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.