Dorel Industries Inc. (DIIB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries Fourth Quarter 2020 Results Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain forward-looking 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, 2021. I will now turn the conference over to Martin Schwartz, Vice President and CEO. Please go ahead.

Thank you. Good morning, and thank you for joining us for Dorel's fourth quarter earnings call for the year ended December 30. Joining me are Jeffrey Schwartz, CFO; and Frank Rana, VP of Finance. We will take your questions following our comments. And a reminder, all figures are in U.S. dollars. Our 3 businesses performed quite well, and adjusted operating profit was in line with our expectations. Dorel Sports saw continued strong demand throughout the quarter despite supply chain constraints, which reduced its performance. Similarly, a lack of product availability at Dorel Home resulted in lost sales opportunities, particularly in e-commerce. Dorel Juvenile continued its improvement, although the second wave of COVID-19 slowed the momentum, specifically at Dorel Juvenile Europe. As you know, Dorel's independent shareholders voted against our proposed privatization, thus stating their confidence and potential for the company as a public entity. Going forward, our focus is shareholder enhancement through solid execution. For a review of our 3 segments. Consumer demand for Dorel Sports bicycles remained high, and segment revenue grew for the seventh consecutive quarter. While the Cycling Sports Group and Pacific Cycle posted gains, which would have been greater had it not been for supply constraints, which limited growth -- has changed its traditional model year structure to the calendar year. The change shifted some orders from Q4, the fall/winter period to the current first quarter, this making things more convenient for dealers and notably is matching inventory with the key spring selling period. Pacific Cycle's investment in e-commerce during 2020 contributed to its growth. The division successfully launched schwinnbikes.com and mongoose.com, which drove incremental sales. Caloi recorded a record volume of orders driven by a loosening of COVID restrictions in Brazil. Their reported revenue was down but up double digits in local currency. Demand for bicycles overall is clearly outpacing the ability to supply in both the IBD and mass channels. COVID had been the catalyst which has prompted many new consumers to gravitate to bikes. And going forward, we see this demand continuing to grow. More and more people on bikes is becoming the new normal. This is excellent news, yet current issues are affecting the entire bike industry. A shortage of bicycle components is resulting in very long lead times, which is having an impact on CSG. This is putting a cap on supply, although we are working with various factories to mitigate this. Mass and specialty, our Pacific Cycle division, is being challenged by the lack of available transpacific containers to meet demand, and this is constraining further top line growth. Costs are also going up. At CSG, we are successfully passing on the increases in freight and components to our customers. However, it is a bit different at Pacific where higher FOB costs, freight and foreign exchange, specifically the stronger RMB, are only being partially covered by price increases to retailers. So in summary, the long-term view is sustainability -- is sustainable higher sales, currently being challenged by a disruptive supply chain and cost increases. This summer, Cannondale's new state-of-the-art assembly plant in Almelo, Netherlands will come on stream to multiply the current production capacity of Cannondale bicycles and e-bikes and allow for an increased focus on premium quality products. This will serve us well with the increase in demand, particularly for e-bikes, which is becoming our #1 selling product, mainly in Europe. At Dorel, Q4 demand also remained high. With like sports, sales were limited due to the lack of available containers to ship goods, which has kept inventory low. This curtailed sales, particularly in e-commerce, which is why this channel represented 57.5% of segment total sales compared to 70% last year. Brick-and-mortar sales offset this with another strong increase, thanks to solid POS at major mass merchants as stay-at-home orders were eased across the U.S. Dorel Home business is increasingly being comprised of branded sales. Little Seeds, Cosmo and Novogratz again beat prior year numbers, and we expect this growth of our higher-margin branded products to continue. We are also confident our relationships with newer brands, such as Queer Eye and Mr. Kate will help support our margin improvement plans. Mr. Kate launched last month, and initial results have been positive. Sales in Europe continued to be strong and profits were substantially improved over a year ago. The segment has added resources to expand opportunities outside of the U.K. into Mainland Europe. Throughout, Juvenile's adjusted operating profit was up significantly from last year as the majority of its markets performed better with the largest improvement coming from the ongoing transformation program at Dorel Juvenile Europe. Revenue is down slightly due to the second wave of COVID, which slowed the momentum in Europe. However, e-commerce resulted in a modest year-over-year overall improvement. Sales decreased in the U.S., also partly due to the impact of COVID on sales and mobility categories, such as car seats and strollers, which was somewhat offset by increases in products for the home. Brazil and Chile both recorded improved revenue in local currency as e-commerce continues to benefit both markets. Several new products were launched through the quarter in the European and North American markets. Thanks to the innovation of our teams, Dorel Juvenile received an impressive 46 global and regional awards last year, including most trusted brand for car seats, best design, best baby gear and outstanding customer satisfaction. The award-winning products are in almost all product categories and all Dorel Juvenile global and key regional brands. For our outlook, looking ahead, now in this new fiscal year, many of the conditions of 2020 are continuing. COVID is still impacting consumer behavior. And while our sports and home segments are benefiting from the higher demand, container availability and higher costs, increasing commodity costs and a stronger RMB are disrupting our supply chain and are increasing the cost of our products. At Juvenile, we are poised to deliver earnings improvement versus the past several years. But in the short term, store closures in some markets, lower demand and mobility categories and recent evidence of lower birth rates is why this segment is being most negatively affected by the pandemic. Specifically, demand for Dorel Sports products remains very strong. Despite the industry-wide reality of component availability limiting production and higher costs, the year is off to a strong start. Q1 expectations for sports are for revenues to increase significantly and for adjusted operating profit to be much better than both the prior year and Q4 of 2020. Dorel Home is benefiting from the heightened demand for home products with branded sales such as Little Seeds, Cosmo and Novogratz, expected to continue to grow through 2021. Like sports, supply is challenged by a lack of container availability and a spike in cost. Overall, we expect the home segment to continue to deliver revenue growth with some -- but with some volatility in earnings. COVID continues to affect Dorel Juvenile. We remain positive about our longer-term perspective based on our strategic direction, our best-ever product portfolio, advanced e-commerce capabilities and return to more normal shopping conditions. However, Juvenile's first quarter will be difficult due to a number of short-term challenges, and coupled with increased input costs, this is expected to decrease adjusted operating profit for 2020's Q4 and be more in line with last year's Q1. On behalf of senior management, I thank Dorel's employees in all our locations worldwide for their contributions in 2020. We recognize that our success of the past year is directly attributable to their hard work, and we all look forward to even better days ahead. I will now ask Jeffrey to provide the financial perspective. Jeffrey?

Thank you. For the fourth quarter 2020, Dorel's revenue increased by almost $51 million to $704 million compared to -- or 7.8% compared to last year. Organic revenue improved by about 8.4% when we remove the variation of foreign exchange. The improvements were in Dorel Home and Dorel Sports. They were offset partially by declines in Dorel Juvenile. And the home revenue increased due to strong POS sales in most categories, particularly brick-and-mortar, which we have not seen in a while, and I'm going to talk a little bit about that later. Dorel Sports revenue improved again for the seventh consecutive quarter. As Martin said, demand is very, very strong for bikes, and it's limited by supply everywhere. Dorel Juvenile growth in both Brazil and Europe, driven by e-commerce, was offset by some declines in the U.S. due to the last wave of COVID in Q4, which impacted the mobility categories, particularly even car seats. Gross profit for the quarter increased 130 basis points to 21.6 compared to 20.3 in 2019. When you exclude restructuring costs, adjusted gross profit was 21.7, representing an increase of 140 basis points. The improvement in the quarter was mainly due to Dorel Home and Dorel Juvenile, partly offset by the decline in Dorel Sports. The home margins improved due to lower warehouse costs from lower inventories and reduced promotions. The Juvenile margins improved to favorable foreign exchange rates, better product mix coming from the new products that are -- have been successfully introduced and some lower commodity costs. And Dorel Sports decline is mainly due to increased freight costs and then last year's onetime refund of tariffs on kids' bikes. Selling expenses for the fourth quarter were just 3.5% higher than last year. General and administrative expenses, however, were $68.2 million, an increase of $23.4 million versus -- or 52% higher than last year. The increase was mainly driven by investments in information technology to support the growth of the e-commerce platform, some higher product liability costs, higher people costs and, most importantly, a onetime $7.5 million costs related to the privatization effort. So that is, like I said, a onetime result. Moving over to finance expenses. As our debt has dropped, so has our interest charge. And finance expenses were down $5.1 million to $9.4 million compared to the $14.5 million last year. So that is being -- we're pretty proud of that. On the tax side, obviously, that's a big one for this quarter. So the increase in taxes is, again, a onetime $19.1 million write-off due to the reversal of previously recognized tax benefits related to prior year tax losses in certain jurisdictions around the world. So we -- in a review of where we would likely be making the profits in the future versus where these deferred taxes lay, we were forced to write off some in certain jurisdictions where we no longer thought we would be making the same amount of money as we had in the past. In addition, the company's effective and adjusted tax rate is always affected by a change in jurisdictions in which the company generates its income. If we move over now to some of the segments. But before that, sorry, I'm going to go -- I just want to talk quickly about profitability. So obviously, the net income was down significantly. We have a loss of $22.9 million compared to $0.6 million of -- or from last year. Excluding restructuring costs, the loss was $18 million versus a net income of $2.3 million last year. However, from an adjusted operating profit, as we have said in our previous press releases, when you remove the $7.5 million of costs related to the privatization, we were very similar to the numbers we did last year. So we were able to come in where we expected on that area. If we -- now if we break it down by division or segment, we look at home, home revenues increased by 10.7% or $22.7 million. The increase in the revenue was explained primarily by a very strong POS and brick-and-mortar channel, where we grew over 50% in the quarter versus previous year. Now some of that has to do with availability of product. So again, in a world where factories are running at capacity and a shortage of containers, a number of our brick-and-mortar customers have gone towards basically picking up the goods in the factories in Asia and arranging for transportation. And those businesses did better because they were able to get more inventory than some of the other businesses in which we have to carry the inventory in North America. So I think that -- we're very happy about that. But I believe that, that's probably an anomaly, and I don't expect to see numbers like that continuing forward. I think we're going to continue to be selling the bulk of our product through Internet channels, as we have in the past. Gross profit, 15.8% in the quarter, an improvement of 330 basis points from last year. The fourth quarter improvement was lower warehouse costs -- most significant as we have a lot less inventory than last year. And also last year, we did significant promotions to bring down the inventory to create demand this year because demand was there and we didn't have excess inventory. We really shied away from a lot of the promotions that we did last year. So that would be the result. From the operating profit, it improved by almost 50%, $5.9 million in the quarter to $17.8 million from $11.9 million last year. And again, the improvements were basically across-the-board revenue growth, gross margin. We did have a small increase in expenses. But overall, we're pleased with the solid quarter there. Over in sports, revenue increased by 13.8% to $265 million. When you exclude the impact of foreign exchange rates, the organic revenue growth was actually almost 16%. So again, very strong demand in the quarter. Organic growth was in all our divisions, CSG, Pacific and Caloi. Gross profit, however, dropped significantly. It declined by 320 basis points to 20.8 versus 24 last year. Again, the decline was an increase in costs, increase in freight. We have not yet -- sorry, as of the end of the fourth quarter, we have not implemented a lot of our price increases to our customers. That happened in Q1 of this year. In addition, last year, we had a onetime grant of tariffs -- return of tariffs related to bike -- for kids' bikes in the fourth quarter of last year. So when we put it all together, operating profit was only $1.9 million during the quarter compared to $9.8 million. When we take out restructuring, profits declined by $10.2 million to $3.4 million from $13.6 million last year. If we look at earlier this year, if we compare to quarters 2 and 3, which were so strong, the difference was definitely a drop in sales from reduced container availability and as well as a less favorable customer and geographical mix. So we sold a lot more lower-margin products than we did in the previous quarters. We also, like I said, have significant cost increases, and most of the price increases only took effect sometime in Q1. So we put all that together. It was a difficult quarter but I think one that's behind us, and we're expecting better things as we move forward. If we look at the Juvenile, revenue declined by $3.9 million or 1.9%. Organic revenue actually declined by 2.4% if you take out foreign exchange from the calculations. The decline was -- in the quarter was really a little bit of weakness in the U.S., particularly in the car seat category due to the resurgence of COVID. And even in -- we don't usually talked about it, but Australia had a lot of shipping delays from China, as did a lot of parts of the world. I haven't talked a lot about that in Juvenile, but the container issue did definitely push back sales as well, but not to the same extent as the other 2 divisions. If we look at gross profit, it was definitely increased. It was 29.3%, an improvement of 520 basis points. Again, favorable foreign exchange was behind that, most importantly, a better product mix. More of the new products that we introduced this year are selling than ever before. From a new product standpoint, we're very excited about that going forward. Selling expense in the quarter decreased by $3 million or 11%. The decrease in selling expenses explained mainly by cost containment measures initiated to mitigate the impact of the lower sales. So we are reacting. I mean people really need to understand that although COVID has treated our bike and home business well, it has not been favorable for the Juvenile business. And if we look around the world, even today, there's numerous, numerous of our customers are closed still, places like -- places all over Europe. Peru is in pretty bad shape from that point of view. Brazil is in bad shape. So we still continue to suffer from that. But nevertheless, we put together a good plan for 2021. Operating profit in the division was $1.9 million during the quarter compared to an operating loss of $4.1 million. If we exclude restructuring costs, adjusted operating profit improved by almost $8 million to $5.6 million from a loss of $2.3 million last year. So a good solid quarter despite all of the headwinds that COVID is bringing to this division. If we look at our balance sheet, we're in a much better -- a much stronger place than we were 1 year ago. Our debt is down. Our covenants are in a much better place as our earnings are up, and we are working to finalize a new long-term debt deal with our banks and hope to -- we're planning to have that in place in the next couple of months. So with all that, I'll pass it back to Martin.

Thank you, Jeffrey. Okay. I will now ask the operator to open up the lines for your questions and request that you please limit on your first round to 2 questions. Operator?

[Operator Instructions] Your first question comes from the line of Derek Lessard from TD Securities.

Yes. I was wondering if you could maybe just talk about some of the feedback you might have gotten from investors, particularly those who might have been opposed the going private transaction and wondering how you maybe plan on integrating some of the feedback or ideas that they might have provided to you.

Yes. Okay. Really, what we've taken away from it is that shareholders see a deep value in the business, the assets of the business, the opportunities in the future, which we share. And a lot of them have given us some feedback on that. They know it's bumpy. And they know quarter-by-quarter, it's not consistent, which is something that we continue to stress to the market. And the reality is after all these 25, 30 years of doing this, and we've tried to be consistent, it's just not the nature of our business, given that we do a lot of this low margin, high-volume stuff, which causes volatility. So I think we accept the fact that -- and we agree that there is some long-term value here, and we're going to try to get at it and grow these businesses and get to that value. But like I said, it's -- it could be a bumpy ride. I mean we said this to shareholders during the process that it's bumpy. Look, we're writing off a deferred tax asset. We've had goodwill, the restructuring. I mean are we finished restructuring? Hopefully not. As our restructuring plans for the most part of work, our European plan is doing very well, but that's just the nature of our business. So if you sort of put buckle up, we're in 3 different businesses. Put on your seatbelt, and we all think we're going to get to a much better place, but it's probably not going to be a smooth ride. I think that's the vision that we have.

Okay. And is it -- obviously, you're not managing the business on a short-term basis, but your vision, are you looking out 5 -- like you have a longer-term objective?

No. I mean we can't -- I mean, things change so fast in our business in our industries. Nobody -- a 5-year plan is a joke. But obviously, we're looking further than just the next quarter and building the value. We've done a good job in the bike business. I mean, well, the hard part for shareholders and analysts is what part of Dorel's results are COVID-related and what part is -- or what part is Dorel-related. What have we done internally that have improved or done the wrong way versus what the market is doing? And that's difficult. We see some of that. That's difficult to see outside of this, and it's -- we'll have to wait and see. An example would be I think we've done a great job on our new products in Juvenile, right? But with stores being closed and demand being down a little bit and distribution being challenged, it's hard to really document that. But we -- I know where we were a year ago with new products as particularly 2 years ago, which was really bad. And we had a really good year in 2020 with our new products, but you don't necessarily see those numbers yet.

Okay. And I guess maybe on -- sorry, on one of those COVID, I guess, driven businesses in bikes. I guess I was wondering -- I mean you guys have said or you've expressed confidence that you expect demand to continue in a post-COVID world. Just wondering what gives you that confidence. And the second is how do you think about the business in a post-COVID world, knowing that you do have these headwinds coming up, right, if you're lapping some tougher comps, and you've got now some supply chain constraints.

Well, I mean it is going to be challenging on the top line. I mean people -- what we were saying was Q2 and Q3 last year, particularly Q2, we had a lot of inventory, right? So we're able to really push the sales very hard. We're going in with a lot less inventory and limited supply, as you know. These are not Dorel problems. These are industry problems. They start at the component level, really. There's just not enough components being made today by those sort of manufacturers. People like to do derailers and suspension ports and -- those -- that's the limiting factor in the industry, and it's not going to change in 2 months from now. So that's going to be the challenge. We do have some good things happening, particularly in the Cannondale area, with the product continues to improve. The operations continue to improve. The customers, we have more customers today. Things are really good, aside from just what I'll call industry demand. But you're right, there is going to be a limit to how high you can go this year.

Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.

I just wanted to follow up a little bit just on Derek's question, just with the deal having -- the deal agreement being not successful. And I know Jeffrey can give a little bit of color. But is there anything from a strategic or initiative perspective that maybe you'll focus on now that the privatization transaction hasn't happened? Like is there any -- are there any targets or metrics that you're working towards that as part of a broader strategic plan now that you are continuing to be a public entity?

I mean I think that's what we're working on right now is figuring out the direction that we're going to go. It's only been a few weeks. So yes, we will have that. We're in the process now of going through exactly what that is. So no, I'm not ready to communicate any changes in our strategy.

Okay. Okay. And then maybe just a couple of more acute or near-term questions. You talked a little bit about the model year shift being negative for Q4 and positive for Q1 in the bikes business. Can you -- are you able to quantify what that impact looks like, how much it maybe took out of Q4? And then when you think about how much it will give to Q1, and when you combine that with increased demand, you're talking about revenue being up significantly on a year-over-year basis, are you able to give a little bit more color on what that magnitude looks like?

On your first question, not really because what -- again, the limited supply, that's really container limitations and component limitations is really the whole story. So it's difficult to quantify exactly what the shift meant this year. I know what we -- in theory, we thought it would be much greater than it probably will be the shift. But having said that, again, it's -- I don't -- I'm not going to use the word unlimited, but obviously, we're not going to get anywhere near the amount of bikes that we could get to sell if we had them in Q1. So again, I'm not going to give you a forecast there. But last year was a very difficult Q1 from an earnings standpoint in sales. And now everything that's coming in is going out pretty much. And the good part is there's no real -- there's still an inventory built to have. So the big question is what happens if supply catches up to the demand. I don't think it's going to be like a light switch. Like we had that back, I think it was 2013, perhaps, where literally the market shut down and there was way too much supply and people were in trouble in February of that year. There's no inventory anywhere at the retail level, at the factory levels. And whatever comes in is going out quickly. Having said that, we want to look -- we are expecting a large double-digit increase in Q1 on the top line. And again, it was a difficult -- it's an easy comp, right? I mean let's face it. It was an easy comp last year. But I think the key thing is the underperformance in the Sports of Q4 is not going to repeat itself in Q1. We're still expecting to do quite well in Q1. But it is a challenge versus Q2 and 3 because we don't have that extra inventory that we had back then. That's the thing the market needs to understand is nobody does. Nobody has, whatever it was, $50 million to $100 million of goods that we can throw into a quarter.

Right. Okay. Okay. No, that's helpful color. And then when you think about the container issues, obviously impacting Sports as well as the Home business, do you have any visibility into when those -- when that -- when those constraints begin to ease up?

All I can say is, I guess, it's not getting any worse for the first time in maybe 4 months or 5 months. When will it get better? I don't know. And this is a worldwide problem, right? This is way beyond Dorel. I mean I don't even think the press is even getting half of it. I mean it's affecting food. It's affecting just all commodities, and costs are going to go up. I think this can drive inflation on its own almost, as it's difficult. Will it catch up? It might, later in the year. We don't know. But honestly, this -- again, it's beyond us. We talk to all the experts in the logistic industry and people just have guesses. So anything you can find online would be as good as what we know.

Yes. Okay. Okay. And then maybe just on the -- finally, on the tax side. Are you able to give a little bit -- maybe give some color on the call about the tax accrual reversal? Is there anything else to it more specific about some of the geographic movements? And then secondly, how do you expect the tax rate to -- where do you expect it to normalize to this year?

The -- okay, the first part, no. I mean it's in numerous different places. Again, as our business shifts, if you have some deferred taxes sitting in a region where you're not -- where we don't think we're going to get the same income that we thought 3 years ago, you have to look at that and then you write off those results. And I mean it could mean that we just haven't income in a different area where we don't have as much deferred taxes or losses from previous periods. So that's really what's behind that. It is, again, a onetime thing. We think we cleaned that up. Going forward, Frank, you want to?

25 to 30 is probably the right range.

Okay. Thank you.

There are no further questions at this time. Mr. Martin Schwartz, I turn the call back over to you.

Thank you. That concludes today's call. I just want to thank you all for being with us, and everybody have a pleasant weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Please disconnect your lines.