Dorel Industries Inc. (DII-B.TO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries Third Quarter 2025 Results Conference Call. [Operator Instructions] Before turning over the meeting 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 10, 2025. I would like to turn the conference over to Martin Schwartz, President and CEO. Please go ahead.

Thank you. Good morning, and thank you all for joining us for Dorel's third quarter earnings call for the period ended September 30, 2025. With me today are Jeffrey Schwartz, CFO; and Jayson Kwasnik, Vice President of Finance. We'll take your questions following our comments. Please note that all figures mentioned during this call are in U.S. dollars. The third quarter ended with a significant agreement with new financial partners that will fund our strategic agenda in accelerating the growth of the Juvenile segment and executing the repositioning of the Home segment. The lack of liquidity prior to these arrangements, seriously impeded our ability to develop and bring new products to market. This was most acute in the Home segment, but as the quarter progressed, it also delayed key product development initiatives in Juvenile, a problem that has now been resolved. This internal challenge was compounded by external pressures, particularly in the U.S., where tariff uncertainty and higher retail price points are creating a slowing retail environment. Despite this, Dorel Juvenile delivered a quarter characterized by stable revenue and strong international performance, led by our European operations, offset softness in the U.S. These results again demonstrated the strength of our global footprint and our commitment to building a more agile and competitive business. Dorel Home progressed on its restructuring plan including the ending of manufacturing operations, further workforce and footprint reductions and aggressive inventory liquidation. As always, Jeffrey will walk you through our results. But first, I want to add some color to our press release on Friday, starting with the Juvenile segment. In many ways, the third quarter was like our second. After a very strong start in the first quarter, sales slowed in the U.S. fundamentally due to the uncertainty being created by tariffs. And as in the second quarter, our international footprint allowed us to offset the challenges in the other -- in the U.S. and strong revenue growth in our other markets offset the U.S. results. As of today, this uncertainty continues to exist with almost weekly pronouncements on potential tariff rate changes. But one thing is almost certain is that tariffs will not disappear even if less erratic in their implementation. Higher input costs are almost certainly unavoidable on imports going forward. Higher prices are in the marketplace and retail velocity is slowing. This is true in both our Juvenile and Home segments. But with challenges come opportunities, and we did not allow the situation to slow our product development and market activation activities. We also have the benefit of domestic manufacturing in our best-in-class car seat facility in Columbus, Indiana, which is proving to be an advantage. One of the largest car seat production sites globally, the facility produces approximately 3 million units annually, supporting nearly 30% of the U.S. market. By leveraging local sourced materials and maintaining a strong U.S. presence, we can manage cost effectively, respond swiftly to market demands and support American jobs. The strategic focus enables Dorel Juvenile to provide families with safe, high-quality products while navigating ongoing trade policy and supply chain challenges. Let me now turn to some of the exciting developments across our brands and markets in the quarter. The marquee event of the quarter was our global preview at the Cologne Juvenile Show. This event brought together our teams from across regions to showcase new innovations and strengthen customer relationships. The event featured the global value of Little Seeds nursery furniture brand and the introduction of Maxi-Cosi SlidePro Family, including the advanced SlideTech 2.0 system. The contributions from all markets, the event fostered cross-regional collaboration and reinforced Dorel Juvenile's commitment to innovation, connection and global growth. We started several unique marketing initiatives in the quarter, including a nationwide brand awareness campaign on Reach TV, the largest in airport television network in the U.S., present in over 70 airports. The campaign featured video content promoting 3 of our global brands. We also promoted our Made-in-Indiana initiative that highlights our domestic production airing every hour and during live NFL game coverage. With an estimated reach of 30 million travelers, this initiative significantly boosted brand visibility among a highly engaged audience. And now for Dorel Home. As we announced last quarter, we are completely transforming the Home segment as we look to reverse the losses of the last 3 years. This transformation is built on 4 key pillars: Elimination of domestic manufacturing, a reduced product line focused on the most profitable items and categories, a smaller distribution footprint and full integration of back-office activities into our Juvenile segment. We are actively delivering on these initiatives. And as of today, we have accomplished the following: We ceased manufacturing at our Cornwall, Ontario facility. We exited 2 major leased warehouse spaces in California and Montreal, moving into a much smaller space in Juvenile run facilities. We reduced our nonmanufacturing headcount from 470 to 240. And we reduced third quarter operating expenses by over 40% year-over-year. We do not see the benefits of all these actions in the third quarter, but we will see more in the fourth quarter and really more in 2026. We continue to work on exiting product categories that are now considered noncore, and this allowed us to exit these large facilities in California and Montreal. The next phase is to move inventory in our East Coast facility and our Michigan location as we drive to a footprint that matches our new business model. And as I said last quarter, the work being done by our North American teams to make this happen has been incredible, including those of our team members who will be leaving us. As I said last quarter, I want to reiterate my appreciation for their commitment to helping Dorel move forward. During all of this change, our sales, marketing and product development teams continue to actively work on the new Dorel Home. We have a lot of exciting new products that we were unable to bring to market thus far this year as we work through our liquidity issues. I'll let Jeffrey update you on how our new structure will allow us to move forward, but from a product development perspective, we can now work more actively with our supplier partners to bring these products to market. In October, we attended the annual High Point furniture show in North Carolina. Several of our top customers attended, and we shared our go-forward vision and several new items across our remaining product categories, and they were extremely well received. I will now ask Jeffrey to review the financials. Jeffrey?

Thank you, Martin. Just before discussing the results, just want to make -- reiterate some things about the new facilities that Dorel has because it really is probably the most important thing that's happened to the company in a while. So as we announced on September 29, Dorel entered into a new financing agreement for the group of lenders led by the affiliates of TCW Asset Management, that includes senior secured credit facilities in the amount of USD 310 million. That consists of USD 175 million senior secured asset-based revolving credit facility, of which we borrowed USD 110 million and USD 135 million term loan facility. Also announced, we entered into an agreement with the Alberta Investment Management Corporation, AIMCo, for a private placement preferred shares issued for the total amount of USD 75 million. The company used the proceeds from the new credit facilities and preferred shares to repay Dorel's previous senior secured debt lenders, and to pay for certain restructuring costs in the Dorel Home segment and for working capital purposes. The new credit facilities and the proceeds from the preferred shares recapitalized Dorel's financial position in the company now expects to be well positioned to advance its strategic agenda, particularly an acceleration of the growth of the Juvenile segment and executing the repositioning of the Dorel Home business. From a revenue standpoint now, the third quarter, Dorel's revenue decreased by $55.7 million or 15.7%. The revenue decline was in the Dorel Home area with Juvenile becoming -- was essentially flat. As announced on June 30, the Dorel Home operation is substantially reduced in size through the international -- intentional reduction of active SKUs that are now considered noncore. In addition, sales decline versus last year due to product availability issues as well as customers holding orders due to the uncertainties of tariffs. So the revenue decline in the U.S., as Martin mentioned, began in the second quarter and was due to the uncertainty that tariffs have brought to the marketplace. This general consumer product issues in which price points again are upside down, but probably more important is it doesn't -- the change in tariffs doesn't give the retailers an opportunity to strategically plan their product lines to meet the right and appropriate price points. So -- all of this is just causing some chaos in the marketplace, and then we're sort of seeing that in softer demand. I'm going to skip over any discussion of general gross profits and margins and stuff like that. Because in the Home side, there was an incredible amount of noise, as you can imagine. I'll just talk about some of the reasons for the noise, but it doesn't really help us in looking -- analyzing any go-forward numbers based on the Home results. The general operating loss was $25.7 million compared to a loss of $11.1 million the year before. If we exclude restructuring costs, the adjusted operating loss decreased by $1.1 million to $8.1 million. Financing expenses increased by $10.6 million during the quarter compared to last year. The increase is mainly explained by the loss of extinguishment of debt in the amount of $9.7 million during the quarter. If we look at Home, like I said, our Home business declined by 40% in sales, again, due to the restructuring and the exiting of many SKUs and product categories. Even within that, we had product availability issues due to liquidity issues that were pretty acute in the third quarter. Many suppliers had moved us to a COD level, and we weren't necessarily able to get everything we needed. In addition, as I talked about before, we've got the problems and the uncertainty of the tariff rates, which affected strategic planning on both our customers and our side as well. Skipping over again all the gross margins. I just want to again, remind people what was done and when in Q3. So we shut down the -- at the end of the quarter, we shut down the manufacturing facility in Cornwall. And unfortunately, had to give quite a bit of severance and write-down of inventory and equipment, which some of that was done in Q2. But as you can imagine, as you wind down a facility, your efficiencies are horrible and we had significant losses because of that. We exited our distribution warehouse in California at the end of September, which again necessitated an aggressive stance to move out old inventory. We are exiting the Montreal facility or did exit the Montreal facility on October 31 of this year. But we, again, ran a sort of shrunken facility expensive lease and other areas there that just caused massive inefficiencies. So that's behind us as is the distribution in California warehouse. We did an inventory write-down of $11 million in the quarter, and we did have severance in the quarter, $4.3 million. So again, we've talked about all this severance. We've talked about a lot of this stuff for a number of months now. But we didn't see any of the relief really in Q3. We had some employees not with us anymore. But generally, we had all the facilities. We had all the overhead, and that was all put into Q3. We're going to start to see some relief in Q4. I'll move over to Juvenile, which had a flat quarter from a sales perspective. A little bit disappointing. We did have a weak August, although our business did rebound significantly in September allowing us to have a reasonably decent quarter. The revenue declines -- there were revenue declines in the U.S. and Brazilian market. The revenue declines were offset by improvements in other markets. So Europe, again, is experiencing some very nice organic revenue growth in most of their countries. And then we've had areas like Australia, Canada, Chile, our export markets, we're seeing significant growth in those markets as well. A lot of it is led by our Maxi-Cosi brand, which is our premium brand, and that seems to be going very well. Gross profit in the quarter decreased by $1.6 million or 2.6%. The margin was 27.8%. It's a decrease of 50 basis points from last year. It's primarily due to the lower sales volume in the U.S., which is, again, caused by tariffs in that area. The operating profit was $4.9 million during the quarter compared to $7.2 million. But if we exclude restructuring costs, the operating profit decreased by only $1.4 million to an adjusted profit number of $6.6 million. With that, I will pass that back to Martin.

Thank you, Jeffrey. The outlook for Dorel Juvenile remains very positive and the resilience to a difficult environment is evident in our results thus far this year. We remain confident in Dorel Juvenile's ability to navigate ongoing market challenges and capitalize on growth opportunities across our global footprint. As we look to the fourth quarter, we expect further improvement in our U.S. business, which coupled with our other markets, gives us confidence that we will deliver results that will well exceed the prior year. In the Home segment, our focus remains firmly on executing the transformation of the segment into a leaner, more agile organization. We are confident that the structural change is underway including back-office integration with Dorel Juvenile, inventory liquidation and facility consolidation will position us for improved financial performance in 2026. For both our segments, while the retail environment remains challenging as tariff pressures persist, we are actively working with our key customers and suppliers to stabilize pricing, rebuild trust and reestablish momentum. Our team's resilience and commitment throughout this transition gives us confidence that we will enter the new year with a strong foundation to deliver significantly improved earnings. With that, I'll ask the operator to open the lines for questions. And please, as always, limit your questions to two in the first round. Operator?

[Operator Instructions] The first question comes from Derek Lessard with TD Cowen.

Jeffrey, I just wanted to maybe just start on the Juvenile segment. Curious if you had a sense of what the organic growth was excluding the U.S.

I believe organic growth was maybe down -- excluding the U.S.

Yes, because -- I think in the press release...

I have it including the U.S., it's down a couple of basis -- a couple of points, organic growth. But excluding the U.S., I'd have to figure that out.

Okay. We can maybe take it offline.

Sorry, is that 9%? Someone is giving me a number.

Yes, because you said it was down to 3% on a consolidated...

Yes. But I would say 10%. We're seeing -- I mean, we're seeing some areas that some countries are growing at 30%. So we're pretty bullish on the general market. And you know what, thank God that we're not just based in the U.S. because -- yes. So that number is somewhere between 5% to 10% if we exclude the U.S....

It makes sense. I mean that would be in line with what you reported last quarter. I think it was plus 12% or something like that. Okay. And then just maybe just on a similar vein, can you just maybe talk about or compare and contrast like the different operating environments versus -- in Europe versus the U.S., for example, in Juvenile?

Well, I think -- I mean, it's tariffs, right? Because at the end of the day, like tariffs is causing chaos is the best way to describe it. Price points are changing, costs have gone up, but then not all price -- not all like 100% of the price increases go through. Now we've got a reduction of 10% on goods from China, right? So okay, that's going to be good. That will hopefully either or stabilize margins or bring down some price points, which maybe will stimulate demand a little bit. So that's a positive sign for the industry. We don't have those issues in Europe. We don't have those issues in Canada or Australia. And the new products that we're bringing to market is doing very, very well. I will say that the liquidity -- if we're talking Juvenile on the liquidity side, we definitely lost some momentum in getting our new products to market on time. That's back now, like -- I'm not saying they're all back in the market, but we no longer have delays. We've got -- our suppliers fortunately stuck with us on Juvenile. But a lot of them were not ready to commit investments until we caught up in our tables, which have been done right now, that's behind us. So I think if we would have been normal, we would have seen some newer items, which would allow for higher sales, but a lot of that stuff is coming in as we speak.

Okay. And how do you look -- or how is the setup, I guess, heading into the holiday period?