Dorel Industries Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Durell Industries' fourth quarter 2024 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, March 12, 2025. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

Thank you, and good morning, and thank you all for joining us for the fourth quarter call for the period ended December 30th, 2024. With me are Jeffrey Schwartz, CFO, and Jason Kwasnick, VP of Finance. We will take your questions following our comments. Again, all figures mentioned during this call are in US dollars. When we released our third quarter earnings and outlook in November, we committed to acting aggressively to improve our earnings and deliver value to our shareholders. Since then, we announced both the substantial restructuring plan in our home segment, as well as the successful monetization of our Columbus factory in the form of a sales leaseback transaction. I will leave Jeffrey to elaborate more on both of those shortly, but at first I want to provide color on our fourth quarter results by segment. The rural juvenile has maintained its trajectory of year-over-year revenue growth this quarter, achieving a 2.2% organic revenue increase. But this was below the trend of the rest of the first nine months of the year, as we saw lower sales in the U.S. in the quarter. This came after a very strong third quarter in the U.S., and it should be noted that for the year, our North American operations was the top contributor to our improved earnings and we gained market share. Notably, Europe achieved a revenue increase of approximately 18% in local currency. The momentum for our third quarter customer events and new product introductions enabled the growth. The major omni-channel players and e-commerce are driving the sales increases. This includes our own DTC sites that continue to grow in importance. Market share gains continues, and in the fourth quarter, we returned to the number one position in car seats in the UK for the first time in many years. We are also growing market share in our other measurable markets, Germany, Netherlands, and France. Our next major event is in the first week of April, and the customer attendance will include all of the major players, and we will be rolling out yet more innovation at that event. The strengthening us dollar against almost all other major currencies negatively impacted revenue growth and earnings in fact currency was the most significant drag on earnings and accounted for 7.5 million of the missed to prior year currency rates have been really volatile since the end of the third quarter we are talking to our suppliers and customers about how to best manage this As we have seen in the past, the ability to recoup the cost of negative currency rates varies by market, but there is also a delay between the change in rates and our ability to offset it. As I said, currencies have been really volatile, and in fact, as of today, some are right back where they were several months ago. The euro, which is our most impactful currency rate, is back where we planned for, as is the Brazilian real and the Chilean pesos. We have also done some hedging to lock in those rates, so as of now, we are less concerned about currency than we were, but of course, it's always a risk. Chile and Peru remain as challenging markets to operate in, and we have been re-engineering those businesses to be less reliant on our company-owned retail locations, which carry a heavy fixed cost. We actually lost money in the quarter, which is usually the best quarter of the year for Chile and Peru, but we have made management changes there and our new general manager has both retail and e-commerce experience. We are going to prioritize e-commerce, both our own retail sites and working with our third party wholesale customers who have omni-channel capabilities. We believe this is coupled with the right retail brick and mortar footprint will allow us to get our business back to profitability this year. Now turning to the real home. As we announced in January, and as Jeffrey will elaborate more upon in his review of the financials, a big part of the turnaround in home is our ability to reduce our footprint to match the new reality of our industry. We experienced it again in the fourth quarter and sales levels could not offset our fixed costs. We also continued to work through our excess inventory, which meant lower margins and a lot for the quarter. But beyond restructuring and reducing our costs, I want to lay out the pillars to success that we have identified and are building upon. Number one, leveraging our previous success with traditional brick and mortar and omni-channel retailers. Our capability to offer real-time customer service and maintaining required in-stock levels for these retailers make us a preferred option, and we are having success in securing new programs with major retailers. Number two, a reduced product line with different and value-added features at outstanding prices. The ability to offer furniture store quality at mass and warehouse chain pricing is how Dorel became a leader in the industry. and we intend to regain that distribution. Number three, become the most efficient domestic manufacturer of wooden RTA furniture. Having domestic manufacturing can be a huge asset, and our Cornwall, Ontario factory has been an industry leader for over 30 years. With new programs and higher volumes, this will provide an advantage over the competition in a lot of wooden furniture categories. Number four, prioritizing fewer but more successful licensed brands such as Novogratz. We have had success with some of our licenses and less so with others. We are going to focus on the winners and this will enable better allocation of targeted marketing expenditures to drive sales and enhance both revenue and profitability. Number five, grow in new markets. Europe today accounts for less than 10% of revenues And we believe this is an opportunity that we have not fully leveraged with our audio acquisition, something we believe we can improve on. And number six, an enhanced management team. Troy Franks has returned to the rail as the rail, the rail home CEO, and he has a record of proven success with our Costco product line. The support team around Troy includes several dynamic members who will drive success. So our ability to execute and deliver on these key pillars, along with the reduction of costs initiated in 2024 and 2025, will lay the groundwork for future profitability. In our outlook, I want to address the recent uncertainty brought on by the potential for tariffs, firstly as proposed by the Trump administration, but also possibly some of the other jurisdictions in which we operate. I want to break down our business a bit more to give you a sense of the exposure for both. First off, the US juvenile business is about 40% of our sales, which means the remaining 60% is mostly immune other than the macroeconomic impact of a possible global slowdown or the impact on exchange rates. But right away, that removes a lot of our exposure. Most of our car seats sold in the US are manufactured in the US. something we are very proud of and that cushions the impact relative to our competition. Some of the inputs of that factory might be subject to tariffs, but obviously our exposure is much less. When it comes to imports in China, we have moved some to other countries, but it is true a lot of products still rely on China. The biggest one is throwers, but this is true of all juvenile companies, so the playing field is level there. The overall impact on juvenile will happen if all the potential tariffs go into place. But less so versus others and manageable in our view. For home, it is a bit different because it is very US centric. So imports in China and possibly Canada will be impacted. Normally, I would also say that our Canadian factory is an advantage but tariffs could become an issue there. However, the type of product that we make there is very competitive versus any other country of origin. So we think that it will continue to be the case. Our competition tends to source from the same jurisdictions that we do. So we are not at a disadvantage relative to them. This is where our excellent supplier and customer relationships gives us some confidence that we can manage the extra costs brought on by tariffs. But as of now, due to the unknowns, it is difficult to assess the potential impact on our supply chain, product costings, retail price points, and ultimately on our consumer. But we believe we are well positioned relative to our competition to successfully navigate the challenges tariffs could pose, So now tariff impacts aside, this is how we see 2025 for the REL. The REL juvenile is poised for continued growth and success. Despite the challenges posed by foreign exchange fluctuations, we remain committed to our business plan centered around innovative new products, brand building, digital excellence, and outstanding customer relationships. This will continue to drive market share gains and expansion efforts and enhance our competitive position. With a focus on improving profitability in underperforming regions, we have made management changes in Chile and we expect better performance going forward. We are confident in the juvenile segment's ability to achieve sustainable growth and create lasting value for our stakeholders. At the rail home, we are making progress in overcoming the challenges posed by the current market environment for furniture companies. The restructuring efforts taken are already delivering results. Our ability to move domestic production to one RTA factory has improved our efficiency and lowered production costs. We have reduced our workforce and our success on lowering inventories means we will be exiting one of our warehouses at the end of the first quarter with the balance of our footprint reduction scheduled for near end of this year. Additionally, we will continue to innovate and introduce new products, prioritize higher margin items, and successful licensed brands to grow with our omnichannel retail customers and expand their market presence in Europe. With a leaner, talented, and more agile organization, We are confident in our ability to capitalize on market opportunities and expect to return to profitability by the end of the year. I'll now ask Jeffrey to review the financials.

Thank you, Martin. Good morning. The fourth quarter was not a good quarter. We got hit by a number of somewhat non-regular operating events. as well as a number of non-operating charges that went through our financial statements. The big issues on the operating side, you know, that Martin mentioned, the FX hit we took in juvenile was significant. The U.S. dollar surged in strength right at the end of the year. In fact, I think it probably peaked right at the end of the year. On the home front, you know, we started the restructuring process, which has led up to significant inefficiencies. as we set our overheads in an effort to reduce costs. On the non-operating side, we had restructuring charges of about $14 million and a write-off of deferred taxes of about $35 million for the quarter. If we look at the total losses for the year, we're showing $171 million, but I want to point out about $100 million of that is made up of the restructuring write-offs of goodwill and deferred taxes that occurred in 2024. In fact, of the $100 million, only $6 million is a cash charge. The actual operating loss for the year was $28.3 million versus $47.6 in 2023. And that $28 million does include the FX hit that we took at the end of the year. Now, of course, we need to get the operating business back into the black. in 2025. To do that, we have engaged in an aggressive restructuring plan for our home business in 2025. We've given out the details of that in a previous press release, but just to remind everybody, we're downsizing our non-manufacturing workforce, which is mostly done. The closure of a manufacturing operation, one we closed Tiffin, Ohio, back in Q3. And then the Montreal manufacturing facility will also be closed in 2025. An acceleration of SKU reduction initiatives. We can't be everything to everybody like we've been in the past, and we're going to focus on the best, most innovative products that make money going forward. But of course, that's a process to get there. We still have to get rid of the old inventories and just not rebuy them again. And then a big one, of course, is a distribution footprint reduction in which we're going to be shedding some warehouse space throughout the year. One of the locations, as Martin mentioned, will be done at the end of the first quarter. We will see the results from this restructuring plan accelerate throughout the year through each quarter. So we hope to see better and better results as time goes on. And we are aiming to become profitable in the home division by the fourth quarter. I'm going to skip this call reading out all the results that I normally have done because they are in our statements, but I'm going to point out a few things. In home, excluding restructuring costs, the adjusted operating loss increased by 1.8 million to an operating loss of 11.7. Again, a result of production inefficiencies during the ramp up of the Cornwall facility and the ramp down of our other factories, as well as an aggressive push to move out inventories of products which we plan to exit in 2025. On the juvenile side, fourth quarter revenues were $212 million, essentially flat, but when we take out foreign exchange, it actually improved by $2.2 million. Earnings disappointed, but we do not see this as a change in trend. The bulk of the decrease in gross profit, gross margin, and operating profit in the fourth quarter was driven by the significant foreign exchange rate impact as the U.S. dollar strengthened. In year over year, the negative impact of the FX was about seven and a half million in that area. And now, of course, we are seeing a reversal in strength of the U.S. dollar. So, so far in the queue and expect to see some of that loss coming back into gains in Q1, providing the U.S. dollar doesn't restrengthen between now and the end of March. In addition to the aspect that, however, we did have two other regions. You know, Martin did talk about Chile. chile uh we have had a change in leadership and uh our business plan at the end of the year uh we all we are seeing results already in q1 uh improving um and we're happy we're really happy with the direction that that's going in um in the u.s u.s one uh it did hit us in a which led to our customers having a good amount of inventory. But more importantly to that is there's going to be a change in standards in CARSI in 2025. NHTSA has included a side impact testing requirement for all CARSI throughout the year. And what is happening is the major retailers slowed down purchasing of the older noncompliant seats in the quarter to make way for the new seats and not, you know, they don't want to get stuck. I don't know the date exactly, but at some point they're not allowed to sell those seats. So they want to make sure that they, you know, are not, they weren't buying aggressively like they normally do of the old seats. So that was probably the biggest single impact we had there. We have started, by the way, we have started shipping many of the new side impact compliances in January and in the first quarter. So things are getting back to normal. The rest of the regions all had very strong sales and growth in Q4. We're very pleased, as Martin mentioned, 18% in Europe in the quarter, gaining market share. That's going well. Again, now that the euro has bounced back too, I think that's going to have a nice impact on our profitability as we move forward. We still remain very bullish on the juvenile and expecting a growth year in 2025. I want to talk a little bit now about liquidity because liquidity is obviously an issue that Sorel is facing. It is tight. We did announce on February 21st that we entered into a sale-leaseback transaction. We received $30 million gross, of which just over $8 million was allocated to reduce debt, and the balance went in to help fund the operations. It actually had a pretty nice impact, and we were able to get some concessions from many suppliers because we were able to catch up on some of our payments. You know, the transaction is part of our initiative to finance the growth of our juvenile segment and the turnaround of the home segment. We are actively working on a number of additional opportunities to further enhance our financial position. I can't disclose the nature or timing of these because until they're done, you know, they're not done. But I want to make sure that everybody knows that this is of the utmost importance. And we feel we're making pretty good progress, actually. Some of them we hope to get done in the short to midterm. All of the ones we're working on are independent, which what I mean is, although, you know, the more things we get done, the easier it will be to do other ones. But they're not one or the other. We have, like I said, a number. They could all get done. They're all somewhat independent of each other. And I feel good that there's a numerous path for us to improve liquidity without having to go down the path of, you know, dilution or any shares impact. And 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. Operator?

We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will 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 2. We will pause for a moment as callers join the queue. First question comes from Tarek Lessard with TD Securities. Please go ahead.

Yeah, good morning, everybody. Jeffrey, I just maybe wanted to touch on the liquidity. I'm curious if, and I think you said in your opening remarks, but are you able to give any sense of sort of the timing when you would expect some of these initiatives to close?

I mean, some should hopefully happen in Q2. But you know, I mean, even the sale lease back, which I thought would be like a four week deal ended up being like a seven week deal. Just getting through the legal stuff and there were no actually no issues. It's just things drag. But I'm hoping to have something in Q2. and then more as we continue to go through.

Okay. And thanks for the color around the juvenile segment in the U.S. I was just curious on those, the changing car seat requirements. Do you have any idea or sense of when retailers are expected to blow through their old inventory?

No. You know what? I should. I don't have the dates for you. I know we and I think a number of our competitors are shipping the new compliance seats now, and they just didn't want to continue to order big quantities of the old seats, you know, given that we've already started shipping the new ones. So that had an impact. I don't have the dates. I can get them to you, but I don't have them.

Okay. And then maybe just one final one for me before re-queuing. Is there – Or can you maybe contrast the differences you're seeing in European demand versus the U.S.? This is on Juvenile.

Yeah. I mean, overall, it's still a bit of a weak demand. It's not as bad as it was maybe two years ago or three. But demand is like the industry is not strong. Our performance. is, I think, better than most in the industry, and that's what we're seeing in the numbers. But we're also not seeing a big drop sort of at the end of last year. So, again, we're not looking at a rebounding industry. We're just doing things better and doing things right, and that's getting us the increase in sales and margin.

Okay. Thank you. That's it for me.

The next question comes from Steven McLeod with BMO Capital Markets. Please go ahead.

Thank you. Good morning, guys. I just wanted to ask about the home business. You know, you get some tariff color, tariff exposure color for juvenile. I just want to confirm with home sort of how much of the revenue is generated in the U.S. I think it's the vast majority. And then how much of your production comes from Canada or domestically in the U.S. versus imported?

It's a little convoluted. Production would be 10%, 15% maybe in Canada. It's growing. I mean, you know, obviously, you know, we closed down a factory in the U.S. that was not as efficient as the Canadian factory. We are getting significant. We were losing money last year, even in our Canadian factory. But now we're starting to see the efficiencies getting better. Production is going up on a day to day basis. Things are getting better. But then this obviously puts a little bit of a curveball in. To be fair, we're working with our suppliers. We're working with our customers. It's not easy to replace this production. The quality is good on what we're producing. The sell-through is good on what we're producing. It's not so easy to move. There's not that many people that can do that domestically. Some of the business we picked up, And our Canadian factory was from a company that was making theirs in Mexico. So I don't think that that's really an option, you know, for that retailer to go to its old supplier. Let's put it that way. So, you know, retailers are going to go through a lot of pain. Customers, I think, are going to go through a lot of pain. We're going to go through some pain. But, you know, we're feeling like our factory in Cornwall, should be okay at the end of the day. But again, who knows, right? I mean, we don't know where, what demand is going to be, what the final tariff is going to be, what currency is going to be. I mean, there's so many variables here. But, you know, we're feeling like at least the retailers, our customers and our suppliers are working well with us.

Yeah. Okay. That's great. And then the balance, if it's 10 to 15% in Canada, is the balance imported? And then I guess how much of that would be China?

Yeah, there's a little bit of, very little bit, but, you know, we did, I mean, this might end up being a good one. We did close the mattress factory, or we will be closing the mattress factory in 2025 in Canada. We're replacing that with U.S. production. Third party, but U.S. production. So, you know, that's going to be a nice move.

Okay, okay.

Okay. And then maybe how much of it is China?

I mean, we did since the last set of tariffs, we moved a lot of products out of China. So it might still be, you know, 40% rings a bell to me out of the imports. but i'll tell you it's not across the board it's very concentrated in certain categories in which we cannot find anyone that could even with the tariffs get the cost you know to make sense so um okay you know that there might be some challenges there but uh We do have some alternatives. We can move some of that product, and maybe now with the 20%, it tips the scale and we'll move some of it. We're working, again, with our customers. I mean, these are important categories for them. They've been with us for a long time. The product is good. It's just a lot of turmoil, right? So far, we're managing through it.

Okay. Yeah, certainly not a lot of visibility, which makes it challenging. And then maybe just on the home business, as you think about the improved or return to profitability by Q4, can you just give us a sense of how much of that profitability improvement comes from improved gross margins versus reducing your fixed cost footprint?

It's both. I don't have the number in front of me. It's both because, again, we've got a number of products that we've produced. We've been really good at our R&D. We have not been able to bring everything in. You know, we are still, you know, liquidity doesn't allow us to increase our inventories quite yet. And that's sort of what we're looking to do. So there is some product coming in that has good margins. We need a buy more of those and sell more of that stuff. So we are expecting that. The other thing is we had a significant number of negative margin when we cleared out old goods throughout 2024. We won't repeat that. I mean, we can't because we don't have that amount of inventory to clear out or to reduce. So we know that that won't be done again. So that in itself kept margins low. So again, we sold a bunch of product at good margins, but then we sold a lot to sort of get out of categories and stuff at low margins, which then shows up as a overall low margin base. And of course, you know, getting more efficient in the factory and making money in the factory. And then the last piece is, you know, just shedding overhead. We're not, you know, as I said, for the last year, we, during COVID, we thought this would be a $1 billion company and started building it towards that. Warehousing and, you know, structures and people and offices and stuff. And now we're just trying to shed all of that and get down to a much more leaner, meaner, competitive company. So it's all of those things. Yeah.

Okay. Okay. Okay. That's really helpful, Jeffrey. I appreciate it. I think that's it for me right now. Thanks so much.

Okay. Once again, if you have a question, please press star, then 1. This concludes the question and answer session. I would like to turn the conference back over to Martin Schwartz for any closing remarks.

Okay, thank you. I just want to thank everybody for joining us today and wish all of you a good day. Thank you.

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