Dorel Industries Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Durrell Industries' second quarter 2023 results conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. 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, August the 11th, 2023. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

All right, thank you. Good afternoon, and thank you all for joining us for the REL'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. Again, all figures mentioned during this call are in US dollars. I'm pleased to report that both our businesses showed signs of improving trends during the second quarter. Underlining this progress is the that adjusted operating losses for Dorel Juvenile and Dorel Home combined improved by $13 million compared to Q1 this year. The teams at Juvenile have done a great job, and the segment posted its first profitable quarter since Q3 of 2021. Europe posted substantial top and bottom line gains as new product launches, in particular the 360 pro family car seat system drove a strong recovery. The REL home has also done a good job and is starting to turn things around. While a general softness in the demand for furniture muted their second quarter, causing an operating loss, the good news is that they posted sequential improvements for the third consecutive quarter. I'll look now at our two segments in more detail. During the Q1 earnings call, I said that we were very upbeat about Juvenile and expected an imminent turnaround. That materialized in Q2, the turnaround led by Dorel Europe, their highly innovative Maxi-Cosi 360 Pro family. A new era of design and safety featuring Dorel's revolutionary slide tech technology has performed extremely well today. As a reminder, the 360 is a range of world's first comfortable ergonomic car seat solutions with a base that can both rotate and slide towards parents. The 360 Pro family sets a new standard in car seat innovation by making it easier than ever to secure children safely and comfortably in the car. Shipped in April, the product line is one of the rail's most important introductions in a long time. 360 sales to date are most encouraging in Europe. For example, it was the UK's number one seller in May and June. Consumer feedback has been highly positive, with a 4.8 out of 5 rating. We anticipate the months ahead to be rewarding as well, if not more so. An intensive marketing campaign is scheduled for France in September, and a new MICA 360 ProSlide tech will be introduced in Q4, which is expected to boost sales as an innovative toddler solution. The REL Juvenile USA had a very difficult comp to beat as last year. The second quarter was the best in a long time. In 2022, supply chain issues were considerably eased, which resulted in higher juvenile sales. That was not the case this past quarter. Plus, the bankruptcy and closure of Bye Bye Baby in April meant there was one less retailer ordering and clearing old inventory. The U.S. division is, however, gaining market share. We foresee this turnaround will continue. And as noted, the situation at the rail home is looking much brighter. Retailers glut of high-cost inventory, but at the height of COVID, is increasingly being clear. Costs have been coming down and sales volumes are starting to increase. a sure formula for margin enhancement. Average daily orders have been increasing steadily since June, as retailers are getting back to normal with marketing plans and are finally restocking. July orders are 30% higher than this year's first half, evidence that we are seeing light at the end of the tunnel. Retail prices are returning to pre-COVID levels and margins are holding. Replenishment on store shelves had been a problem the last couple of years. Like many industries, retailers lacked the necessary employees to stock shelves, leaving consumers with limited in-store choices. This is now changing. Homes' branded sales were also better, with their four main brands up double digits. The cost of freight, particularly ocean freight, as well as warehouse and distribution costs decreased in Q2. Inventory came down significantly, both year over year and quarter over quarter. After a number of quarters of reduced activity, staffing is being increased at the Tiffin, Ohio and Cornwall plants to deal with the anticipated increase in domestic production. There are significant opportunities for increased business, which should materialize through the balance of the year at the three Dorrell home factories. Looking ahead, we fully expect the quarter-over-quarter earnings improvement that started in the first quarter to continue into the back half of this year. Dorrell Juvenile is ahead of Dorrell Home on that path and will improve its profitability across the quarters. We are also confident home will return to an operating profit in the second half. The key to success in both segments will be continued growth in e-commerce and, just as importantly, at brick and mortar. where we are in a position to fully leverage our excellent longstanding relationships around the globe. Clearly, these are difficult times for consumers. We are working with the winners in our markets, and our heritage of retailer support and collaboration will enable us to win with our customers. This combined with stable cost environment we have established will also allow us to overcome the challenges in the market and should allow us to return to growth and profitability going forward. I'll now ask Jeffrey to review the financials. Jeffrey.

Thank you, Martin. I'm going to go pretty brief because, you know, this wasn't a great quarter compared to last year, but sequentially we are getting out of the hole that we were in. And we continue to see better things ahead. So quickly, the second quarter's revenue decreased by 19.3% to $345 million from 427. Organic revenue decline was actually 19.6%, so almost the same. Gross profit for the second quarter decreased by 5.1 million. However, the gross margin for the quarter increased 210 basis points. as a percentage from 15.3 last year to 17.4. The declining growth profit in the quarter was mostly within the home, and it was only partially offset by improvements in the juvenile business. The operating profit at the end of the day, you know, Doral reported a loss of $13 million. compared to 9.1 million and excluding restructuring costs, it was 13 million versus 6.9 last year. Again, much less of a loss than Q1 as we move forward. Finance expenses increased by 1.5 million to 6.1 during the quarter. That's mainly explained just by higher interest rates that we need to pay. If we get into the the segment. The juvenile segment was declined 6 million dollars or 2.9%. Organic revenue declined by approximately 3.5%. You know most of that decline was in the U.S. market which was due to both the decline in revenue due to the network security incident we had at the beginning of April. As well, we had a pretty substantial quarter last year in the U.S. We saw improvements in the European, Canadian, and Brazilian markets. Europe, in fact, experienced double-digit revenue growth in the quarter from the successful launch of new products and that has gained momentum. The products were just in the middle. Gross profit for the second quarter increased by 8.5 million, or 18% from last year. The gross margin in the quarter was 25.9, representing an improvement of 460 basis points. The increase in gross profit in the second quarter was mainly due to lower product costs, as the prior year second quarter included a much higher container freight. significant impact from a strong US dollar last year as well. Operating profit was 800,000 during the quarter compared to a loss of 4.7 million. If we exclude restructuring costs, we still had a $3.4 million positive adjustment versus last year. If we move over to the home business, second quarter declined by 36% to $133 million. POS sales continue to far exceed replenishment orders. And this has resulted in reduced inventory levels at our retailers, which is very important. And that should translate into increased order replenishment in the second half of the year. Gross profit declined. by $13.6 million in the quarter, and the gross margin was 4%. That gross margin includes the lower factory absorption, and that's really, like I like to tell people, we don't sell our products at 4%, but with not absorbing enough through the volume in the factories, that's the net result of that. Also included in the quarter was a continuing sale of high-cost inventory acquired in 2022. On a sequential basis, however, the gross margins did improve 260 basis points. We are getting better costs. We are getting better freight. And we are starting to get out of that high-cost inventory. environment that we had. The operating profit for the home group declined by 12.2 million in the quarter to an operating loss of 10 million versus a profit of 2.2. Again, significantly better than last year. Sorry, significantly better than last quarter, Q1, as we continue to move ourselves in. Our optimism looking forward is based on you know, a number of factors in both of our businesses. Lower costs, you know, both from the freight and the fact that, you know, we're buying at significantly lower prices today. That's allowed us to actually lower some retails of key items. When we lower items, when we lower prices of these items, we see an uptick in volume. In some cases, it's double digit or, you know, or higher double digits. So we are starting to see a recovery from the fact that costs were so high in 2022. Better FX. Stable FX is allowing us to price our product and not take losses like we did last year. Last year's high US dollar was really, really difficult in many of our international markets. We're seeing the The stability or even the reduction in the value of the U.S. dollar is allowing us to have a very nice business around the world, particularly in the juvenile. One of the other areas that we're seeing, and again, I keep highlighting this because I can't emphasize it enough, particularly in the home side, the reduced amount of inventory at our customers. It was terrible from, you know, the end of last year right through even into Q2. The difference between our POS and the reorders was huge. It is getting to the point where in some of our large customers that is going away, they now have the right amount of inventory they want to carry, and we're seeing closer matching to what is actually selling and what they're actually ordering. Because it's not an issue so much to clear, some of our customers that haven't really focused on merchandising and planning and new products are back in that mode again. And it's been a while because we go back to the beginning of COVID, a lot of our customers were just chasing inventory. They didn't have enough inventory and they were just looking where can they buy anything to put on the shelves. And then that changed dramatically last year when sales sort of dried up. And then our customers spent most of their time trying to figure out how to clear inventory. So it's been years since we've really been able to sit down and really plan merchandising strategy on products and all of that. But that's sort of coming back to normal again, which is great. And we're focused on the things that we used to do well. And the last piece of where we're going here is better product introduction. We've certainly done really well in Europe in juvenile. We've gained market share in all our other markets in juvenile. Most of that is just through better product. And I think our teams are really focused on bringing some great innovation to the market. We're seeing the results of that, and it's allowing our business to recover even quicker. than had we not had these products. With that, I will pass it back to Martin.

Okay, thank you, Jeffrey. I'll now ask the operator to open the lines for questions. And as always, request that you limit them to two in the first round. Operator?

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. you'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. Our first question is from Derek Lazard with TD Cowen. Please go ahead.

Yeah, good afternoon, everybody. I just wanted to maybe hit on your gross margin performance, specifically in juvenile. Jeffrey, maybe just talk about, you know, some of the drivers there as well. And when do you expect, I guess, the U.S. to close the gap with Europe? And are there any sort of incremental changes that you need to get there? The margin in Europe was clearly really good.

Yeah, I mean, again, the reason for it, I think I just talked about it, you know, lower cost, better effects. you know, better volumes in the case of Europe. A lot of that has come from new product introductions. You know, the U.S., again, I want to stress U.S. has gained market share during the quarter despite having lower sales. And again, a lot of it, you know, I don't want to call it artificial last year, but because of our customers chasing orders, they already just wanted as much inventory as they could. And we shipped a lot last year and then it all kind of ground to a halt even in juvenile. So that's not going to be the case. The volume should, you know, improve. But new product is definitely guiding our margin recovery, our gross margin recovery. Even in the U.S., we're selling more maxi-cozy product, which carries a greater gross margin. You know, that's been successful. Our customers at the high end are doing well. It is, again, a challenging environment in the U.S. We've lost Bye Bye Baby. I mean, it's coming back. Somebody bought them, but I think what I heard is they're starting with 11 stores. So it's going to be a minor player for a while. So the market itself is still challenging, but we intend on growing through that. You know, we've got a lot of nice stuff coming through, you know, the system. And we can't forget, you know, our international business. When the dollar is stable or coming down, it's got a meaningful impact. You know, we are the number one player in Brazil. We make a lot of money in Brazil, and that's continuing despite the difficulties of Brazil. So everything just kind of... the way we called it the perfect storm last year, it's kind of coming back along a lot of different lines. So, um, we expect to see gross margins improving, especially, you know, not having that high cost inventory in the system anymore. That's going to, you know, move our margins up as well. So, um, you know, we're expecting that to continue. Okay. And, um,

You did call out some POS data in HOME. Just curious about what you're seeing on the juvenile side.

We're seeing, I mean, again, it's a little bit of a mixed bag. You know, we're seeing, depending on customers. So some customers are down a little bit in POS from last year, and others are up significantly. You know, nice double-digit numbers. Overall, we're pleased, and that's why we know we're gaining market share in a tough environment. That, to us, is the most important thing. Continue to gain market share. A lot of it's through innovation. There's a couple of ways to get market share. One could be lowering your prices to the point where you're lowering your margins, but that's not the case here. We're pretty upbeat. We think it's been a long time since you know, we've been restructuring and re and tweaking and, but you know, now things are in place and we're starting to see the results. So, um, we're, we're very pleased with all that sort of that work we've done in the last few years to get to this place.

Okay. And, uh, another one on a good job on, on the working capital and taking down the inventories, um, questions twofold. Any, do you think there's any more room there in, The second one is, you know, we're seeing this in a lot of companies in this higher interest rate environment, but your receivables are up as well. Anything you can point to sort of on the customer payments, any categories like your 45 days or 90 day plus where you're seeing any signs of pressure and maybe do you plan on stepping up the collection effort?

No, actually nothing of interest. of significance on the accounts receivable. I mean, we've got a lot of good customers. You know, we did not take a hit on Bye Bye Baby. We were protected. So, you know, I think our team did a good job there. You know, we're watching it. I mean, I will tell you, maybe there's some places outside of North America and Europe that, you know, we have concerns on credit and we're cutting back a little bit because of that. But that has not been, you know, a material to the state.

Okay, Jeffrey, I'll reach you for Steve. Okay.

The next question is from Stephen McLeod with BMO Capital Markets. Please go ahead.

Oh, great. Thank you. Good afternoon. I just wanted to just follow on on a couple of things here. You talked about you seem to have pretty good visibility into the inventory positions at retailers and seem very optimistic about those levels declining. And I'm just curious, what kind of visibility do you typically have or would you have now in terms of replenishment orders?

Yeah, I mean, that's another reason we're somewhat optimistic, particularly on the home side. We're seeing them coming in fine. So we've been waiting and waiting for certain orders that we know will sell this year. And finally, in sort of a June, July, August period, they're coming in again. So I think Martin made the comment, but, you know, orders, you know, the receipt of orders in the last few months is substantially above where it was in the earlier part of the year for the home business, which, you know, again, our big problem is volume. I mean, better volume is going to lead to better margins. And now we're starting to see those replenishment orders or those new sort of planning orders where, like I mentioned, you know, before it was just about clearing goods and now it's like, okay, we got to get back. We need to sell, you know, this folding chair. We need to sell this table. We need to sell, you know, this, you know, fireplace stand, whatever it is. So the orders are starting to come in and they're priced right. So, you know, new merchandise coming in, it's coming in at the, you know, we'll call it pre-COVID costs. So the pricing in the marketplace is less. Our margins are good. Our retailer margins are good. So it's starting to get back and we're starting to see that stuff coming.

Okay. Yeah, that's great. And then maybe too soon to say, but again, you seem confident on the return to gross margin, particularly given some of the factors you talked about, sounds like in both the juvenile and the home businesses. Is it too soon to say sort of what those gross margins may get back to in terms of where they sit relative to historical levels compared to sort of the very low levels we've seen recently?

Yeah, I left. I don't have that visibility on the home site quite yet, but the juvenile is looking to get back to sort of pre-COVID gross margin levels or maybe even better now. The more success we have with our new products and the more success we have, you know, selling Maxi Cozy in the U.S., all of those are higher margin. So we're really focused on changing the mix to the higher end stuff and so far it's going well. So, um, yeah, definitely looking to get back to pre COVID levels, but perhaps even do better than that.

Okay. That's great. Um, but, but, and then I guess, is it safe to say that, um, sounds like you're, you're, you're incrementally more confident on the, uh, the juvenile disability than home. Is that, is that a fair thing to say?

Yeah, and I think the reason being we've actually turned the corner in Q2. You know, we've actually seen some really good data in Q2. Now, not April, you know, so we're seeing sequentially, you know, Q2 is better than Q1. Q3 is going to be better than Q2. But within Q2, we saw that June was substantially better performance than April. So when you put that together, we just, you know, the trending is just good. and we see it um we're more comfortable with our forecasts um this year i mean a little you know the market is where i'm a little more concerned on the juvenile side i feel really good about what we're doing and our ability to get listings and our ability of our products to sell um you know europe is definitely leading the way but the u.s i want to you know make sure people realize we're We're also gaining share in the U.S. We don't have that spectacular one product. You know, it's coming from a lot of different products. But the mixes are good. You know, we're selling good margin products, and we're focused on that. So, yeah, definitely a lot more confidence on the juvenile. The home is just starting. Q3 is the turning quarter, while juvenile is Q2. So I guess that's the confidence difference.

Okay. That's great, Keller. Thank you.

The next question is a repeat from Derek Lazard with TD Cohen. Please go ahead.

Yeah, thanks, Jeffrey. I just want to follow up on the visibility and on the gross margin. Did you have a sense of the timing of getting that gross margin back up to the pre-COVID or better level?

Oh, yeah, I think I'm expecting, you know, in juvenile, you know, Q3 to be better than Q2 and then Q4 to be better than Q3. You know, exactly when we're going to be, you know, into the 2024 margin, it's a little early. But, you know, we are making some very good progress.

Okay. And... One final one for me, and it pertains to the cybersecurity incident. Were the lost sales in Q1, were you ever able to recoup them in Q2? And if not, was there still an impact from the cybersecurity in Q2?

Yeah, definitely. So it took us, I think, as late as mid-April, right, to get some of our systems back online. We did lose a couple of weeks. Now, again, some of that sales gets pushed into another week. Some of it's gone. You know, we had a couple of other sort of quirky things, which I don't know that I want to get on this forum, but things that actually ended up impacting us right through the whole quarter by not getting goods out on a timely basis at the beginning of April. So, There was definitely an impact to the entire quarter, mostly in the U.S. That's where the system stayed down the longest. Okay. That's it for me. Thanks, guys.

Okay.

This concludes the question and answer session. I'd like to turn the conference back over to Martin Schwartz for any closing remarks.

Thank you. I just want to thank all of you for joining us this afternoon. And I wish you all a very good weekend. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.