligned with the market pricing and design trends gain traction. The Shower Systems business reported an increase in revenue of 45% as demand trends remain positive, driven by new customer programs. In custom kitchen cabinetry, Covered Bridge revenue increased 93% in the quarter, driven by continued strong dealer and customer expansion across the U.S. Isla Porter, our digital custom kitchen joint venture is off to a strong start, establishing relationships with the premium design 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 in coming quarters. Our strategic growth initiatives are progressing well and are expected to fuel above-market organic future growth. I commend our FGI team for their dedication to our long-term objectives, positioning the company for success for the remainder of 2024 and beyond. With that, I’ll hand it over to Perry for a more detailed financial review.

Perry Lin: 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 with our guidance for the full year 2024. As Dave mentioned, for the third quarter 2024, revenue totaled $36.1 million, an increase of 20.6% compared to the third quarter of 2023. Gross profit was a record $9.3 million in the quarter, an increase of 18.9% year-over-year. Our gross margin declined to 25.8% in the quarter compared to 26.2% in the prior year. Our operating expense increased 27.6% to $9.4 million from $7.3 million in the prior year due to ongoing investment in our growth initiative in the kitchen cabinet business which includes Cover Bridge and Isla Porter and investing in distribution for our Canada business.

GAAP operating income was negative $0.1 million in the quarter, down from a positive $0.5 million in the prior year. Lower gross margin and higher operating expense due to investing in our growth initiative accounted for the loss. Moving to our balance sheet. At the end of third quarter, FGI had $16.3 million in total liquidity which we believe is more than sufficient to fund our growth initiative. We are updating our 2024 guidance as follows: our revised revenue guidance is $127 million to $131 million compared to the previous range of $115 million to $128 million; the new adjusted operating income guidance is negative $1 million to breakeven from the previous range of $2.8 million to $3.8 million; the new adjusted net income guidance is negative $1 million to breakeven from the previous guidance of $1.2 million to $2 million.

Please note that the guidance for adjusted operating income excludes certain nonrecurring items. Adjusted net income excludes certain nonrecurring items and includes an adjustment for minority interest. That concludes our prepared remarks. Operator, we are now ready for the question-and-answer portion of our call.

Operator: [Operator Instructions] And the first question comes from Reuben Garner with The Benchmark Company.

Reuben Garner: Wondering if you could help us with the components of the growth year-over-year in the quarter? How much of the outperformance? I mean, I certainly think it was still a down market and you grew 20%. How much of that was that new product offering within the Bath Furniture? Was that a onetime kind of stocking benefit that goes away? Or is that an ongoing item? And I’ve got a couple of follow-ups.

David Bruce: Yes, sure. No problem. Good question. So no, it’s not a onetime event. We had a nice revenue bounce based on what we’ve been talking about the last couple of quarters which is really reengineering that assortment to meet more of the pricing trends in the market which we’ve talked about, higher ticket, higher retail furniture has suffered more recently in the last year or so. And we’ve been working diligently to change that assortment and we’re starting to see the results. We’re getting new placement. We’re taking some share. We’ve had a couple of large customers also do the same by adding new product into the mix. And we would fully expect to see that type of growth continue as we start to comp this new business.

Reuben Garner: Okay. And then, can you talk about the impact on gross profit margins? In the quarter is that — I think it was 25.9% or 25.6%. Is that the new way to think about it with this new portfolio mix? Or was there anything kind of unique in the quarter that dragged it down?

David Bruce: Yes. There was — we don’t expect these margins in the quarter that you saw continue. We fully would anticipate to get back to where we were in previous quarters. Mostly what drove the margin change in Q3 were a couple of things. One, ocean freight rates did spike. They have been going up this year. They were higher in Q3. And we did have larger cabinet shipments from our kitchen business, as you saw in the results which impacted gross margin, as well as the growth in the bathroom furniture and other products that we had brought in. So there was impact on freight. And at the same time, there were some promotional costs associated with launching some of the new bathroom furniture which impacted margin. But we’re very confident with the cadence that we have going into Q4 with the gross margin that we’re going to get back to where we were in that 27-plus range for gross margin.

Reuben Garner: Okay. And then — so does that mean that that’s the primary difference between your profitability guide from — I mean, you’ve outperformed on the revenue front. You raised your revenue guide. The profitability side comes in some — Is that entirely driven by the change in the freight component and the promotional piece that — and I guess, was the promotional piece not expected before? Or was there new — even new wins sort of post last quarter that impacted that?

David Bruce: Yes. So I think there’s 2 ways to look at this. So from a gross margin perspective, looking at that 25.6% number, whatever it was — 25.8%. That’s — like I said, we’re very confident we’re going to get back to that 27-plus number based on our mix. And with freight normalizing again, we don’t anticipate freight rates to be as spiked as they were in Q3. But I think you’re also talking about operating expense which impacted our bottom line, right? So our — we expect and I think I mentioned this on one of the last calls, is we fully expect that we’ll be able to leverage a lot of our operating costs. We have some good leverage here. And we fully expect that we’ll be able to, in the short term, in the near term and the midterm, continue to reduce our operating expense ratio which is really critical and leverage what we are investing, particularly in the new businesses such as Isla Porter and the kitchen growth which has been large areas of investment for us which have, in the short term, negatively impacted our bottom line.

But as you’re starting to see, is now starting to impact positive results on the revenue side which in turn will drive gross margin and gross profit dollars. So it’s a twofold thing in the quarter, the continued investments in our — what we feel are some of our key core growth categories as well as that little bit of a blip with promotional costs and freight on the gross margin perspective.

Reuben Garner: Okay, great. I’m going to sneak one more big picture question in. What are your customers saying today as — I know it’s early but kind of initial thoughts for next year? I mean, I think there was a lot of optimism over the last couple of months that rates coming in could have a meaningful impact but it seems that in the near term, at least rates have actually gone the other direction. Is it muted outlook for ’25 for the industry still the right way to look at it? Or do you sense that there is increasing optimism from your customers?

David Bruce: I would say there’s cautious optimism. I do think muted is a good term. I believe some of our industry comps for some of our customers, you’re looking at 0 to low single-digit growth potential next year. For us, however, we’re starting to take share in some of the key categories we do business with — that we do business in. And so we’re not necessarily tied to where the market goes, only because we’re gaining incremental new sales. But to answer the question, I think the industry is cautiously optimistic about some improvements. And I think if rates which we would — it seems everybody expects that rates will improve and that should spur a little bit of market activity beyond just the incremental growth that we’re expecting.

Reuben Garner: Congrats on the progress.

Operator: With 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.

David Bruce: Thank you for your 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.

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