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spk01: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to DOREL Under Street First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we'll conduct a question and answer session. Instruction 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 would like to remind everyone that this conference call is being recorded today, May 6, 2022. I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.
spk02: Thank you. Good afternoon, everyone, and thank you for joining us for Dorel's first quarter earnings call for the period ending March 31st. On the line with me are Jeffrey Schwartz, CFO, and Frank Morana, VP of Finance. We will take your questions following our comments. And a reminder that all figures are in U.S. dollars. Our first quarter was affected by a continuation of the supply chain issues, which have plagued companies for the past two years. This continues to make it difficult to get sufficient product to meet demand and has increased the cost of goods. There is nonetheless optimism across the rail as we are doing the things we need to do to prepare for a better future. We are actively pursuing many projects and are strengthening customer relationships to get the business where it needs to be once the current environment improves. So yes, many of the last quarter's issues remain the same, but our employees are fully engaged and collectively we are feeling optimistic about the process underway. Our fundamentals remain strong and our strategic plan in both segments remain on track. At the rail home, post-pandemic demand was down from the high of last year due to COVID prolonged stay-at-home period, plus the quarter's lower sales were affected by the continued erratic supply chain which did not allow all orders to be filled. The reduced sales translated into lower profits, but other factors such as high freight, pre-straw material prices, and warehousing costs also ate into the bottom line. Nevertheless, it certainly is not all bad news. The machinery that we have previously mentioned is now fully installed and operational at the segments ready to assemble factories in Tiffin, Ohio, and Cornwall, Ontario, and is already providing productivity efficiency. As well, new mattress production lines at Darel Home Products in Montreal are now running. We are pleased with the quality of these new mattresses being produced locally and will soon add more equipment to manufacture upscale products. There are several benefits to having our own Canadian mattress operation and controlling our own destiny. Major benefits include no tariffs and anti-dumping duties to deal with, no high freight costs to pay, as well as our ability to be faster to market with our products. The new machinery at all the rail home factories will not only augment our domestic production, but will importantly, will also help increase margins. Another encouraging sign was the important pickup in business at the rail DIY retailers. Historically, these have been smaller accounts, but the growth in this category was significant this past quarter. Also on the bright side is the consistent growth of our branded furniture lines. The REL Juvenile's Q1 revenue increased as demand was strong in most markets, although supply issues, which limited some available finished goods and components, prevented an even better performance. The U.S. was the most significant contributor as travel systems, strollers, and infant health products were popular with consumers. This more than offset lower sales of car seats, which were hurt only by the lack of available components, notably car seat covers, stemming from supply chain issues. As of late March, finally, with the arrival of the required components, production levels improved at the Columbus car seat factory. In Europe, performance was considerably better compared to the second half of last year, even though the region was affected by a lack of key items. Again, demand has been there, but getting the goods is still an issue. We are encouraging Europe as we're seeing increased sell-through at the consumer level. The team there is invigorated as new products are being introduced and several innovative programs are being launched to increase market share. The rail juvenile goods are moving in stores, which is validating the many efforts that we have made. Sales in Chile and Peru grew by strong double digits in the retail and wholesale channels, although this had some negative impact on e-commerce sales. This was not unique to us, but across many industries as shoppers returned to brick-and-mortar locations. Turning now to our outlook, I must say that visibility is still difficult. Volatility and earnings should continue, giving rising inflation and its direct impact on input costs. and the potential of slowing consumer demand. The war in Ukraine is also affecting the economy. Things in Eastern Europe are difficult. And as an example, in Germany, people are nervous and have slowed down shopping for anything but essential items. Russia's invasion is adding to the increase in energy prices everywhere, further feeding record inflation. Right now, we are seeing some improvements in the supply chain situation out of Asia, with better container availability and a stabilization of pricing, although still high. The rail home remains challenging, given the lower consumer demand for furniture overall, and with the attitude toward COVID changing, purchases for the home have slowed. We continue to focus on what we term nearsourcing, with our newly installed machinery, our branded furniture lines, and the integration of our recently acquired European business, Nadio, although it too has been affected by the war. This will put us in a leading position as demand for our product picks up in a more stable environment. Juvenile, the market most impacted by uncertainty, is Europe. The devaluation of the euro to its lowest level in over five years relative to the US dollars and retailers ordering more cautiously means our outlook for the second quarter is less optimistic than it was. We will not allow the current challenges to detract from our long-term direction, and we believe our strategy on recapturing market share remains valid. We are actively working with our retail partners on enhanced marketing, store investments, and the rollout of our new products in Europe, but the positive impact of these actions may be delayed. I'll now ask Jeffrey to review the numbers.
spk04: Thank you Martin about to some numbers quickly. For the first quarter of 2022. There else revenue declined by 10.5 million or 2.4%. Adjusted organic revenue declined by 1.4%. The revenue and adjusted organic revenue decline was in the home section offset partially by improvements in the real juvenile. The real juvenile. revenue and adjusted organic revenue improvement was in virtually all the markets. So that was good news. Looking at the gross profit for the company, it decreased by 13.4% or 13.4 million or 15.6% compared to last year. Gross margins were 16.9 in the first quarter, declining by 260 basis points from 19... 0.25% in 2021. The decline in the first quarter was in both the home and the juvenile segment. Margins were negatively impacted by, you know, particularly in the juvenile, besides the regular costs that we've talked about, like freight and input costs, but the impact of component shortages that didn't allow our manufacturing activity to be normal and therefore increased our overhead costs. Before we get into each segment, I want to make a note about financial expenses. So the financial expenses increased by $5.7 million to $12.6 million. But of that 9.1 of the 12.6, is related to the extinguishing of the senior unsecured note, which happened after the transaction. So I think it's important to note that that number is really related, not to the operations of the business, but to the transaction that happened at the beginning of the quarter. And of the 9.1, 6.4 was a cash amount. The other was a... was a non-cash event. The cash amount was included when we discussed with the market and with the street. The difference between gross and net, you know, 6.4 was already counted in that area. So I just wanted to highlight that because I think it's a significant number in the quarter. We look at home now. We move to home. First quarter revenues declined by 17.2 million or 7.5%. You know adjusted organic revenue declined by 10.5% if you remember we did add the no deal living. Acquisition to to our business. Daryl Holmes revenue from the direct import business in the first quarter. was lower as a result of supply chain disruptions that continue to persist. Last year's revenue benefited from a strong demand created in response to consumer needs and in particular home office furniture during the prolonged stay at home period caused by COVID. From the gross profit standpoint, gross profit for the first quarter decreased by 8.2 million or 26.1% compared to the first quarter. Gross margin at 11% in the first quarter declined by 270 basis points. The first quarter decline was due to, you know, higher warehousing costs, significant increase ocean freight costs, and substantial increased board and overseas finished goods costs. Now, we have raised prices, but we did not have the price increase go through on January 1st. So, you know, by the end of the quarter, the margins were improving over where they were at the beginning of the quarter. And for profit, the REL homes operating profit declined by 9.3 million or 62.7% to 5.5 million this year. The decline, again, mainly due to lower revenues and lower gross margins, as we discussed. We move over to juvenile. The juvenile first quarter revenues increased by 6.7 million or 3.2%. If we look at the organic revenue, it improved by 8.9%. after we removed the impact of various foreign exchanges and the prior year revenue that we had from the Chinese manufacturing facility, which was still in our books in the first quarter of 2021. The most significant contributor to the increase was the U.S. market, principally from the sale of travel systems, strollers, and infant health products. That more than offset lower car seat sales, which were severely hampered by a shortage of components. coming from Asia. Europe continued to suffer slightly from the lack of items, but the situation has greatly improved from the second half of last year, and revenues were slightly better than last year. We're seeing pretty strong results as well in the Chile and Peru area. Brazil's top line was also impacted a little bit in the quarter because of high out-of-stock levels. The same thing happened in Canada as well. On the growth profit area, the first quarter it decreased by 5.2 million or 9.6% compared to last year. First quarter gross margin was 22.6% representing a decline of 320 basis points. The decline was mainly due to increased container freight costs and higher input costs overall. Additionally, margins were negatively impacted by the component shortages as mentioned in the factory leading to lower manufacturing activity. Price increases are in place in all the markets now, though timing limited their positive impact, you know, in the quarter. Product liability costs increased by about 8.5 million for the quarter. as we had significantly more activity than is normal in that period. As anyone who's followed the company knows, we can go a long time without having anything significant. And in this quarter, we just had a number of cases coming to the end of the line. The good news, looking forward to the rest of the year, we see a lot less activity than normal. So certainly more in the first quarter, but I think we're not foreseeing anything to that level for the rest of the year. The last little area has been corporate expenses. Just pointing out that $2.2 million of the increase or of the expenses is related to an unrealized FX impact. Because I know that that stood out as a significant.
spk00: You know.
spk04: And with that, I'll turn it back to Martin.
spk02: Okay. Thank you, Jeffrey. Okay. I'll now ask the operator to open the lines for questions. And as always, I ask, okay, please keep your first round of questions to operator.
spk01: Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press the star followed by the number one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please for your first question. Your first question comes from Derek Lassalle from TD Securities. Please go ahead. Your line is open.
spk03: Oh, sorry about that. Good afternoon, everybody. You mentioned that you were seeing some improvement in the supply chain. Just wondering if you could maybe talk more about that, what you're seeing and maybe how container costs are trending.
spk04: I always tell people supply chain is a huge category with lots of subsets underneath it. If we're talking about container availability, we are seeing definite improvements. We expect to be much more in stock by the second half of the second quarter. So that's the good news. Pricing is down a little bit in the spot market, which is a good indication. But contract pricing is up significantly over last year. And that's what we end up using. Contract pricing generally is lower than even spot pricing. So it's looking like it's getting a little softer, but we still have to deal with issues like the shutdown in the Shanghai region and all the ships that are there. What's going to happen when that opens up and all those ships get filled and they all start coming to ports on the west coast of North America at the same time? You know, I think that's going to be another wave of delays. So it's getting a little bit better there. But, you know, on the other side, you know, if you look at Europe, you've got things like trucking is very difficult now in Europe. There's a lot of truck drivers coming from the eastern block of the European countries. And, you know, the wars sort of slowed that down. So there's always seems to be other all sorts of issues that keep popping up and we have to deal with them.
spk03: There seems to be a difference between the pressures that you're seeing in Europe versus the U.S. I guess you alluded to one of them being trucks. Is there anything else that's making it more difficult?
spk04: The containers in Europe are actually a little bit easier right now. We are getting supply. We need to get it out of But again, I think I'm talking about right now. I'm not talking about the first quarter. But right now, we're getting the goods that we need to get so that we can fulfill the demand and really see the potential. It's been extremely frustrating, particularly on the juvenile side, where we think we've got, you know, increased listings, increased products. We've got, you know, better stuff happening, better relationships happening. with our customers, and yet we can't get enough stock into the system to really see if it's working financially, if you know what I mean. So hopefully we start to see some of that in the second half of Q2.
spk03: Okay, that's a good color. And congratulations on the startup of the new machinery lines. Just curious how much those two plants mean to overall consolidated revenues in homes.
spk04: Figure that out. Right now, what we're seeing, let me just tell you what we are seeing, what we're not seeing yet. We are seeing significant increased efficiency. So our factories are putting out significantly more product per day than they had in the past. Demand is down a little bit. You know, there's a lot of inventory in the system, depending on which product. So we're not seeing, you know, the same demand as we were seeing last year. So we can't push the production to where we want to go. We hope to change that as we introduce more and more domestic products, which we're in the process of doing throughout the year. And margin-wise, again, we're seeing the efficiency improving the margin, but then we've got significant cost increases on particle board and all the other inputs and get raising prices again, but there's that whole process. So we're not seeing necessarily yet the benefit from all of that, but I think it's all in place. So, you know, hopefully we'll be fine.
spk03: Okay, Jeffrey, I'll reach you. Thanks.
spk01: Your next question comes from Stephen McLeod from BMO Capital Markets. Please go ahead.
spk05: Thank you. Good afternoon, guys. Just wanted to follow up on the pricing. You know, you talked about juvenile and home in both situations or both segments you've put through price to offset some of the inflationary challenges that you're seeing. Sounds like some of that you began to see in the quarter, but maybe not to the full extent. So I'm just curious what it looks like with respect to when you might expect to see price coming through into margins.
spk04: Yeah, that's the big question, Steve. I mean, when is inflation going to slow down? When is the next price increase going to stop? Then we can answer the question. I mean, we're just, we're always in catch-up mode. We're always, we can't be any more proactive. If anything, sometimes we're more proactive than our competitors. But, you know, we raise prices to cover, you know, the freight And now there's other things happening out there. So it's difficult to know when we're actually going to finally see the impact in the gross margins. It's just it's so much uncertainty out there. You know, in Europe, we've got exchange rates, right, or around the world other than the U.S. You know, exchange rates have moved significantly in the last month, negatively, by the way, to us. So, you know, are we going to price for that? Is it going to come back? We don't know yet. It's still early days, but extremely frustrating by all the different elements of pressure on the margins that we're seeing. Right. Okay, okay.
spk05: And then I just wanted to turn to one thing specifically with respect to the mattress manufacturing that Martin was referring to. You mentioned it's higher margin, and I'm just curious, like how much higher margin is it than other home manufacturers?
spk04: type product? We're looking to be, you know, 800 to 1,000 margin points, I guess, higher. I mean, again, not every, you know, depending on what we're doing. I mean, we're doing some volume stuff, but, you know, it's a low margin business in general right now, especially under all the pressure. I mean, our standard margin should be a lot higher than our reported gross margins in that industry. But nevertheless, we think that we can put a program together with domestic manufacturing that gives us even higher margins than the average standard margin that we're supposed to have. I mean, it's quite a benefit for everybody because right now, you know, just getting stuff out of Asia is difficult. Plus, you've got all the cost of transportation and Plus, you've got just the uncertainty of having to order lots of inventory. We can make it, and we believe we're making a really good product. We've had some significant retailers in to see the manufacturing facility, and they're interested. So we're pretty upbeat. I mean, we don't have all of these people online yet as customers, but we're talking to people that we could never talk to before because they weren't interested in buying imported mattresses, but very interested in domestic. And again, a lot of these are all lower priced mattresses than, you know, the names that we're all familiar with. Yeah, the market sector. Yeah.
spk05: Okay. And then maybe one more if I could just just with respect, you talked about normalized margins being like should be a lot higher. Can you talk about where you think normalized margins would be in both segments where you're not seeing all this inflation and noise? Is there something that people can answer to?
spk04: I think we have to just go back to history and say, can we be at 15, 16? Again, we're talking gross margins here. We're talking net margins, but certainly on the gross margin, that's what this business is. It's a business that should be averaging definitely north of 15, 16. We've just been struggling in the last couple of years with all the changes and all the stuff that's happening.
spk05: Yeah, and those are home margins you're talking about, 15 and 16. Yeah, talking about home margins?
spk04: Yeah. Juvenile, I actually think they move quite a bit. I always look at juvenile as a business that is from an operating leverage point, has a lot of upside. If we can increase, we don't need to increase double the revenue to double the earnings, right? And we're at that, we're looking at that from our point of view, and we're saying, you know, it's not that much more where that operating leverage really kicks in and you really start to see increased profits quickly. So we're fairly upbeat on the potential for Juvenile. Just need to get all these clouds out of it.
spk05: Okay, that's great, Collin. Thank you.
spk01: Your next question comes from Derek Lassalle from TD Securities. Please go ahead. Derek, your line is now open.
spk03: Sorry, I keep muting myself, but just a few more for me. You know, you did mention some of the increased liability costs that you took in the quarter. Curious on how much visibility that you guys have. I know you said you don't have any major, I guess, costs coming up for the year, but how much visibility or advance warning do you have on these things?
spk04: I mean, we could see the calendar as to which cases are actually going to come to, I don't know what the right word is, like a resolve, resolvement, I guess is the right way to say it. So, you know, we can see what's on the calendar for the rest of the year. We can't necessarily see into next year. I mean, many cases that, you know, we're notified of don't actually even end up being cases. Some of them just fade away. Some of them get settled quickly. Some of them, you know, will fight. I mean, depending on a whole bunch of things, and I don't want to get into it now. So we know what's on the sort of likely to be resolved for the rest of the year. And it is, you know, it's lighter than it's been, than the average would be.
spk03: Okay. And on the corporate expense side, there was a jump recently. to $8.5 million, I think, from 3.8 last quarter. What was driving that?
spk04: I think I mentioned before, maybe you missed it, 2.2 of that is FX impact. I mean, corporate ends up being everything that doesn't fit into a division, including some hedges that we have between areas and corporate. So 2.2 of that is an unrealized FX pitch.
spk03: Okay. Okay. And maybe one final one for me, and it might be a bit of a harder one to answer. I was just wondering, you know, how you guys view the macro environment and how that could, you know, potentially impact you from maybe unlocking more value from one or both of your businesses.
spk04: The macro environment right now makes it unwise to try and do that. I don't know that it impacts the value of these businesses in the midterm or when we can unlock it. We're very, very, very focused now on doing the things we need to do to create value. We also have to deal with the you know, the reality of the day-to-day operations. Somebody in our organization, I'm going to quote him. I liked it. I feel it's appropriate. It's like on a week-to-week basis, we're seeing a lot of progress, but on a day-to-day basis, man, it's tough. It's really, really tough. Like there's always something popping up that we have to deal with. There's another kind of curve ball and, you know, we're, a component doesn't show up because it's stuck on a boat because there was a fire. I mean, you know, or this port is on strike or, you know, all of those things are happening all the time and they all go right immediately to your bottom line. So we got to look past that and say, you know, we got to deal with it, but we also need to do the things that we need to do. You know, as an example, in home furnishings, we need to continue to expand our European business. I mean, right now it's suffering because of the war, But that doesn't mean we don't go out and get new accounts and we don't start listing products all over the place, even if sales are down. So on one end, you know, we know that the work we're doing today is going to pay off. But when you look at the end of the month, you don't see it. So we've got to wait for the clouds to disappear and then see where we are. We want to come out running when things open up again. And then we'll know timing. We don't even talk timing now. We don't know. We just have to do the thing so that this business is going to be better when it's back to normal.
spk03: Okay. And it hasn't impacted, I guess, any of the conversations that you might be having?
spk04: We've been transparent with the market. One day we're going to do that, but today's not the day. It's really not the day today. So there's no point talking to anybody or anything. There's nothing, you know, we got to fix the businesses. And while we're fixing them, we have to deal with all of this day-to-day craziness that the world's in now. So let's, you know, it's really two prongs. We really have a two-prong approach dealing with, you know, day-to-day trying to get as much as we can in our quarters. But at the, you know, as important or more important is, You know, are we doing the things so that next year this business is going to be in a much better spot? Do we have the right products listed with the right accounts? Do we have the relationships right? You know, is our marketing better? Is our branding better? All of those things aren't necessarily being done for this quarter, but they're being done for 23 and 24. So we'll have to see. So there is no news on timing.
spk03: So much, guys.
spk01: presenters. I know further questions at this time. Please continue.
spk02: I'd like to thank everybody for being with us today. And we wish you all a pleasant weekend and special wishes for a great day Sunday to all the mothers out there. Thank you very much.
spk01: Ladies and gentlemen, this concludes this conference call. You may now disconnect. Thank you.
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