Good morning and welcome to the FGI Industries, Inc. Fourth Quarter 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Paul Bartolai. Please go ahead.

Thank you. Welcome to FGI Industries fourth quarter and full year 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 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. 2022 was an exciting year for FGI. It was our first year as a public company and I am extremely proud of our strong execution throughout the year despite what turned out to be a very challenging operating environment. We made important progress against our strategic priorities and performed extremely well operationally and as a result, we are well positioned to continue to execute on our value creation strategy in the coming years. During the year, we continued to make critical progress at our BPC initiative which stands for brands, products and channels and is the key driver of our organic growth strategy. I will provide more specifics later in my comments but we further ramped key new products programs, expanded existing product categories and launched several brand initiatives during 2022 which should enable us to gain market share, expand our market penetration and drive strong organic growth in the coming quarters and years. In addition, we continue to make significant gains on our margin-recovery initiatives with our fourth quarter gross margin up meaningfully, both versus last year and from the third quarter. Our gross margins are well above the pre-pandemic levels and we expect continued strength in our gross margins going forward. FGI and the building products industry as a whole faced a number of challenges during 2022, including persistent inflation, ongoing supply chain disruption, global unrest and widespread customer destocking. However, thanks to the hard work and dedication of our team members across the organization, we continued to focus on what we could control and as a result, we believe we are in an attractive position as we enter 2023. We will likely continue to face some industry headwinds, especially in the early part of…

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 $31.8 million during the first quarter of 2022, a decrease of 39% compared to prior year due primarily to ongoing inventory destocking as well as some softening in customer demand. Looking at our business lines, sanitaryware revenue was $20.2 million during the fourth quarter, a decrease from $34.2 million during the prior year period. The revenue decline was largely the result of the channel inventory reduction by key partners, particularly in the pro channel, end customer demand has remained relatively stable. So we continue to expect volume to rebound as inventory level are adjusted. Bath Furniture revenue was $6.1 million during the first quarter, down from $12.6 million last year. The bath furniture business also continue to see pressure from destocking. The inventory correction in bath furniture started earlier than some of our other categories, so we were expecting to see this trend begin to normalize in the back half of 2022. But we continue to see inventory reduction pressure revenue through the first quarter. Other revenue was $5.4 million during the first quarter of 2022, essentially flat from the prior period. As order timing in our shower business was offset by continued momentum in our kitchen cabinetry business. We expect the growth in our shower system business to resume in 2023 as we look to expand our co-branding program with Lowe's and continue our expansion into Canada. Gross profit was $7.5 million during the first quarter of 2022, basically flat from last year as the significant progress we made on our margin recovery initiatives largely offset the revenue decline. Gross margin improved…

[Operator Instructions] Our first question comes from Reuben Garner from The Benchmark Company.

Wondering just if we could square up the outlook a little bit on the top line. So you mentioned R&R down I think mid- to high single digits as a market. Would the destocking impact be incremental to that mid- to high single digits? And if so, is there any way you could kind of quantify what kind of hit you're anticipating that to have on the first half of '23?

Yes. Thanks, Reuben. I'll bring that back to -- let's go back to Q3, just to give the whole picture here. So Q3 of last year was when we started to see a very abrupt impact from the destocking in the middle of Q3 -- into late Q3 and it was initially with retail, we saw on the retail side first and then it followed up on the pro side of our business. So that we fully expect -- that was obviously the largest impact that we saw in Q4 and we continue to see that as we had mentioned going into the first half of this year. So in relation to the market decline -- the market decline without destocking isn't as impactful because we are still taking share. We haven't lost any market share. We haven't lost any programs in the market and we're continuing to add new incremental business. We have several opportunities on the table that we expect to execute in the second half. So in the end, destocking is the major impact. And we're seeing a bit of a relief in order cadence that I think I mentioned as we've entered Q1 as it relates to destocking on the retail side. The pro side, again, we expect to continue a little bit more towards the middle of the year but the second half is when we anticipate that we should see more of a normalization as far as the impact of destocking. And as far as the R&R market, we sort of baked in what we expected. But at the same time, we've also baked in some opportunities that we know are going to be executed. And we have others that we have not baked in that we feel very, very confident about in the second half.

Okay. So just to be clear. The mid- to high single-digit market declines would not include the impacts of destocking that would be incremental to you?

Yes, that's correct. Yes. That's obviously, assuming all things were equal going into Q1, for example, if there was no destocking, we would definitely anticipate a softening in the market. But our expectation would be that we'd be able to outpace that with market gains that we're seeing with new business opportunities.

Perfect. And then on the -- let's see, the kitchen investment, I recognize you don't have a ton of detail right now but one question about it. Is there any revenue benefit in the guidance for this year baked in from that? Or is 2023 for the most part, an investment year. And so the cost is going to have an outsized impact?

Yes, you're exactly correct. So we anticipate that there'll be no revenue. We did not make any revenue into the guide for that new investment. But we did build in the anticipated and expected investment for 2023 and we would see the benefits of that next year.

Okay. And how about pricing just given the destocking environment and the consumer and what happened over the last couple of years. Can you just walk us through any pushback you've been getting? What kind of -- maybe tied into the cost that you're seeing? Or have you started to see deflation in a bigger way and therefore, you're able to give some of the price back?

Yes. I think we've actually seen a little positive effect in some sense. So I'll just give a little broader picture. We'll go back again to last year where obviously, there were enormous inflationary pressures as we entered for the entire year. And as we -- and I think I had mentioned on previous calls that we were adjusting price to our customers throughout the year. And the majority of those price actions were executed by the end of Q4. And so some obviously wouldn't have full impact until this year. We don't really anticipate any additional inflationary pressures at this point. And what we have seen in the market, as you know, as -- even though we have grown sales of our brands, our proprietary private label brand business is still a larger portion of our business. And we are seeing more, what I would call trade-down activity in the market, from maybe more premium-priced brand names to the private label brands, particularly in the retail environment. And as you know, we also sell in a, I'll say, a good, better, best strategy within the private label space. So we're seeing a little advantage there, a little tailwind for us because we anticipate that that's going to continue to be strong and customer sentiment on private label brands right now is quite positive. So we look at that as a tailwind as we enter the first half and continue into the second half of the year as well.

The next question comes from Greg Gibas from Northland Securities.

If I could follow up just on maybe the cadence this year, with the expectations for inventory destocking to normalize in the second half, can you be maybe more specific on what you -- whether quarterly or between the two halves are kind of expecting within your guidance?

Yes. So we anticipated -- originally, we were thinking that destocking -- and when I say originally, this is prior to the guide. We thought destocking would end a bit quicker but here's what we think and it's a bit different geographically. We started to see in our Canadian market, the wholesale or I'll call the pro market rebound a bit quicker. We started to see some recovery earlier in the first quarter, where here in the U.S., we anticipate the pro market at this point to become more normalized, maybe more in the middle of the year, into the late part of the middle second half -- second quarter. Retail; we've already started to see some breakthrough as far as order cadence. I wouldn't call it cadence at this point. I would just call it the beginnings of the inventory levels dropping -- on to our customer side. So I'll give you an example. Many of our customers experienced anywhere between 40% to 70% higher-than-normal inventory levels as they went into the fourth quarter last year. So those levels are -- as you can imagine, that takes time to normalize that. So, I think what we're going to see on the retail side is more of a normalization by the middle part of the year. And I think second half would be -- my anticipation would be we'd see cadence that would be more normal in that part. And on the pro side, again, I think same but a little bumpier because of the housing market and understanding where new construction is going to go and because some of our pro-business obviously is not just for smaller contractors but we -- our products do end up in new construction as well. So even though that's a small part of our overall business, we'll have to watch the pro side a little closer.

Got it. Very helpful. This makes a difference. And if I could follow up. I mean you spoke to kind of what you're seeing destocking relative to each channel. And I think it was kind of DIY and then pro channel to the most as of late. Wondering if you could just kind of cover the other channels in terms of maybe, relatively speaking, how they're being impacted from destockings.

Yes. Well, it's very similar. A lot of our e-com channels are linked or related to brick-and-mortar, right? They're brick-and-mortar customers that sell online and it's the same effect as far as the destocking goes. The same -- we're seeing the same on our hospitality distributors that we deal with as well, although that's actually picked up a bit. We are seeing, since our Kitchen and Bath show that we were at in January, we've seen a little bit more activity on the hospitality side than we have on our typical pro-business. So yes, I mean, I think it's industry-wide sort of overall average. I don't think one channel has particularly outperformed another. I would just say, in general, that retail seems to have broken first, in a sense, than more of the pro or commercial side of our business.

Got it. That's helpful. And I wanted to ask you on gross margins. Nice to see strong performance there despite the lower revenue. And I think in your prepared remarks, you mentioned some other drivers of gross margin expansion going forward. It doesn't sound in the near term but could you maybe elaborate on what those factors could be?

Sure. So we've mentioned and when we've posted some of our results by category, we've really experienced exponential growth in our shower systems business and our kitchen business. And that's where I think we'll be originally going back to the beginning of 2022 when we first went IPO, we talked about our BPC strategy. We really anticipated a large growth area there in those higher-margin categories. And we continue to do that and we're continuing to see that. So -- and not only that. I think I've talked about -- not getting into the weeds of all of our product categories. But we've talked about how we're reengineering the mix of all of our programs, including our cabinetry and the sanitaryware business. So we're really reengineering the mix in every one of our product categories to continue to grow not only the brands but on the image and -- but the quality of the product, the ticket, the margin. But what we're seeing, first, we're seeing the impact of the shower systems business and the kitchen growth. That was part of -- that's part of the margin driver. That's part of the reason you saw a margin improve but that's also the drivers that you're going to see and we expect, going into the balance of this year as well.

Okay, understood. I guess the last one for me. I just wanted to see if you can speak to the impact that you're still seeing from the supply chain disruptions. I'm trying to get a sense of whether they're changing at all or if they're kind of the same over the last several quarters.

Yes. I would say now that things have pretty much moderated. There's always blips on the screen, so to speak, as it comes to supply chain. But as of right now, I would say that we're almost back to a pre-pandemic level as far as disruptions. So we're getting -- we have a lot more cadence now on our ordering and our deliveries. So yes, that's no longer on the radar right now as a threat for the year.

This concludes our question-and-answer session. I would like to turn the conference back over to David Bruce for any closing remarks.

Well, 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.

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