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.