Dorel Industries Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to DORO Industries' fourth 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 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, March 14, 2023. I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.

Martin Schwartz, President and CEO, Okay, thank you. well good morning and thank you for joining us for durell's fourth quarter and year-end earnings call for the period ended december 30th with me today are jeffrey schwartz cfo and frank rana vp of finance we'll take your questions following our comments again all figures mentioned during the caller in u.s dollars our fourth quarter was disappointing the real home sales were down considerably in all channels and pretty much all product categories as our major retail partners continue to reduce their ordering due to their high stock positions. In addition, the excess inventory across the entire industry resulted in discounting to move higher cost inventory, further pressuring profitability. This combination of less favorable pricing and significantly reduced overhead absorption at our factories severely reduced Q4 earnings. Substantial cost cutting and inventory reductions have been implemented at the REL home, which will help earnings going forward. At the REL juvenile, the situation is more optimistic as things are moving in the right direction. Still, major U.S. retail customers continue to curtail orders and therefore segment sales decline despite a generally positive POS performance. While the quarter with soft juvenile is in a recovery mode with positive signs, notably in Europe. Several new products were launched during the quarter, and importantly, we have gained market share in key juvenile categories. Inflation and potential recession pressures continue to weigh on the economy, but let's remember that Dorel has traditionally done well during these periods. as our wide diversity of opening price point products have consistently proved popular with consumers. The priorities at Dorel Home are to clear their old high-cost inventory and to start building sales volumes again. There has been some slight improvements during the last few weeks in demand, but it's a slow process and is dependent on three things. Retailers getting more product out on the floor, replenishment of retailer stock, but that won't happen until they clear what they have now, and clearing the pipeline of the industry's over-inventory position. In conjunction with this transition process, a great deal has been accomplished and continues to be done to cut costs and improve operations so that things are firmly in place as demand ramps up. Warehousing and factory efficiencies, staff reductions, as well as decreases in sales costs will result in savings through the year of some $13 million. Emerge and detention costs are now close to nil. Ocean freight is down significantly from last year, and importantly, inventory has been reduced by close to 20% from the peak back in May. Equally important is that the cost savings measures will help mitigate Q4's poor overhead absorption while volumes build. The investments made at the segments ready to assemble furniture factories to facilitate domestic production flexibility and speed the time to market have not yet had a significant impact due to slower consumer demand. But all is set. New equipment is now in operation at Montreal's Derail Home Products Plant. to manufacture coiled spring mattresses which were previously imported from Asia. Bhutan mattresses are also being made locally. The segment is also implementing a dual strategy to more aggressively address the huge furniture store channel. The REL Homes team, headed by account managers, are now dedicated to growing sales at the top 100 furniture chains with a two-pronged approach. The first is to obtain additional floor placement by offering differentiated categories in store. And secondly, by what we call extending the aisle, selling home products on retailers' websites, many of which were enhanced during the peak COVID period. To address the 87,000 North American independent furniture stores and boutiques, the new website, called torellshowroom.com, allows these smaller retailers to easily order exactly what they need in small quantities. The site is up and running with online purchasing available 24 hours a day, seven days a week, year round. There will be a big push at next month's High Point Furniture Market to introduce retailers to the new concept and explain the benefits to them. This project is in the instant stage with excellent potential. Demand at Durrell Juvenile during Q4 was somewhat softer, and the U.S. retailers continued to reduce orders to lower their overall inventories. The good news is that points of sale of Durrell's Juvenile products remain generally positive. Europe in particular showed strong revenue growth versus prior year in almost all markets. Canada, Brazil, and Mexico also improved from last year. It is also most encouraging to see that the segment has gained market share in the last few months in many categories that Darrell marketed, while much of the competition has been down. Some of the biggest gains have been in high chairs, car seats, baby gates, and activity seats. Product development has moved back into high gear. New product introductions were reduced last year as they came in at higher prices due to the container cost. Now that this situation has improved considerably, several new products were shipped last quarter. The U.S. launched new Maxi-Cosi and Safety First car seats, as well as a new concept Lombe Day wagon stroller. Connected range products, including monitors, humidifiers, and crib lights, were introduced under the Safety First brand in the U.S. and Maxi-Cosi in Europe. Consumers in Europe have given the app high ratings, which provides a good foundation to accelerate sales this year. For the first time in several years, the REL Juvenile attended the Hong Kong Fair in early January. Vendor relationships were solidified following the prolonged pandemic downturn period. Regarding our outlook, our retail partners remain cautious in the current soft consumer environment. and are focusing on carefully managing their inventories and their cash flow. This is particularly the case of Drell Home. As the segment is working to rebuild sales volume, efforts continue to further reduce inventories and deplete existing high-cost items as aggressively as financially possible, while also implementing additional cost-cutting initiatives. The transition to new lower-cost inventory is a process. The timing of improved earnings at the rail home in the short term is difficult to predict. We are more upbeat about the rail juvenile's ability to return to profitability. As mentioned, POS is strong, and we saw market share gains as we started the year. Juvenile also faces the issue of transitioning out of high-cost inventory in an aggressive marketplace. With the consumer demand for our products coupled with a lower-cost environment, and a more favorable foreign exchange environment should translate into positive earnings by the second quarter. I remind you that Dorel has always fared well with our wide diversity of home and juvenile opening price point products when consumers trade down in difficult economic times such as these. Coupled with a lower cost environment, we expect Dorel to be on the path to recovery through 2023. I'll now ask Jeffrey to review the numbers. Jeffrey.

Thank you, Martin. Not a lot of fun, these numbers. We agree, but let's go through them and then we can talk a little bit about 2023. So for the fourth quarter, Durrell's revenue decreased by $95 million or 21.8%. When removing the prior year's revenue, from the China manufacturing facility that was disposed in the fourth quarter of 21, and the current year revenue from Nodeo Living that was acquired in November of 21, the adjusted organic revenue declined by about 20.5%. The revenue, organic revenue and adjusted organic revenue declines were in both home and juvenile. uh gross profit for the quarter decreased 20 million dollars or 41.2 percent to 28.6 million and from and from 48.6 million last year when excluding restructuring costs adjusted gross margin decreased 600 basis points as a percentage of revenue uh this of course is probably the the most important part of uh the biggest impact that we had in q4 was The drop that we have in gross margin and a lot of that is volume related as well as other issues that we're going to get into. The operating loss for the fourth quarter was $40.7 million compared to $26.2 million in 2021. The increase in the operating loss was mainly due to the decrease in the gross profit dollars from lower sales as well as the lower gross margin in percentage of revenue, partially offset by the overall lower expenses. Finance expenses decreased by $1.3 million to $6.8. The decrease is basically explained by a decrease in the overall average debt balances, offset by the increase in average interest rates on those balances. Getting into the divisions now, the home business declined by $79 million, or 34.4%. Organic revenues declined by 33.8%. The decrease in the revenues in the fourth quarter, which was the largest in any of the quarters, was basically both in online sales and in brick and mortar. A lot of the brick and mortar were explained by some reduced POS, as well as the retailer's inability to properly stock store shelves. We did a lot of studies on a lot of our retailers' brick and mortar and found that throughout the fourth quarter, many of our items were not on the shelves, despite the goods being in the systems of the retailers. uh everyone remembers pretty chaotic then we were still in um the throes of the uh supply chain crisis and uh you know i think that uh retailers had to make a choice between you know do we want to have enough food uh do we want to have certain categories in do we want to have the christmas goods in and unfortunately furniture was always seemed to be at the bottom of the list of uh getting the store shelf stock. So that continues to be a problem, although it's less than it was before. And of course, inflation, which in Q4 was rising, forced people to make decisions between purchasing items and furniture seemed to be less important at the time. Moving over to gross profit, it decreased by 22.9 million. compared to a year ago. The fourth order decline was due to aggressive promotional incentive offerings across all the categories to increase sales and most importantly to move that high cost inventory out of the system. And again, why high cost? We've talked about this for a year in Q4, we still had significantly high ocean freight, substantially increased board prices overseas, cost of goods in Asia was relatively high, and our reduced sales volume obviously had a big impact. And then one of the big things that we're facing and continue to face in Q1 is the negative impact of the lower domestic manufacturing activity and its impact on a negative factory overhead absorption. So that is something that we're very focused on, and that had a big, big impact. The net result was Durrell's home operating profit declined by $22.6 million for the quarter to an operating loss of $18.3 million from a profit of $4.3 million in the previous year. The juvenile business now, moving over there, had a difficult fourth quarter. Revenues declined $15.6 million or 7.6%. Organic revenue defined 3.2% versus last year. The decline in revenue was mainly in the U.S. and Chile. In fact, we had in the U.S., we had a double-digit decline. We are not concerned about that, given that our POS, what the customers are selling of our goods, remain very strong in the quarter. And this was just an attempt by our customers to reduce the amount of inventory they had in their system. And it was, in many cases, it was a general reduction and not necessarily due to slowdown in demand or anything like that. In Chile, we also had a decline as overall demand affected that country, particularly in the fourth quarter, because inflation is running extremely high there or was running extremely high there. And that had a big impact. However, we did have increased sales in most of the European markets. Q4 was very strong. Brazil, again, continues to show growth. Mexico, small market, but that did very well. And Canada also had a very good fourth quarter. now that the product shortages that they had through most of the year had disappeared. On gross profit, our gross profit increased by 2.9 million or above 10 percent. Fourth quarter's gross margin was 16.2, representing an increase of 260 basis points for the quarter. The operating loss, however, was 23.5 million during the quarter compared to 26.7 the previous year. That is pretty much it for that quarter. We'll talk a little bit about 2023. We've seen, as Martin mentioned, we've seen a good start to the year for juvenile. Our market shares are continuing to grow. We're seeing good continued growth in Europe. We're seeing strong growth in the United States as well. We are still fighting a little bit with the retailer's desire to keep inventories low, but given a strong POS that we're seeing, we don't think that's going to last very long. and are expecting to see some good growth later in the year. We have a lot of new listings in the United States and over in Europe as well. A lot of new listings, a lot of new product coming to market this year. So as Martin said, we're pretty upbeat on the juvenile side. Unfortunately, we don't have the same visibility on the furniture side. It still remains tough. We are doing everything we can to get out there, but on the fortunate side for us, our costs have now significantly come down. But I want to just caution people that the impact of the cost reductions won't see much of that in Q1 because we still have the overhang of inventory that came in at very high levels. are still in the system and getting sold in Q1. So that impacts the margins in Q1. But nevertheless, we are being set up for a good, a much better year than we had last year. And with that, I'll pass it back to Martin.

Martin, you're on mute. Yeah.

Okay. With that, I'd now like to ask the operator to open the lines for questions and request that you limit them to two in the first round.

Operator? Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the star followed by the one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be pulled in the order they're received. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment please for your first question. And your first question comes from Derek Lassalle from TD Securities. Please go ahead.

Good morning everybody and thanks for taking my questions. The first one I just want to hit on Juvenile was I was curious about why there was such a performance difference in terms of sales growth between Europe and the rest of the world versus the U.S.? Wondering what the drivers were there.

I mean, the big driver is the desire of our large customers in the U.S. to reduce their inventories and carry less inventory going forward. As you know, it's also Christmas season. A lot of them had very, very full warehouses and storage capacity, and I think they chose Christmas goods over all other goods. So we saw a large double-digit decline in the U.S. in sales, but our sales of the products through their channels was strong. So it's just, you know, we look at that as temporary, and we're seeing a lot of that coming back, you know, in Q1. So I don't look too deep into that, the decline because it was really just for them to get their house in order. And Europe, we're making progress. We're finally getting the progress we needed and expected. The new products are hitting, the new sales channels are doing well. You know, everything that we've been working for the last 18 months is finally starting to click in Europe and we're seeing the numbers.

Okay. You did mention that you did secure some new listings for 2023 with some bigger accounts. Just curious on how those sales are trending on those products so far and what we have to look forward for the remaining of the year.

In the U.S., a lot of them have just started to ship and aren't even in place yet. I know I know we've had a delay in setting up the modular set on a few of our customers who postponed it a few weeks. So we haven't really seen the new product click yet, but it's listed. It's being shipped or will be shipped shortly. So it's a little early to get a read on that. Some of the new products we have in Europe have done well, as we can see in the fourth quarter. There's some new stuff we are uh going to show the market very shortly uh some stuff that we're pretty excited about so uh we haven't quite seen that yet uh which is you know which is good given that we've already gotten sort of a good start with q1 and there's still a lot of new product to be seen out there okay uh one more for me and i'll i'll re-queue um what is what is a reasonable

time frame, I guess, to expect those high-cost inventories to be right-sized for both segments.

Yeah, I mean, we are making a lot of progress on our inventory, so probably Q2, you know, more, again, upbeat about juvenile there because we are getting through the system, and we do a lot more internal manufacturing, so there's less of You know, when you make something in the U.S., there's less of that inventory sort of out there. So, you know, I think early Q2 is probably the right answer for juvenile and a little bit later in Q2 on the furniture side, probably the right answer. Okay, thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. As a reminder, if you're using a speakerphone, please lift the headset before pressing any keys. Your next question comes from Stephen McLeod from BMO Capital Markets. Please go ahead.

Thank you. Good morning, guys. Jeffrey, I just wanted to clarify, just in response to the last question, did you say that... early q two pro the right answer for juvenile and then did you say maybe q three for for home returning back to the letter later in future later in q two on the whole site later in q two okay and i don't know about it yeah go ahead sir go ahead no i just want to clarify uh... uh... you're you're responding about uh... is that for return to profitability or is that for uh... working through that course

Yeah, that's for getting, like we said, a lot of our costs are down, and we have the ability now to both reduce some of our pricing on specific items and also improve our margins. But again, the stuff that came in in, let's say, October that might be sitting in inventory and only getting shipped this month, those items are still at high cost. So at what point do we kind of replace those? that high-cost inventory, and we're estimating that it's sort of mid to late Q2 on the home side.

Right, okay. Okay, that makes sense. And then when you look at the full year, you know, is it reasonable to expect that you'd be back to profitability levels that you saw in 2021? Or is that something that you think maybe is pushed out a bit considering the near-term headwinds that you're seeing?

We're expecting a significant return to profit. I'm not sure which line item. I mean, profitable EBITDA for sure we're looking at in our plan. You know, we're already seeing the progress in juvenile. You know, the home is still lagging significantly. We really need to get, you know, that volume up. We're doing everything we can. We don't believe this is about us losing the market share as much as it's about just the chaos sort of still from supply chain where, you know, importers, if you've got to remember, there was so much demand in home furnishings that there were a lot of small importers were doing very well during the pandemic and bringing in lots of stuff. And then what happened was you know, when the man slipped, these guys said, okay, there's no business for me. And they continue to try and, uh, uh, they continue to dump their stuff. So they were still facing that issue.

Right. Okay. Okay. And sorry, did you say you would expect EBITDA to be back to 2021 levels in this current fiscal year?

No, I'm not, I'm not predicting a number. I'm saying it's going to be positive again. We lost a lot of money last year, but EBITDA will be positive this year. I'm not going to give you an exact level of... Yeah, no, that's fair. That's fair. You've got to remember, 2021 had a very, very strong furniture demand. We couldn't keep up, if you remember about that. And now we're in a post-pandemic level where a lot of people have bought furniture. I mean, people are still buying. It's just that sort of huge amount of inventory that got into the system, whether it be our competitors, our retailers, or ours, that needs to be reduced. We've done a really good job on our own inventory now, so we're feeling good about that, and we just have to worry about our customers and other competitors.

Okay, that's helpful. And then maybe just in terms of Europe, you talked about Europe being positive with Juvenile. Is that really on the back of new product launches, or are you seeing just sort of ongoing better retailer strength in the European market versus the U.S.?

I'm going to say it's much more on our new product and our – We kind of reinvented the way we went to market in Europe, and there was some pains going through that. And it's all kind of working out now. So our go-to-market strategy, how we deal with our customers, our pricing regimes, you know, there's a lot of different countries there. All of that has now been stabilized, making it easier to do business with our customers. Our new products are selling well. I'm not sure there's a lot more strength in the retail market in Europe. We're not seeing that as much.

Okay. Okay, that's great. That's all I have. Thank you.

Your next question comes from Derek Lassalle from TD Securities. Please go ahead.

Yeah, thanks. Back to home, I guess I was wondering if there's anything, or maybe you can point to some things that you think you can do better to get the segment better positioned over the next quarter or two?

We've reduced a lot of, we'll say, overheads and expenses, so we've done what we can there. Obviously, it takes time to kick in, Um, the other, I mean, we're getting great, like a lot of reduced costs, you know, that come to the system. Our biggest problem by, by far is just volume. We just need to get that volume back up because not only, you know, for the obvious reason that, you know, if you don't have the volume, you don't have the margin, but the impact on, um, negative overhead absorption has been really, really big. And, uh, That's why I like to think that when that volume comes back, it's almost going to be a supercharge because we're going to get less negative absorption. Plus we're going to make a margin on that extra volume and we can see our earnings, you know, rising significantly. And that's one of the reasons you see our earnings drop so much. I mean, it really did drop a lot in a short period of time. And it's, it's really related to that. So we're focusing everything we can on, on, dealing with the challenges of the increased margin. There are a lot of smaller accounts that our sales are up on. We are definitely going after smaller accounts, doing well, but it doesn't replace the big guys, unfortunately. There is a little bit less competition out there. I mean, there's been some large bankruptcies in the furniture industry in the last year. I'd expect there'd probably be more There's definitely less importers, especially small guys coming in. So it's a real transition the whole industry's in. And, you know, we're kind of waiting for a lot of that to go away. I mean, we've already picked up business from companies that have gone bankrupt. So we know that, you know, that's a plus. It's just a transitionary period. It's a difficult period, probably the worst period I've seen in the furniture industry. and we've just got to wait it out and do everything we can to promote and do the right things.

Okay, maybe I'll then ask a different way. Do you have a sense of consumer demand? Again, this is on furniture, like consumer demand on the retail side. In other words, did consumers just pull forward their home purchases during

covid and they're still working through that and sort of we're approaching a replenishment or upgrade cycle in in the near future you know what there's so many moving pieces and that's one of them right for sure there's there's less demand but i mean people still need furniture all the time and um this is not expensive furniture so uh You know, that's one of the factors. You know, another factor is just retailers, as I mentioned, wanting to reduce their inventories. That's a big factor. Another factor is on the brick and mortar side is not having our goods on the shelves. I mean, that's a real issue where it's in the system. It's in our retailer system somewhere. Is it in the warehouse? Is it in the back of the store? We've heard they could be stuck in containers sitting somewhere between the warehouse and store, and it's not on the shelf. So they're not ordering more, but the consumer's not buying it either. So that's not something we expect to stay long-term. But I can't tell you how much is on each. You know what I mean? These are all factors together. We do believe, you know, people aren't going to stop buying containers furniture. I think he used the term pulled it forward for sure. But now we're getting past that section. Right. We're probably almost getting to a year since everybody slowed down buying. And we do expect people to get back to normal. And hopefully the inventory balance will be in the right place. And like I said, there's less suppliers. So we hope to move forward that way.

Jeffrey, have any of the retailers that you've spoken with giving you an indication as to why some of these products or the product is not on the floor?

You know what? I think it's just I don't think people appreciate the volume of goods in general, the SNOTs or all goods or even our categories that was poured into the warehousing system you know, when everything slowed down, uh, as you know, if you remember when a year ago where everyone was talking about, we can't get goods, they're very expensive. We can't get them on containers. There's always shortages. So everybody ordered, ordered, ordered, and then it all picked the gates open and everything poured in and warehouses got so full and, um, strained. And that is much better today, but it continues to be a bit of an issue. And we have to, um, You know, we have to deal with that. I mean, that's what they tell us. I mean, you know, we're dealing with it. We're getting through it. We're doing the best we can. It's a bit of a crisis element. There's a lot of retailers that have, in furniture, instead of bringing it in directly from Asia, they're looking to reduce the pressure on their warehouse systems They're asking us to bring it in and ship it directly to their customer, which we're capable of doing. We're one of the few people that are really good at that. And our ability to turn around and ship orders is back to like one day. That got strained, you know, a couple of years ago and it was in multiple days. So that's something that's good. I mean, we make, you know, a good margin doing that. The problem is, is that, you know, instead of them buying, 10,000 pieces and shipping directly, they're buying one at a time every day. And that's a process. That's a transition. You know, they have to get out of all of this stuff in their warehouse system before they transfer the orders to us. So that's another piece that's added. Eventually they will get out of it and they will turn it on and we will be getting a lot more direct orders. So it's just a transitional phase that we're in. I don't know how long it's going to last. That's probably the next question you have.

Okay, that's fair. Last one for me. I just wanted to get your thinking around, you know, potential future divestitures and, you know, what you need to get there and any thoughts around, you know, around the timing of that.

Yeah, I have no real comment on that other than that still continues to be the plan. We are, you know, we want to get the business. Our priority right now is to get the business's cash flow positive, get them moving again, gaining market share. You know, a lot of the stuff that we're doing on the juvenile, we need to continue to do and show the results, obviously. At home, it's a little bit more, I feel like, out of our control. We're reacting the best we can to the market transition, and we're waiting for that period, at which point... we will hopefully get back there. Another point I didn't mention before in dealing with home furnishings is one of our strengths has always been the ability to bring new exciting products to the marketplace. Well, 2022 was really difficult in that area. We had created a lot of products, but when we went to the market, we found out that the prices were significantly higher than we expected. uh you know during the beginning of last year and that by the time we brought them in we said this this isn't the value anymore it might be a nice looking product but you know we we said we can't really add to the extra inventory and bring in this expensive inventory so we didn't bring in a lot of new items last year and that's also sort of paved the way for again less excitement from the consumers on some of our products We are now, that inventory at Doral is dropping. We are now increasing that new product pipeline, and hopefully this year we'll have a lot of that new stuff in the marketplace. That was another thing that affected last year. Thanks for that, Jeffrey.

Presenters, there are no further questions at this time. Please continue.

Okay, we'd like to thank everybody for joining us this morning and wish everybody a good day. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.