Release Date: November 12, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• FGI Industries Ltd (NASDAQ:FGI) reported a significant year-over-year revenue increase of 20.6%, reaching $36.1 million for the third quarter.
• Gross profit reached a record $9.3 million, marking an 18.9% increase compared to the previous year.
• The company experienced substantial growth across all its markets, with revenue increases of 21% in the US, 9% in Canada, and 39% in Europe.
• Bath furniture revenue surged by 64% year-over-year, driven by a shift towards lower-priced offerings and alignment with market pricing and design trends.
• FGI's custom kitchen cabinetry segment, Covered Bridge, saw a remarkable 93% revenue increase, supported by strong dealer and customer expansion in the US.

Negative Points

• Gross margin declined slightly to 25.8% from 26.2% in the previous year, partly due to higher freight costs and a mix of sanitary ware and bath furniture.
• Operating expenses increased by 27.6% to $9.4 million, attributed to ongoing investments in growth initiatives, impacting profitability.
• GAAP operating income turned negative at $0.1 million, down from a positive $0.5 million the previous year, due to lower gross margin and higher operating expenses.
• The company's revised guidance for 2024 projects adjusted operating income to be between negative $1 million to break-even, a downgrade from previous expectations.
• The industry outlook remains relatively flat, with customers forecasting minimal growth in 2024, posing a challenge for sustained revenue growth.

Q & A Highlights

• Warning! GuruFocus has detected 4 Warning Signs with FGI.

Q: Can you explain the components of the year-over-year growth in the quarter? Was the growth in bath furniture a one-time stocking benefit or an ongoing trend? A: (David Brooks, CEO) The growth is not a one-time event. It resulted from reengineering our product assortment to align with market pricing trends. We've seen new placements and market share gains, and we expect this growth to continue as we build on this new business.

Q: What impacted the gross profit margins this quarter, and is the current margin level expected to continue? A: (David Brooks, CEO) The margin decline was due to increased ocean freight rates and larger cabinet shipments, along with promotional costs for new bathroom furniture. We expect margins to return to previous levels, around 27%, as freight rates normalize and promotional impacts lessen.

Q: Why did the profitability guidance decrease despite revenue outperformance? Was this due to freight and promotional costs? A: (David Brooks, CEO) Yes, the lower profitability guidance is primarily due to increased freight costs and promotional expenses. We are confident in our ability to leverage operating costs and expect these investments to yield positive revenue results, improving profitability in the near to mid-term.

Q: What are your customers' expectations for 2025, given the recent changes in interest rates? A: (David Brooks, CEO) There is cautious optimism in the industry. While the outlook is muted with expectations of zero to low single-digit growth, we are gaining market share in key categories. If interest rates improve, it could spur additional market activity.

Q: How do you plan to manage operating expenses given the current investments in growth initiatives? A: (David Brooks, CEO) We expect to leverage our operating costs effectively, particularly in new business areas like Ila Porter and kitchen growth. These investments have short-term impacts on the bottom line but are starting to drive positive revenue results, which will help reduce the operating expense ratio over time.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.