Dorel Industries Inc.

Welcome to Durrell Industries' fourth quarter 2021 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I'd like to remind everyone that this conference call is being recorded today, March 11th, 2022. I'll now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.

Martin Schwartz Hi, thank you. Good morning, and thank you all for joining us for the REL's fourth quarter and year-end earnings call. The period ended December 30th. With me are Jeffrey Schwartz, CFO, and Frank Rana, VP of Finance. We will take your questions following our comments. Again, all figures are in U.S. dollars. A key objective of any public company is to enhance shareholder value. Our efforts to do so have paid off handsomely with the sale of the rail sports. The team built an excellent bicycle business over the years, and we sold it in October at a very attractive price. Our timing was excellent, growing the business as the demand for bikes surged, particularly during the peak of COVID. We rewarded shareholders with a special dividend, disbursing $390 million to them. We also used the net proceeds to pay down debt, and our balance sheet is stronger than ever. We now intend to grow Dorel Home and Dorel Juvenile as we did sports. Our strengthened balance sheet places Darrell in a firm financial position, which gives us the ability to solidify these businesses and sustain the current downturns. Turning now to the fourth quarter, record inflation, continuing global supply chain issues, and higher costs for products, services, and commodities pressured margins, creating a negative effect on earnings at both Darrell Home and Darrell Juvenile. Demand for our products was steady, but we were unable to secure the necessary goods or parts to fully satisfy consumer requirements. Six months ago, the problems were the result of COVID-related shutdowns at our suppliers in Malaysia, Vietnam, and China. Today, suppliers are up and running, but it is the shortage of containers that is causing delays in shipments. We are making investments and changes to strengthen our operations and expand our domestic production At the rail home, the erratic supply chain was a problem throughout 2021, with no relief in the fourth quarter, resulting in substantial cost increases on imported and manufactured items in warehousing, freight, labor, raw materials, among other things. The container situation has not improved, and this has seriously hampered the rail's ability to introduce several new products as the procurement process remains difficult. Home has announced product price increases effective late first quarter. Depending on future cost increases, another round of price hikes may be required. Reducing warehouse and distribution costs has been a prime objective for the segment. There was an urgent need to correct operational issues. I'm pleased to say that the rail home senior management has done an excellent job in regulating things. Management changes have been made at the Savannah facility leading to vast improvements. The backlog of incoming product was cleared in late November. The speed to ship product to customers is much better. Plus, square footage in Savannah has been reduced. The investments to upgrade our North American manufacturing facility should bring results by Q2. The addition of new equipment at AmeriWood's RTA plant in Tiffin, Ohio and Cornwall, Ontario, are being implemented and will increase domestic production through 2022. New machinery at the Rail Home Products Montreal factory is almost complete and will permit the expansion into domestically manufactured coiled spring mattresses for the North American market. These additions across our plants will return some production from Asia. There is great potential from these initiatives which will permit increased volumes and the production of higher quality items, which will translate into higher margins. The acquisition of Norio in Europe allows HOME to consolidate operations and strengthen management, with Norio taking the lead in the segment's growth initiatives to expand into the European mainland. New items will be introduced in Europe, utilizing North American designs and brands adapted to European tastes and standards. We foresee exciting opportunities as a result. Branded sales again increased, beating prior year by almost 20% with further growth anticipated. At the real juvenile, the procurement landscape in Asia also remained difficult as COVID continued to impact the supply chain. No commodity prices rose through 2021. Overall, we kept costs at a manageable level. allowing us to successfully pass on price increases in most markets. Juvenile has been proactive in attempting to mitigate the higher procurement prices by, among other things, migrating the production of some of the soft goods to Mexico. Regarding sales, most juvenile markets did better than last year, except for Europe, which continued to suffer from shortages created by the supply chain bottleneck. Additional changes were initiated in Europe, including a new brand strategy, positioning Maxi Cosi as a powerful global brand in the mid to high end for specialist stores, and Baby Comfort in the mass market. In the States, Juvenile benefited from strong consumer demand, notably in car seats and umbrella stroller categories. There have, however, been delays in getting components due to the supply chain challenges. Importantly, our U.S. domestic manufacturing footprint at the Columbus factory remains a definite competitive advantage. In line with the segment's overall strategy of simplifying the organization, improving cash flow, and bringing a broader product line to market faster, the REL Juvenile sold its remaining manufacturing facility in Wangxi, China, late in the quarter. Going forward, the focus will be on co-development opportunities with a wider supplier base bringing up resources to concentrate on product innovation and branding. It was also decided to streamline the activities of the juvenile distribution business in Shanghai. There are several Q4 product launches, including a new line of car seats in Europe and maxi-cozy items in the U.S. Turning to our outlook. Earnings via visibility is a significant challenge going forward for both segments, with the volatility in earnings likely to continue into 2022. Lack of container availability and higher shipping costs are expected to persist. Coupled with rampant inflation and the current terrible humanitarian situation in Ukraine, this makes the predictability of our earnings very difficult. At the rail home, higher input costs will translate into increased retail prices, which with inflation may limit consumer purchases. Though we have resolved many of our internal North American warehouse issues, the overall supply chain remains fragile and could create further challenges. Our investment in domestic production will give us a competitive edge going forward, but in the short term, earnings improvement could be a challenge. Juvenile's poor performance is the result of European losses, negating earnings in other markets. We have made changes in the organization, which we expect will drive improvements. Our product portfolio is strong, and with it, we are actively improving key retailer relationships, which is important given the need for price increases. COVID and supply chain issues have delayed our turnaround strategy in Europe, but we remain convinced we are on the right track. We are among the leaders in our other main juvenile markets and remain positive about our future prospects. We sell across all price points, which will protect us somewhat from consumers trading down in the face of higher prices. But with the principal concern of supply, earnings visibility is limited. I'll now Jeff, I'll ask Jeffrey to review the numbers. Jeffrey? Jeffrey Siedman Thank you, Martin.

Before I jump in the numbers, I just want to remind everybody some of the major transactions that happened in Q4, which is unlike many other quarters. So, of course, on October 11th, we announced a deal to sell our sports group to Pond Holdings for $810 million in cash. That was closed on January 4th of this year. And then Doral went on to pay a $12 U.S. dividend per share to all its shareholders, and in addition to that, of course, paying down a significant amount of long-term debt. Other things that happened during the quarter, at the end of November, we announced the acquisition of Nodeo Living, an e-commerce home furnishing brand based in Denmark, for $17 million. We also, as Martin mentioned, sold our last remaining factory in China. We are now officially out of the manufacturing business in Asia. We will buy from third parties. And, of course, on a negative note, in October, we had a ruling against us by the Luxembourg Administrative Tribunal which said that we owed $64 million U.S. in taxes, including interest. So those were the big events that happened during the quarter. If we now look at some of the numbers, in the fourth quarter, Durrell's revenue decreased $3.8 million, or 0.9%. If we look at organic revenue, as well as removing the impact of the sale, of the juvenile facilities, our organic revenue was flat. Making up that is, you know, the Doral home, which had some declines, but Doral juvenile had some improvements. The gross margin, I mean, that's really the story of the fourth quarter. Our margins have been squeezed by various different supply chain issues. uh, cause, you know, was going back a year. I think everybody on the call knows, you know, why we have all these issues, uh, but they have a significant impact on Doral. Our gross profit dollars were down, uh, 48.4 million or, uh, almost 50%. When we exclude restructuring costs, um, the adjusted gross margin decreased by 780 basis points, uh, from, uh, was 22.2% last year down to 14.4% this year. So, uh, that's really, uh, in our eyes, the story of the quarter, um, the decline was in both home and juvenile. I mean, home, you know, we'll, we'll, I'll get into a little bit more detail when we talk about home, um, as well as juvenile. But like I said, gross margin is really the story of the quarter. Um, Finance expenses for the company was increased to $8.1 million from $7.5 the previous year. That, of course, is going to be significantly less going forward because of our new debt structure. And in the fourth quarter, the effective tax rate was 13.6%. The net loss from continuing operations during the quarter was $29.6 million, $0.91 per diluted share, compared with a $13.3 million loss, or $0.41 in the previous year. Excluding restructuring charges, adjusted net loss for the quarter was $12 million, or $0.37, compared to $9.8 million, or $0.30 a year ago. If we move over to homes, Home's fourth quarter revenues declined by 3.4%, 3.4 million or 1.4%, to 230.7 million. Last year's first quarter was heavily impacted by delayed shipments from China, resulting in the supply chain disruptions in that country. So, again, everything that we've got, uh, is really related to supply chains going forward. Now the gross profit, uh, as we said, it decreased by 16 million, uh, dollars or 43.6% compared to a year prior to that. And the gross margin was only 9.1% in the fourth quarter. Um, and that's down the 670 basis points. So let's, let's take a little bit of time to explain, you know, what is happening here. Um, They're all, you know, increased price costs have a severe impact on a furniture company, as one could imagine. When a container goes from, you know, $2,000 to $15,000 in an 18-month period, and there's only maybe 300 or 400 bunk beds or sofas on the container, the increase is significant. And therefore, our pricing has to go up significantly. So just the increase in ocean freight was huge. Warehousing, we had significant issues in our East Coast warehouse related to COVID. COVID hit us over the summer. Just when we were getting in significant amount of containers and had quite a bit of orders, we had significant drop in attendance for a number of weeks, and the backlog took months to clear up. In fact, we paid this year in demurrage and detention, which is basically rent on the containers that are not unloaded, $8.5 million. And that is, you know, by far a huge record. And, you know, in theory, we should not be paying anything. I mean, in a normal year, you probably end up maybe about a million dollars or so. But the eight and a half last year was certainly a major pain. We are, as Martin said, we've made a lot of changes. We are getting back to clearing containers on a timely fashion. We're getting our product shipped at the door on a much faster rate than we have in the last six months right now. So I think we've turned the corner and we're starting to see an actual increase in dropship orders because our speed of delivery has increased. In addition to that, you know, what I haven't talked about is just raw material price increases, labor increases, finished goods from various places in Asia increases. All of this is happening. And then as we look at things now, you know, you're going to see fuel increases. So We are in the middle of a storm. Visibility is difficult to know when this thing will end. We respond to all of these increases by increasing our prices, as does everybody else in the marketplace. So it's not necessarily a competitive issue. But what we do is we question what some people what is going to be the response of the market to significant price increases on large goods that freight has sort of increased significantly. So a lot of unknowns there, but overall, you know, we think our product range is good and we have a lot of new stuff that we're offering. So we have to balance sort of the newness with the margin squeeze. And we feel like when all of this storm sort of dissipates, and we don't know when that's going to be, we'll be in a good shape to move forward quickly. So our operating profit, which really took a hit, was declined by $13.5 million to $4.3 million from $17.8 million. And then the adjusted operating profit declined by $13 million to $4.6 million. As I explained, it's mostly all in the margins. Expenses are normal, and business is fairly normal other than the margins. The juvenile, a little bit of a different story, but still with the same theme of supply chain problems. Fourth quarter revenue declined by 0.2% to $204 million. Organic revenue was flat when we removed the impact of exchange rates, and then organic actually went up by 2.6% when we removed the impact of the sale of the Chinese factory in the fourth quarter. We're seeing improvements in the United States. Sales are growing there. The Chilean market, which was fairly closed in 2020, is opening up and we're starting to see a nice rebound in that market over there. These improvements were offset by declines in Europe as supply chain shortages have really hurt us there. Getting containers delivered in Q4 to Europe was extremely difficult. We had introduced a lot of new products. A lot of it was doing really well. And then supply just kind of stopped or was significantly delayed. So our best and hottest products, we couldn't get to market fast enough. And that obviously had an impact on our sales, which then, of course, had an impact on our margins and profitability. So we are looking forward in Europe to seeing some changes there. We also had another issue in Europe where in 2021, we were not contractually not able to increase our prices to a number of accounts. That is now changed and price increases have started in 2022. So we're expecting to see This year, in 2022, a nice rebound in our European business as we're seeing success in the products that we're introducing. And hopefully now with our margins starting to look a little bit better, we're going to see better results. If we look at gross profits, like I said, that's been the problem. They decreased as well. significantly, excluding restructuring costs, our margin for the quarter was 20.4% down 910 basis points. And again, the decline is the underperformance of Europe that was affected by lower sales volume. Overhead absorption really takes a hit when your sales drop like that, and then it all shows up in the gross profit line. Supply chain disruptions, as I've talked about, and of course, higher costs of everything that's coming in and not being able to raise prices in Europe certainly hurt us. And the operating loss in the quarter was 26.7 compared to a profit of 1.9. If we exclude restructuring costs, the loss increased to $8.9 million from an adjusted profit of 5.6 the year before. With that, I mean, I know it was a disappointing quarter number-wise, but, you know, I think what Martin's talked about, I've talked about, that we're focused on fixing parts of business that aren't working and enhancing the parts of the business that are, so that when this storm lifts, and we do believe it will lift, we'll be in a good shape. With that, I'll pass it back to you, Martin.