Dorel Industries Inc.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Durell Industries' third 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 and then 1 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, November 3rd, 2023. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

Okay. Good afternoon, and thank you all for joining us for Dorrell's third quarter earnings call for the period ended September 30th. Joining me are Jeffrey Schwartz, CFO, and Frank Renna, VP of Finance. We'll take your questions following our comments, and all figures mentioned during this call are in U.S. dollars. Durrell Juvenile delivered double-digit revenue growth and an impressive turnaround in earnings. Their new products are clearly winning with consumers, and our business is gaining market share in an industry that is down from last year. Durrell Home's revenues continue to improve for the third quarter with positive indicators at brick and mortar. Considering the continuing challenges for consumer product companies, I'm pleased to say that our two segments are navigating positively through, though we recognize the need for continuing improvement. A further positive is that retailers selling our products now have far less inventory on hand, and our own inventory levels are at their lowest in two years. The vast majority of the high-cost inventory from last year has been sold. The current lower-cost inventory is contributing to improving margins. Looking specifically at our two segments, the world juvenile posted year-over-year and sequential improvement in both the top and bottom lines. Operating profit would have been even better had it not been for the currency impact in Europe. New products are continuing to drive sales, as was evidenced during September's Cologne Juvenile Product Show. We built excitement with our teams and connected strongly with our customers from all over the world, writing the most orders ever at Cologne. The new Mica 360 Pro was unveiled, a seat that can be used from birth till four years old. It's the latest addition to the groundbreaking Maxi-Cosi 360 Pro family, featuring Dorel's SlideTech technology. In addition to the cologne show, Juul attended several local European fairs during Q3. Among the items unveiled was a new Maxi Cosi 3-in-1 stroller in what is termed the comfort segment. There is a considerable market for this latest entry as it's at the right price point with all the features consumers are looking for. Maxi-Cosi now offers parents a wide range, including car seats, strollers, home equipment, and connected products, to take them through their parenting journey. These launches represent continuous improvement in the European product portfolio, allowing Juvenile to retake market share, something we are clearly doing. Another exciting development was Juvenile's recent partnership with BabyList, at the grand opening of their first flagship showroom in Beverly Hills. The showroom offers a guided registry and product showcase where Maxi Cosi, Tiny Love, and Safety First take center stage with dedicated displays just as you enter the store. This partnership is a testament to Dorrell Juvenile's commitment to innovation, providing parents with the opportunity to explore our products. Additional launches are planned to further broaden Juvenile's product portfolio and strengthen its position in the market. While sales are not where they have to be at the rail home, there were nonetheless a number of positives during the third quarter. Revenue and gross margins have increased steadily through the current year, with lower freight and board costs contributing to improved margins. Inventories have also decreased considerably from last year's comparable period, and is the case with Juvenile. Also, Home has also been successful in depleting its higher-priced stock. Last month's High Point Furniture Market drew excellent attendance to the Dorrell Home showroom. Comments regarding the segment's new product introductions were extremely positive. with customers saying it was home's best lineup ever. We are enthused with our new product development talent. Currently, the furniture industry is experiencing a moderation in consumer spending. This year's numbers show a continuation of slower growth. Challenging interest rates are tempering spending, but there are a number of things in place at Dorel Home to capture sales as consumer appetite returns. Several new products are scheduled for next year, and we feel somewhat positive that home will gain market share. Looking ahead, we maintain our overall forecast of quarter-over-quarter earnings improvement going forward. At the REL Juvenile, market share data confirms that we are gaining sales at the expense of the competition with our new, innovative product that is resonating well with consumers. While we are concerned by the economic environment in which we are operating, we remain focused on bringing winning products to the marketplace, partnering with our retail customers, and investing in e-commerce to ensure that the progress so far this year continues for the balance of 23 and into 24. Results at Doral Home are less positive, but sales have been steadily improving and we are narrowing our losses. The segment is operating in a challenging environment, slowing the pace of our turnaround, but the expectations are that we should deliver an operating profit as soon as fourth quarter of this year, setting the table for a much better performance in 2024. I will now ask Jeffrey to review the financials.

Thank you, Martin. For the third quarter of 23, Durrell's revenue decreased by $14.5 million, or just under 4%. Compared to last year, the organic revenue declined about 5.9% after removing the variation of foreign exchange rates year over year. The revenue and organic revenue decline was caused by the Durell Home Group, which was partially offset by improvements in Juvenile. In the Durell Home, the revenue decline was mainly at the online level. as opposed to brick-and-mortar channel, which we actually saw growth in during the quarter. Gross profit for the quarter increased $27 million, or 69.7% compared to last year. Gross margin in the third quarter was 18.3%, representing an improvement of 790 basis points from 10.4% last year. Improvement in gross profit in the quarter was both in juvenile and home. In juvenile, it was mainly due to improved product mix, lower product costs, and a weaker U.S. dollar relative to major currencies from last year. In dual home, the improvement was also due to lower product costs as well as increased factory absorption. from slightly improved domestic manufacturing activities. The operating loss for the quarter was 3.7 million compared to 33.7 million last year. Excluding restructuring costs, the adjusted operating loss decreased by 27.8 million to an adjusted loss of 3.7 this year from 31.5 last year. Finance expenses in the quarter increased by $1.4 million to $6.5 million, and that's related to the average interest rate costs compared to last year. And the overall net loss for the quarter was $10.4 million, $0.32 per diluted share, compared to $36 million or $1.13 diluted share last year. The $1.13, when you look at it from excluding restructuring costs, was $1.07 last year. We move over to juvenile. We're pretty happy with the quarter. It is on the trajectory that we wanted it to be on from the beginning of the year. So revenue increased by 19.3 million or 10.3%. Organically, that number drops to 6.4% because of foreign exchange. The improvement in revenue and organic revenue was mostly in the US and European markets, although we did see some strength in some of the other foreign markets as well. In the US, the increase was across the board in all brands and categories. Europe actually experienced double-digit revenue growth for the second sequential quarter from the new product launches that continue to gain momentum, and that was both in the specialist and the e-commerce channel. Gross profit for the quarter increased 25 million, or 83.5% compared to last year's third quarter. The gross margins were 26.7, representing an improvement of 1,060 basis points over last year. that is mostly, again, due to lower costs, better efficiencies, better absorption, weaker U.S. dollar. All of those things are helping us get our margins to where we want them to be. And the operating profit, which it's nice to say an operating profit for the quarter, was $3.2 million compared to a loss of $18.4 million last year. If we look at the restructuring costs, that loss last year was 16.2 without restructuring costs. If we go over to the home side, third quarter revenue dropped by 33.7 million or 18%. The decline in the revenue is mainly, as we said before, reduced online sales, you know, pretty much across the board where we do online sales. However, on a sequential basis, the third quarter revenue did increase by about 15% over the last two quarters, and that's important for us. Gross profit for the quarter increased by 2.1 million, or 23%. Gross margin in the quarter was 7.1, which was an improvement of 230 basis points from 4.8 last year. Again, the reason for that, lower product costs, both in raw material and freight, and a smaller percentage of the older, higher-cost inventory that we open the year with. As that depletes, it allows our margins to go up. The level of older, higher-cost inventory has actually been reduced significantly. There's a little bit left, but it's a much, much smaller amount than we've had in previous quarters. The margin also was impacted positively by slightly better domestic manufacturing activity, and we hope to see that activity picking up over the next few quarters, which will also lead to some improvements. On a sequential basis, gross margins improved by 570 and 310 basis points compared to the first and second quarters of this year. The margins should continue to improve as freight costs and board and overseas finished good costs of all decreased significantly from the start of the year, as has the remaining older higher-cost inventory. Finally, the operating profit in that group declined, the loss, sorry, the loss declined by $4.4 million to a loss of $3.6 million from about $8 million last year. 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 request that you please limit them to two in the first round. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Derek Lessard with TD Cowan. Please go ahead.

Yeah, thanks, and good afternoon, everybody. So I just wanted to start with juvenile. Looks like some encouraging trends there, but one in particular stands out to me, and that's in the U.S., where I think just last quarter you called out the difficult operating conditions. I think retail customers were right-sizing their inventories, but you went from zero to basically double-digit growth. Is it fair to say that you're on the other side of this in the U.S.?

I would think so. As you know, Derek, I think I've explained we've divided our juvenile business into three areas now, Europe, North America, and what we call international. All three of them are doing very well. The U.S., absolutely. We continuously, every quarter, we're seeing market share gains. It is tough still out there. There's not a lot of customers, you know, and the bigger ones are probably growing a little slower. We are doing much, much better with the smaller players, but we are still doing well with the big players in general. But, you know, we are looking at this point to market share, and as we see gains there, we have to be a little bit patient, and hopefully we'll see the market in general improve. But in the meantime, we are pretty pleased with where we're going.

Okay, and then maybe just – switching gears to the cost structure, maybe of both businesses, starting with gross margin. Juvenile has, again, shown, I guess, the greatest progress, as you could say, but how do you think about where you are right now in terms of your gross margin, and how do you get back to sort of the pre-pandemic levels? It looks like you're close, but what's going to take you to the next level in juvenile?

Yeah, that's a good question. So where we're going with that is we're seeing our mix moving in the right direction. We're selling more and more Maxi Cosi products, as an example, which carries much higher gross margins. We're seeing a lot of success there, both in Europe, obviously. That's where Maxi Cosi's main area is. But we're seeing it in North America and international as well. A lot of that is led by, you know, innovative products. So when you have the right product, people will pay for it. And we continue to be successful in those areas. So that's helping. That's helping really drive the margin, as is volume. You know, I've always said that we were just operating at a, you know, break-even type volume area where it was tough. You know, you had to cover all your costs. But once you're past that, you know, you start to see really your margins increasing much quicker. And I think that's where we are. So mix is probably the most important thing. And then, you know, level of leverage is probably number two.

And then maybe, and that's helpful, maybe before we QA, I'll just, maybe the same question for home. But gross margin there, you're probably at the quarter of what you were at its peak. So is it, Is it a reasonable expectation or do you have an internal goal to get back to the sort of pre-COVID or pre-pandemic levels?

I mean, pre-pandemic levels. The problem with home when you go back is pre-pandemic you had that whole tariff issue, right, for about a year and a half. So if you really want to take out all the noise, you probably got to go back to 2017 and, you know, in the business world that's, 100 years ago. So it's a little more difficult to compare. But yes, if you're asking can we do better, absolutely we can do better. You know, volume is still challenging. It's still a difficult environment where people are not necessarily choosing to buy furniture products. You know, we're focusing in on doing what we need to do to drive the sales and take costs out of the system. I mean, it's Costs are coming down, and we are looking at, you know, different ways to remove the costs. And we're seeing sales increasing, but it's at a slower rate than we would have hoped for. That's probably the best way to put it. I'll read you.

Thank you.

Once again, if you have a question, please press star, then one. The next question comes from Stephen McLeod with BMO Capital Markets. Go ahead.

Great. Thank you. Good afternoon. Just a couple of questions that I wanted to follow up on here. Just in terms of the juvenile business, can you talk a little bit about where you're seeing your share gains? You mentioned that a couple times in the press release as well as the outlook. So just curious, are there specific geographic markets or specific product and markets, or is it something you're just seeing sort of broadly across the board? Sure.

It's primarily car seats, but it is across the board from a geography standpoint. So a lot of success in Europe, a lot, a lot of success in Europe. Also good success in the United States and Canada. Australia, we're having a tremendous push on car seats as well down there. Other products are doing well. But I think if you look at what's causing all this, it really is the newer car seats that we've introduced.

Okay, that's helpful. Thanks, Jeffrey. And then maybe just secondly, when you think about the home business, you're talking about the brick-and-mortar in-store sales turning positive today. Can you just talk a little bit about what the drivers are there, and then I guess the flip side of that would be, what are the drivers that are continuing to weigh on online, or is it all just demand-related?

Let's start with bricks and mortar. One of the things that's plagued us earlier this year, maybe the end of last year, was the lack of actual product on the shelves. I think we've spoken about that. It was a real issue where Our customers had the product in their systems, but not on the shelf because lots of different reasons, including lack of focus on furniture, lack of labor to get the product on the shelves, lots of different reasons. So that stuff is now pretty much, that problem is gone, and with a lot of product on the shelf, it's a lot easier to buy that. We've also focused on that area. That's kind of where we started. there's less competition in that area for bricks and mortars. You've got to be able to do that work. It's not the same as, you know, one at a time pieces. And I think people in general are just going into stores again. And, you know, that's not an issue like we had, you know, during COVID where nobody wanted to go into stores. So, you know, I think we're seeing a general pullback on online. It's still strong. But, you know, I think between maybe more competition and weaker demand is causing the – and I'm going to throw one more thing in there. I think – because it's not across the board. We have some online customers that we're actually improving on. I think it's focus. I think some of the retailers have decided that furniture, given, you know, interest rates, given, you know, the challenges the American and, you know, I guess world consumer has, that perhaps furniture isn't a category to key in on. And we're sort of feeling that as well, because where we do have more active customers who are really focused on it, we're actually seeing growth.

That's great. That's great. Thank you. And then maybe just one more, if I could. Just in terms of the inventories, it sounds like, obviously, you saw – the positive impact on your margins from selling through a lot of the high-cost inventory. And then you also talked about retailer inventory being less in the channel. Do you still think that there's an opportunity for retailers to replenish their inventory levels into Q4, which could drive accelerated sales growth on your end?

I think retailers are being pretty cautious this year. So I'm not seeing sort of what I would call the upside of what you suggested. Having said that, given that their inventories are now down, we're not also seeing sort of a – they're not pumping the brakes, but they're not really accelerating. I think everyone's still nervous about the consumer, and I think they're still trying to carry less inventory than historically they have.

Okay, that's great. Thanks, Jeffrey.

The next question comes from Derek Lazard with TD Cowen. Please go ahead.

Yeah, Jeffrey, I just wanted to hit on your G&A line. You talked about some cost cutting, but if you look back, it seems like it is a bit higher as a percentage of sales basis in both segments. So I was wondering if you maybe can talk about how it got there and anything to suggest why Either it should stay that high or any other cost initiatives that you've got in the pipeline.

Right. Well, we'll start with, okay, there's, I think, two answers. One, on the home side, I think it's just the level of volume. We are looking at it. I mean, obviously, you know, part of it is related, has a variable relationship with sales, but some of it doesn't. So, We are looking at that. We are expecting sales to go up, and hopefully between everything that we're doing next year, we'll right-size that number. The juvenile answer is a little different, and maybe it's a little more positive, and that is it's been a number of years that we've missed our plan, and the incentive programs haven't really kicked in for all the employees. And as of the end of the third quarter, we're on schedule to hit our internal plan, and We've got incentives built in, and that's probably the single largest item in there that I can think of that wasn't there last year at this time.

Okay.

I mean, that's a good thing, I guess, right? I mean, you want to give people their bonuses when we perform, and they are on schedule to hit their plan. Right.

And just maybe a few housekeeping for me. How much debt did you pay down in the quarter from your cash flow? I think you pointed out.

Right. Okay. We're just checking on that here. What's the number? Flat. Yeah, it's about flat. Yeah. Flat. So no real pay debt.

Yeah. Okay. And you also pointed out in the press release, you know, that discussions with the lenders are ongoing. I'm just curious if you've got any update on when you expect to cross the goal line.

Yeah. I mean, I'm going to start with a disclaimer, and that disclaimer is until we have a signed deal, we don't have anything, right? So it's dragging out a little bit longer than we had hoped, but but we have made significant progress versus three months ago. So, again, I'm hoping it will be sooner rather than later. And, you know, that's all I can really say. I'm really in a box on this one.

Okay. Thanks for taking my questions, everyone.

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

Okay. Well, thank you all for joining us, and I wish you all a very good weekend.

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