Dorel Industries Inc.

Welcome to Dorel Industries' second quarter 2022 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 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 is being recorded today, August 9, 2022. I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.

Thank you. Well, good morning and thank you for joining us for Darrell's second quarter earnings call for the period ended June 30th. With me are Jeffrey Schwartz, CFO, and Frank Rana, VP of Finance. We'll take your questions following our comments and a reminder that all figures are in U.S. dollars. It's safe to say that in most industries, things are difficult. I cannot remember when conditions were like this. First, the pandemic. And this year continued supply chain challenges, the war in Ukraine, high inflation and rising costs. It's next to impossible to plan properly as things are so unpredictable. We are working our way through the many issues and I'm confident that things will get back to normal. Dorel will prevail. I will now take you through each of our two segments, what we have been facing and how we are dealing with things and where we're going. At the rail home, the second quarter began with serious supply chain problems, from no available containers to logistics and unloading issues. However, as the quarter progressed, some of these matters eased to the extent that goods began flooding in at a time when consumer spending habits were changing dramatically. Furniture industry sales online and in-store decreased markedly from the peak pandemic periods. Consumers increasingly worried about high inflation, focused on food and gas purchases, and were traveling a lot more. This move away from furniture purchases created an inventory glut for us and also for our retail customers, who have slowed ordering. With lower volumes, price increases introduced during the quarter did not sufficiently offset high operating costs. The war in Ukraine also slowed the rail home's European expansion. As well, in Germany, the most important market, Sales there have been hurt. The segment is now dealing with these matters head on. An aggressive inventory reduction program is underway, and since the end of Q2, there has been progress. We expect levels to be more balanced by year's end. Part of the solution is a series of promotional programs, which will have short-term pressure on margins. Costs are at least stabilizing, and ocean freight rates, which have been off the charts, are also steadying. The first half reduction in sales has been at our major retail and online customers. But interesting, there have been significant increases this year in DIY and specialty stores. The rail home strategy of going wider with more accounts is paying off, even in this environment. Branded sales, which have grown steadily, will be expanded into Europe as soon as things start improving there. We are quite confident in the potential results. Our recent investments in domestic manufacturing and our factories will also serve us well as market conditions improve. We look forward to getting past this difficult period and returning Durrell home to its traditional growth. Durrell Juvenile posted its strongest second quarter revenue since 2019 with gains in their major markets. An excellent performance in the Americas offset the declines in Europe. For the second straight quarter, the most significant contributor was the U.S., with double-digit sales gains. Latin American markets all recorded solid organic revenue increases. In Brazil, both sales online and in the specialist channel showed strong growth, while in Chile and Peru, sales increased as all company-owned retail stores were open, unlike during last year's second quarter. It's much different in Europe, which sails down double digits. The real juvenile Europe has been facing a slowdown in consumer demand, particularly in Germany, Poland, and the Scandinavian markets, as these regions grapple with the high inflation and the indirect impact of the ongoing Ukraine war. Portugal and Spain, on the other hand, the westernmost part of Europe, and thus more removed from the war, experience double-digit growth. More than most companies, Dorrell relies on international markets, and the strong U.S. dollar took a significant toll on us this quarter. The main way to gauge U.S. dollar strength is by indexing it against a basket of currencies of major trading partners. By that measure, the dollar is at a 20-year high after gaining more than 10% this year, a huge move for an index that typically shifts by tiny fractions. But like the REL Home, Juvenile is seeing progress. According to a recent third party study, the REL Juvenile Europe is gaining market share in several key categories. This is highly encouraging as it comes at a time when overall Juvenile industry numbers are suffering. There has been positive reaction to newly launched Juvenile products with many new listings. Looking ahead, we expect a slight slowing of sales in the America as our retail customers are looking to reduce their high inventories. This should be a short-term issue as we have already increased listings for 2023 at key retailers. Europe remains our primary concern as consumers seem to be delaying purchases due to the difficult environment there. We know this cannot continue long-term given the essential nature of our product categories and expect sales to begin to increase by Q4. The US dollar continues to be strong, and this will pressure earnings, though not to the extent as in the second quarter. Should current currency levels continue long term, market prices will need to be adjusted. As economies have slowed in our markets, we are seeing a decrease in the cost of key commodities, especially in China. This might allow us for an easing of the very high cost environment in which we have been operating for well over a year. I will now ask Jeffrey to review the numbers.

Thank you, Martin. I'll do this fairly quickly. You know, for the second quarter, revenue was down almost $20 million or 4.4 percent to $427.8 million. Adjusted organic revenue declined by 3.6 percent after removing the impact of foreign exchange rates year-over-year, and the current revenue from no-till living, which was acquired in November of 21. The revenue and organic revenue declines were in Doral Home, and they were offset by partial and partially by improvements in the juvenile segment. Our gross profit for the quarter decreased 20 million, or 24 percent to 65 million. The gross margin for the quarter decreased 390 basis points to 15.3. The decline was in both sides. As you mentioned, the Durrell Home, the gross profit was due to higher costs through the system. And for the juvenile, it was higher overall input costs and a large net negative impact of foreign exchange of approximately $6.5 million. versus the very strong surging U.S. dollar. If we move over to the home business, the sector declined by 27 million or 11.4%. And then, again, if you add foreign exchange changes and no-deal living, the actual organic decline was 13.8%. A dramatic rise in inflation has caused prices for everyday consumer goods to increase significantly. And we've seen since, you know, late first quarter until now a noticeable reduction in demand in furniture across the board. And it seems to be in all industries, online, not online. All parts of the furniture industry has been hit. We believe it's a combination of, like I said, less disposable income because of inflation, the fact that many people have bought a lot of product during the pandemic, and also the fact that as we come into this summer season, people were traveling and they were doing more things than just buying products. And we're seeing that currently right now. So overall in the home, our profits declined by $12.1 million to $2.2 million from last year. And again, as we said, it was mainly due to lower revenues and lower gross margins. On the juvenile side, second quarter revenue increased by $7 million, or 3.4% to $218 million. Organic revenue, however, was up by almost 8%. after moving the impact of foreign exchange year over year. You know, Europe was impacted by higher inflation, and the war is really, really having an impact on markets that are very close to it, like Martin mentioned, Germany. And that is definitely reducing demand. However, over in the Americas, particularly in the U.S., Brazil, very, very strong performance. We're continuing to pick up market share in those markets. In fact, one of the odd parts is we believe, according to third-party studies in Europe, that we've actually increased market share despite the sales being really struggling. And according to the statistics that we saw, the market has dropped double digits in the juvenile industry when you look at places like Germany, and much less so as you move West from there. So, you know, the UK was down low single digits in the market size in the quarter. So, you know, we do believe that that is something that is not sustainable, that at some point people are going to need to buy more products. They're putting it off now. They're borrowing or whatever. But at some point we do believe that those numbers will get back up. And, again, given that we have been gaining some market share, We are confident that at some point soon, hopefully the fourth quarter, we'll be able to see that coming in on the revenue side. If we look at gross profits for the quarter, they decreased 15 percent from a year ago. The gross margin was 21.3 percent. That represented a decline of 460 basis points. Again, we talked about it, higher input costs and the negative, the big one was the negative impact of the foreign exchange, which we had through most of the markets in the world. We ended up, you know, with an operating loss of 4.7 during the quarter compared to an operating profit last year of 2.1 million. And again, the bulk of you know the change right there's just the foreign exchange with that I will pocket back to Martin although I before I go there is one obviously the elephant in the room is our inventory or inventory went up about eighty million in the quarter you know what happened was you know people were talking we we we would talk to them to our investors for, let's say, at least nine months about how the lack of inventory was hampering our business and we couldn't get goods and goods were sitting in China or we couldn't get containers or the containers couldn't get unloaded. And it all kind of cleared up all at the same time in Q2. And we literally had a massive flood of goods into our warehouses. on both the juvenile and the home side. Unfortunately, on the home side, demand slowed down. So, you know, we were stuck with, you know, increasing supply, decreasing demand. And this is, you know, like Martin said, this is not a Dorel problem. This is an industry problem. And everyone at this point is going through and clearing, you know, reducing ordering, clearing through inventories so we can get back to normal times. On the juvenile, we do have more goods than we need, but the market is fairly good and steady. We're reducing our orders to sort of match the supply chain, but we feel that, you know, the inventory that we have is good. It's just we got too much of it at once, and we have to wait for, you know, the normal flow of inventory. But we're focused, you know, that's $80 million of inventory excess cash taken out of our system. So we're focused now on reducing that inventory and, you know, increasing, you know, our cash flow. We had a fairly negative cash flow in the quarter. That should change fairly quickly as our, you know, as our ordering has gotten much slower. and we go through the inventory that we have, and we're hoping by Q4 to be down to a normal period, a normal level. Normal level is a bit higher than it was last year. We were short inventory at the end of last year, so we're not looking to get down to necessarily last year's level, but we are certainly in excess of $50 million for sure that we're going to tackle this year. And we are on track. June was actually down a little bit from May, but July was a good month for reducing inventory. We're going to see that again in August. And we're pretty confident we'll get through it. Most of the inventory, you know, the vast majority of inventory is very good inventory. There might be a commodity here or a commodity there that perhaps we have a lot more than we need. That's going to take more than six months to clear, but there's not a lot of those categories out there. Things are just moving. They're just moving slowly, and we've readjusted everything for that. So with that, I'll pass it back to Martin.