Dorel Industries Inc.

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.

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.

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.