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

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries' First Quarter 2021 Results Conference Call. [Operator Instructions] Before turning 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, May 7, 2021. I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.

Thank you. Good afternoon, and thank you for joining us for Dorel's first quarter earnings call for the period ended March 31. On the line with me are Jeffrey Schwartz, CFO; and Frank Rana, VP of Finance. We will take your questions following our comments and a reminder that all figures are in U.S. dollars. We are very pleased with the Dorel's first quarter, which exceeded our expectations and ended with the superb month of March. Demand remained strong at Dorel Sports, Dorel Home, with Dorel Juvenile seeing improvements as well. Our solid quarter is attributed to our teams who did an excellent job of mitigating severe supply chain difficulty. Now looking at each of our segments. Dorel Sports had another huge quarter with momentum at all 3 divisions recording its eighth consecutive quarter of growth. Cannondale benefited from significant double-digit growth in all geographies. Sales of Cannondale e-bikes and mountain bikes helped drive the revenue increase in Europe. The Moterra and Habit NEO e-bikes as well as the Scalpel and Trail mountain bikes are extremely popular among cyclists. In the U.S., IBD channel organic growth has been very strong. The demand for bikes continues to outpace supply, keeping inventory low and margins up. Dealers are now actually placing orders into 2022 to ensure supply. Pacific Cycles sold whatever it received as retail POS was very strong. E-commerce was a significant factor in the growth as online sales of bikes, ride-ons, parts and accessories were up substantially. In Brazil, first quarter saw product mix improvement and growth in the IBDs and e-commerce. Caloi finished the quarter with an operating profit of vast year-over-year improvement. While economists in Brazil are predicting a tough economy in the second half, it is expected that bike demand will remain strong. Dorel Home had another good quarter with top line growth and a very solid increase in operating profits. E-commerce sales increased low single digits, but as a percentage of the segment's higher gross sales represented, it 57.4% of revenue compared to 64% a year ago. Brick-and-mortar once again did very well with sales up quite a bit from a year ago, helped by strong POS in most categories and major mass merchants. So it was also another great quarter for the segments branded sales as Little Seeds, Queer Eye, Cosmos and Novogratz, all combined to beat prior year numbers substantially. The new Mr. Kate collection launched in February has had a very good run up to this point and we anticipate this trend will continue. Though not significant for the segment as a whole, sales in Europe were again strong and growing. Resources have been added to expand opportunities outside of the U.K. into mainland Europe. COVID-19 related store closures persisted in a number of Dorel Juvenile's markets, notably parts of Europe, South America and Canada, yet the segment posted another quarter of improved adjusted operating process. Europe posted 3 consecutive months of good performance, yet revenue was down from last year as some regions re-entered lockdowns. Limited in-store sales were somewhat compensated by an uptick in e-commerce. The late shipments from Asia compounded the situation resulting in out of stock for certain products. An important new introduction in Q1 was the Maxi-Cosi 360 family of products, a rotating base with multi-age group car seats. The full roll up in -- rollout in Europe is being held until markets improve when more stores reopen. The U.S. did well due to a combination of pent-up demand and government stimulus checks. Sales were strong in all product categories, whilst more significantly in car seats as consumers began to shop for mobility products with travel increasing. Brazil had a strong double-digit increase from continued e-commerce [indiscernible] and a gradual recovery in brick-and-mortar as stores began reopening. Sales in Chile in local currency increased as well there. The proportion of e-commerce continues to rise. Throughout Chile has made many important changes and the organization has really turned around nicely. In addition to closing some retail stores over the past few quarters, the warehouse has also been closed and has been outsourced to a third party and office space has been reduced. The e-commerce platform is far more agile and more mature. As a result, online has grown substantially. The sale of the Dorel's Juvenile major China factory closed on March 31, and the transaction thus far has been smooth. The transaction is part of the overall strategic direction of Dorel Juvenile. That includes the co-op development of innovative new products with a diverse supplier base of which the purchaser is one. Sales and earnings for all divisions would have been even higher had it not been for increased prices in Asia, shortages of parts, not enough supply to meet the high demand, and ocean container costs and availability. But this situation is not unique to Dorel. Rising prices, shortages of supply and cost of transportation have affected companies worldwide. To offset this, we will have to work on price increases to our customers throughout the rest of the year. Looking forward, higher import costs and supply chain issues are expected to pressure earnings for all our businesses. Dorel Sports sales remain very strong, and the second quarter will be similar in earnings to last year. Sales are expected to be at a record level but bike component availability will remain an ongoing issue. Dorel Homes demand also remained strong however, year-over-year earnings are expected to be lower as higher input costs will pressure margins until needed price increases are implemented. In Juvenile, the second quarter will be significantly better than prior year, which was heavily impacted by the COVID-19 pandemic. COVID remains very presence and this is limiting sales in the key markets of Europe, Chile, Peru and Canada. This has continued into April and May and will likely be similar. This is being offset by better sales in Juveniles' other markets, but overall is limiting our expected performance. In addition to the higher cost on imports, Dorel Juvenile's domestic manufacturing capabilities in North America and in Europe are not immune to higher costs with car seats and resins, in particular, double what they were for most of last year, particularly in North America. We believe we can overcome most of these supply chain challenges and cost increases. Though higher sales, cost reductions and price increases, they do pose a risk to our earnings going forward. I will now ask Jeffrey to provide the financial perspective. Jeffrey?

Thank you, Martin. For the first quarter of 2021 Dorel's revenue increased by $128 million or 22%. Organic revenue improved by about 20.5% after removing the variation of foreign exchange rates year-over-year. These revenue and organic revenue improvements were in all 3 segments. As mentioned, Dorel Homes revenue increased due to strong POS in the brick-and-mortar channel as last year's first quarter was impacted by the start of COVID and the closure of a lot of stores. In Dorel Sports, revenue improved for the eighth consecutive quarter with organic revenue growth coming from all 3 divisions. And at Dorel Juvenile several markets, primarily the United States and Brazil, saw organic revenue improvements that were partially offset by declines in other countries because of COVID. Gross profit for the quarter increased by about 250 basis points to 20.8% versus 18.3% last year. The improvement in gross profit in the quarter was in all 3 segments despite some raw material and cost increases as well as the freight increases that we've been talking about for a while. Let's talk a little bit about restructuring costs here, just to make sure everybody understands what's happening through our statement. So for 3 months ended March 31, we recorded $9.7 million compared to $1.3 million last year. The restructuring costs are mainly related to a loss on the disposal of the Chinese factory. During 2019, Dorel Juvenile initiated a new restructuring program across several regions. Main objective there was to simplify the organization and optimize its global footprint in order to improve its competitive position in the marketplace. These restructuring initiatives were expected to be completed in 2020. However, in the light of the COVID pandemic, some initiatives were delayed and will only be completed this year. So the total costs relating to the restructuring activities of $1.1 million was recognized during the first quarter compared to $1.2 million last year. And then, as mentioned, on the end of the month, Dorel completed the sale of its Juvenile factory in China for gross proceeds of $51 million, of which was received during the first quarter and in that we incurred a loss of $8.6 million that we recorded with our restructuring costs. If we look at finance expenses in the quarter, they decreased by $6.4 million to $8.9 million during the first quarter compared to $15.3 million last year, and the decrease is mainly explained by a decrease in interest on the long-term debt of $3.4 million due to lower average debt balances and the loss of a debt modification of $3.7 million recorded last year in the first quarter in connection with the modification of our unsecured notes. I want to point out too that our balance sheet, that our debt-to-EBITDA ratio now is below 2.5 while last year we were above 5, and I think that says a lot about the turnaround on the balance sheet of Dorel in just 1 year. If we look over to net income during the first quarter, net income was $2.7 million or $0.08 per share versus a loss of $57 million or a loss of $1.78 per share in 2020. However, when you exclude the impairment charges on goodwill last year and the restructuring costs in both years, adjusted net income for the first quarter increased by $25.8 million to $12.2 million or $0.37 per share versus a loss of $13.6 million or $0.42 a share last year, so a good turnaround there. If we move over to the segments now, Dorel Home first quarter increased by 15.8% to $228.7 million. The increase was mainly explained by a strong POS in the brick-and-mortar channel, which is something again that we haven't seen in a number of years. We also had last year delayed shipments in the first quarter from China, which resulted in the supply chain distributions because that's where -- if everyone remembers, that's where the outbreak was and that's where the first signs of disruption were last year on goods shipped directly from China. Online revenue gains were partially offset by supply constraints of imported products. So in this sector we are definitely still feeling the container shortage issue. There are a lot more products we would like to get to be able to bring in, but we -- sort of had a upside limit based on the amount of containers that we can access. Gross profit at 13.7% is an improvement of 130 basis points over the last year. However, it is down from where we were in the latter half of last year. And that again is due to raw material price increases, some mix. Unfortunately for us, some of the product that is the most in demand right now is also the product that is undergoing the most cost pressures. Things like steel chairs, anything made out of steel is definitely seeing their prices increase more than other commodities. And if we look at the operating profit, we finished up 44.2% to $14.8 million versus the $10.3 million last year. Again, improved revenue, big part of that as well as higher gross margin versus last year, but like I said, it is down from where we were at the end of 2020. And of course, that's all offset partially by a little bit of increased expenses that occurred in doing business. We move over to Sports. A great quarter. Our revenue increased by $82 million or 43.6% versus last year. When we remove the varying foreign exchange rates, the organic revenue was still up by 41.5%. So this is the eighth consecutive quarter that we've been able to do this. So we are definitely seeing a lot of strength in the category. Revenues continue to grow with unprecedented consumer demand for bikes around the world since COVID started, as people are continuing to see outdoor activities or transportation methods that are safe and respect social distancing guidelines. In addition, Dorel Sports was able to deliver sound operational execution costs across the supply chain in the first quarter despite extremely challenging global shipping environments and shortages of bike components in the marketplace. So we are performing well, but we definitely have limits put on us by the availability of containers as well as the availability of component parts, which limits the amount of product we can manufacture. We do see also a difference between our Cannondale higher-end business and the mass business. We are seeing more pressure, both on costs and on container availability for the mass businesses because just the sheer volume of product that we need to sustain that business, it's just putting a lot more pressure there that we're seeing on the Cannondale side. Gross profits during the quarter improved by 390 basis points to 22.9% versus 19%. The increase was favorable volume absorption of fixed overhead costs and favorable foreign exchange in many markets, and that's offset by, of course, rising freight costs, rising cost of raw materials and the weakening of the U.S. dollar versus Chinese currency. Overall, the operating profit was $21.8 million compared to a loss of $600,000 last year, and like we said, the increased revenue -- the increased profit was explained by an increased revenue and gross margin improvements in the channel. If we move over to Juvenile, again a little bit of a different story. This business is not being helped by COVID, although we are seeing different parts of the world now moving in different directions. So overall, we increased our revenue $14.7 million or 7.5% or an organic sales improvement of 5%. So we're pleased to see that despite the challenges we have. Several markets, United States and Brazil particularly, are seeing improvements, with the U.S. being very strongly coordinated with the checks that went out for stimulus late in the quarter. We did see other areas, primarily Europe and South America, State of Chile, Peru, Brazil where the resurgence of COVID is continuing to have a negative impact on revenue and making it tough in those areas. Gross profit's up 25.8% representing an improvement of 210 basis points. The improvement in gross profit in the first quarter was mainly due to higher sales volume and better efficiencies in the factory as well as the weakening of the U.S. dollar against most currencies, and that's partially offset by the increased freight costs and people costs in last year's first quarter saw reductions, we all remember during the time because of uncertainties and where there were layoffs and furloughs and stuff like that last year. We get down to the operating profit. The loss was $7.6 million versus a loss of $46.2 million last year. But that includes again, impairment losses on goodwill last year and restructuring in both years. So the adjusted profit improved by $4 million to a profit of $2.1 million this year. So we're glad to see that's moving in the right direction. Little comment on the long-term debt. As you know, we're still refinancing the debt. We are very confident that we will be closing that relatively soon. We do have till the end of the second quarter. There is no real issues here. It's just taking a little bit longer than we expected, but we have a lot of confidence that we're going to get that done with plenty of time here. So 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 Instructions] Operator?

[Operator Instructions] Your first question comes from Stephen MacLeod with BMO.

I just wanted to look at -- just looking at the Sports business here, which obviously had a very strong quarter with very robust growth and it doesn't seem like demand is abating at all and you have a positive outlook for Q2. Can you just talk a little bit about sort of how you would expect, based on what you know today, sales to unfold considering last year's Q2 was so strong like, would you expect the growth rate to be strong but moderated from Q1? Or is it even so strong that you might see Q1 growth rates again?

I mean demand is very strong, right. So demand, I think Martin mentioned, we're taking orders now -- and again what I'm going to say, it goes for the whole industry. So we're pretty much taking orders for 2022 today because 2021 is done. There is no excess availability in 2021 for bikes. So -- and again -- and production is good. I don't want anyone -- we keep complaining about problems in production. That's because we can't get everything we want. But at the same time, we're getting a lot of bikes in every day. So we are expecting a good strong second quarter. Again, particularly on the Cannondale side, that should go pretty steady right through the whole year. We don't see a lot of ups and downs in that business. The Pacific Cycle mass business is a little more variable. Their demand is very, very strong in there as well, but it's -- that's where container freight becomes an issue and we don't have any inventory in our channel. And I'm going to say most retailers have very little inventory. There is some inventory in China, but we just can't get enough containers to get it over here fast enough. So that is definitely an issue. I don't know when that's going to abate. So that could have an impact on Q3 or Q4 as well as we're finding the price increases on the lower priced bikes are significantly more than on the higher price bikes as a percentage right. So those are the challenges we have, but demand is not one of the challenges. Demand seems to be going. I don't believe that the industry is going to be able to fulfill the demand this year, and what we're seeing is going to continue into next year.

Interesting. Okay. That's great. And then just turning to the Home business, you talked a little bit about inflation being an impact for Q2 and even Q1, I guess to a degree as well. When would you expect to put price increases through to offset that inflation? Is it safe to assume that you'd see some Q2 margin pressure, but then maybe that begins to moderate in the back half of the year?

Yes. If prices don't continue to climb, but that's the big if. We don't know where it's going to stop. So we have commodity -- we have items, some furniture items that were on our third price increase since the fall of last year. So that's a lot. The markets aren't used to it. We saw what happened to markets when tariffs came in, right? So tariffs are already in there and we're okay with tariffs, but as I mentioned a couple of years ago, the implementation of price changes are always difficult. And that's kind of what we're going through, but again, so is the whole industry and it just -- it's just always a bumpy ride because like you said we put some price increases in, in Q2, it's going to affect Q2. And if nothing goes up after that, we should be stable by Q3, Q4. But we don't know that yet. So that's kind of the bumpy part of this. But demand is pretty good. Demand is solid. We have a lot of new items that are doing well. We have a lot of new brands that are doing well. Our customers are all doing well in this sector. So it's just going to be a bumpier margin issue than it is a sales issue.

Okay. Okay. That's good. And then maybe just one more if I could, on the Juvenile business, just with respect to the sale of the China manufacturing facility, you've given gross proceeds, but I'm just curious, can you tell us with net proceeds were and -- or --- and how much of that was used to pay down debt and then what kind of operational efficiencies you expect to achieve having sold that facility?

So I mean, most of it -- there was very little difference between gross and net, maybe just over $1 million. It was all used to pay down debt. So that's where the cash went. It's going to give us flexibility. It's going to give us the ability now -- we're going to continue to buy from that factory for sure, but it gives us an opportunity to find items and find technologies from other factories and not have to worry about funding all of the R&D that we have to fund. So we're going to see a good improvement as less cash, less CapEx because we don't have to fund as much of the R&D, we don't have to fund the actual factory anymore. It gives us more flexibility as to go in the direction of the best ideas and best factories that are out there. We've had some -- a lot of success in Europe doing things this way in the last couple of years, and now we're going to be able to do it sort of worldwide. So we're pretty excited and it just takes the pressure off. Our focus needs to be on product design, marketing, branding, and not on running a factory in China, which was never our strength although we did improve the factory quite a bit over the years, but still.

Derek Lessard with TD Securities.

A couple of more follow-up questions. You said the sports and furniture business should remain strong. I was just wondering how you guys think about those businesses in particular, sort of in a post-COVID world where people and the discretionary spend might go away from bikes back to things like vacations and driving and those types of things?

Yes. I mean there probably going to be some of that, but I do think we've seen a lot of people rediscover bikes. That seems to be what we're finding out. Again, demand has not been satiated, so we still have I think a lot to go. There is very little inventory in the system, so we're not -- we think that when it does happen, it will be more of a soft landing than a hard landing. And I -- we don't have the answer to that, but we don't see a slowdown, I could say, at any time this year and certainly into next year. The way the market's reacting and some of the new items that are coming out and sort of a shift to e-bikes, which are really starting to gain a foothold in North America, we still see a lot of runway to go. I'm sure it's going to soften some of the demand here and there, but we're -- it's not like we're filling that demand anyway. And on the home side. The home side, you -- it could level off a little bit, but so much of our business has moved to online retailers, although brick-and-mortar has been pretty strong in the last little while. But again, we're focused so much on our online customers, and I do believe that the move from brick-and-mortars to online retailers is probably permanent. I don't think all those people are going to move back to brick-and-mortar once they've bought furniture online.

Okay. And maybe one -- quite a one for me again on -- more specifically on the Chinese business or factory that you sold. I was just wondering if as you look through maybe your organization over the last several months and years, there are other opportunities to divest off some of the things that you would consider non-core?

I think it's a lot harder because what we have around the world is marketing and distribution, businesses that sell Dorel products. So it's not so easy to sell your -- it's not impossible, but you're selling your distribution of your items in a country, maybe we can do that. But I wouldn't think it's -- there is another material piece like the factory that would be available.

And your next question comes from the line of Stephen MacLeod with BMO Capital Markets.

I just had a follow-up question, a more modeling question than anything else but the tax rate has really moved around quite a bit over the last couple of a few quarters, so I'm just curious what you would expect in terms of the tax rate for maybe the balance of this year and next year?

Is that -- yes. So I think we're looking probably in the 25% range given all -- everything being equal and not having sort of adjustments.

And there are no further question at this time. I will turn the call back over to the presenters for closing remarks.

Okay. Thank you. Okay. This concludes today's call. I want to thank you all for being with us. Have a pleasant weekend, and a very Happy Mother's Day to all the moms out there.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.