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

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries Second Quarter 2021 Results Conference Call. [Operator Instructions] 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, August 6, 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 second quarter earnings call for the period ended June 30. 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 discussed are in U.S. dollars. We are very pleased with the second quarter. Dorel reported substantially improved earnings despite the continuing chaotic supply chain environment. Our teams again demonstrated sound operational execution in dealing with the effects of record increases in container freight rates, higher product costs in many categories and somewhat limited inventory. We are able to secure product to meet much of the demand, but it wasn't enough to fully satisfy consumers' needs, many of whom return to in-store shopping. The U.S. commerce department recently reported the increase in second quarter GDP reflected the continued economic recovery and the reopening of establishments, but noted a decrease in retail trade inventories. Dorel sports had a remarkable quarter, again achieving record revenues and earnings. Demand for bike showed no signs of slowing and Cannondale's models remain extremely popular. There has been continued improvement at Dorel Juvenile with gains in all geographies as consumers responded well to new products. Europe's progress was limited by COVID and freight-related issues. And Dorel Home revenue was significantly down also due to COVID shutdowns at suppliers in Vietnam and Malaysia as well as container issues. Now we'll look at each of our segments. Dorel sports posted its 9th consecutive quarter of gains. It is worth noting that according to NPD data for the 12 months leading up to this spring, sales of bicycles at U.S. retail were 21 million units compared to 15 million for all of calendar 2019, just before COVID hit. This clearly says it all and the demand shows no signs of slowing. The segment posted organic growth at all 3 divisions despite container shortages and low inventory levels. The Cycling Sports Group and Caloi did especially well. Europe led CGE's compelling advances and the first half of the -- was a record-setting one for Europe, easily beating last year's numbers in local currency. Among the best performers were Cannondale's Topstone, the highly popular gravel bike. There was also significant e-bike sales, mainly from Cannondale's Adventure NEO launch, the Moterra and Habit NEO as well as solid growth in mountain bikes from the Trail and Scalpel. Overall, CSG had far more orders than could be supplied. Demand for Pacific Cycles' products in the mass channel was very strong, but was again limited by ocean container constraints and in-stock levels. Retailer e-commerce was down as consumers resumed in-store shopping. Caloi had strong organic revenue growth driven by continued consumer demand despite similar supply chain challenges. Even previously, slow-moving bikes sold out due to other product's unavailability. Caloi implemented a new round of price increases enabled by the exceptional consumer demand. As mentioned, Dorel Home suffered this quarter due to freight and COVID issues. Also year-over-year comps was a tough one to beat as the segment had its best quarter ever last year due to extremely high e-commerce demand at the height of the COVID lockdown. While consumers returned to stores this past quarter, boosting brick-and-mortar sales by 20%, it was not enough to offset the drop in e-commerce. Dorel Home is currently developing additional products to better serve the online channel. Promotional activities are also planned to spur demand. New products such as step stools and indoor furniture from Cosco Home & Office as well as the line of outdoor furniture did very well in 2 major mass customers. Branded products continued to perform with yet another quarterly increase in sales. We remain bullish for this category as growth of higher margin branded products is expected to continue through the year. In addition, with the lower revenue, supply chain issues affected Dorel Home's profitability. In particular, freight costs impacted by industry pricing pressures and container availability increased dramatically. Also port delays compounded the situation. The segment will still be a solid performer as these conditions ease. Dorel Juvenile had a very satisfying quarter and is continuing to make headway as markets reopen and its product portfolio resonates well with consumers. Sales of its indoor home equipment such as play yards, high chairs and safety items gained ground. The segment maintained its improvement trend with gains in revenue and adjusted operating profit. All geographic markets posted higher revenue, notably the U.S., Brazil and Chile. Europe was also up and would have done even better had it not been for COVID restrictions in April, but things improved later in the quarter as retailers began reopening. Reaction has been positive to new products, particularly the new Maxi-Cosi 360 family of car seats. Home equipment and other car seat sales also improved. U.S. had a very strong quarter driven by Cosco and Safety 1st products as well as government spending stimulus, which help push consumer demand. Convertible and Booster car seats and umbrella strollers were the most popular product categories. Brazil continued its leading market share expansion with its strong e-commerce platform pushing sales. It has been the go-to juvenile product company in that country. Improvement also continued in Chile despite continuing pandemic-related restrictions affecting stores. Sales grew triple digits from last year as the division's emphasis on e-commerce enhancement boosted the online channel, helping to offset lower retail sales. In the outlook, the uncertainty of supply for every industry worldwide is as acute as it's ever been. Demand for container freight continues to push our cost to unreal levels and is hindering our ability to meet the continuing strong consumer demand. Virus outbreaks in various parts of the world and labor shortages are additional risks. Our capacity to successfully manage these issues with our vendor and retail partners will be vital to our ability to deliver a strong second half. This is especially true for Dorel Sports as component availability and supply are preventing us from delivering even better earnings. Exceeding prior year's second half earnings is limited only by these supply issues as demand is expected to remain very strong throughout the year. At Dorel Home, demand is softening versus last year's unprecedented performance that was driven by purchases for the home as the pandemic enfolded. We are implementing strategic price increases, but higher costs will continue to negatively impact our margins. Despite this, we expect we can deliver earnings consistent with prior year. At Dorel Juvenile, success in Europe remains critical to our continuing turnaround. Consumer reaction has been positive to the innovation in our new products and our product pipeline remains robust. The majority of our other Juvenile markets continue to do well with North and South America in particular delivering improved earnings. Borrowing significant product shortages from a lack of supply or an inability to manage higher costs, we expect Juvenile's second half to be better than the first and in line with prior years. At this point, I will turn it over to Jeffrey for his review.

Thank you, Martin. For the second quarter of 2021, Dorel's revenue increased by $41 million or 5.7% to $765 million. Organic revenue improved by about 3.2% after removing the variation of foreign exchange rates year-over-year. And then when we also remove the impact of revenue from the sale of the Juvenile products manufacturing facility in China, adjusted organic revenue actually improved by 4.3%. Revenue and adjusted revenue growth was in the Sports and Juvenile segment, and that was offset partially by the reduction in Dorel Home. On the gross profit level, when we exclude restructuring and other costs, adjusted gross profit was 21.4%, representing an increase of 110 basis points. The improvement in the quarter was again in Dorel Sports and Dorel Juvenile, offset partially by a decline in Dorel Home. The rise in expenses that we've seen in the quarter is really mostly a result of last year's cost containment measures to mitigate the impact of COVID-19 in quarter 2 of 2020 when we were really unsure of where the business was going and did some significant cost increases, including some layoffs and some other areas. While this year, we pretty much ran as a normal business given that demand is pretty strong. Finance expenses for the quarter decreased by $2.8 million to $9.3 million during the second quarter compared to $12.2 million in 2020. Our taxes, if we exclude income taxes and restructuring costs, the company's second quarter adjusted tax rate was 26.7% compared to 49.9% last year in 2020. And then we come down to net income. Again excluding the restructuring costs, adjusted net income for the second quarter increased by $7.4 million to $23 million or $0.70 per diluted share compared to $15.6 million or $0.48 per diluted share a year ago. Getting into the divisions now, we take a look at Dorel Home. Now second quarter revenue declined by $23.9 million or 9.2%. The decrease in revenue is mainly explained by reduced online sales during the quarter versus last year's unprecedented growth. People were stuck at home last year and spent a lot of time buying stuff for the home. However, we did see a fairly large increase in store, brick-and-mortar store, which is interesting as people are actually getting out of the house to go back to the stores and we saw that in our numbers. If we look at gross profits, excluding restructuring costs, the adjusted gross profit was 13.2% in the quarter, a decline of 100 basis points from last year. The decline was mainly due to higher warehousing costs, increased freight costs, reduced sales volume and a higher proportion of lower-margin store sales. In addition to that, when you look at our business, we often are the leaders in raising prices or giving price increases. We saw this during the -- in I think 2019 when we did the tariff increases that being ahead of the market does slow down your business a little bit until everybody catches up. And we expect our competition to be catching up in price increases, given the fact that costs are going up so much around the world. And we saw that in tariff issue and we did have a few months where business was softer until everybody caught up. So we're confident that going forward, the market will balance itself, and our demand should pick up because of that. Our operating profits, excluding restructuring costs, the adjusted operating profit declined by $7.1 million in the quarter and again mainly due to lower gross profit dollars from lower revenue and a lower percentage and some increased expenses as I talked about before. If we look at the Sports business, great quarter. Last year's second quarter was a record and we're able to beat that. We beat it by 11% or $31.7 to $317 million. When we exclude the impact of varying foreign exchange rates year-over-year, the organic revenue was actually 8.5%. Dorel Sports' revenue and organic revenue improved for the 9th consecutive quarter, driven by organic gains in all 3 divisions. CSG and Pacific revenue continue to grow with unprecedented consumer demand for bikes around the globe since the beginning of the COVID-19 pandemic and as people seek outdoor activities or transportation methods that are safer and respect social business guidelines. In addition, Dorel Sports was able to continue to deliver sound operational execution across the supply chain in the period despite the extremely challenging global shipping environment and a shortage of bike components in the marketplace. So you're going to hear us complain a lot about supply issues. But nevertheless, we're selling more bikes than we ever have before and I think that's important. During the second quarter, gross profits improved 90 basis points to 24.5% from 23.6% last year. That's due to pricing, limited discounting and some favorable foreign exchange rates. Look at the operating profit, $31.7 million compared to $26.8 million last year. Operating profits improved mainly due to increased revenue and gross margin improvements as well as a lower impairment loss on trade accounts receivable last year, offset in part by some overall higher expenses. In Juvenile, Dorel Juvenile second quarter revenue increased by 18.7%, $33 million. If we take adjusted organic revenue, that improved by 18.1% after removing foreign exchange adjustments and the sale of our Chinese factory. So we did see a significant bounce back in business. All markets had organic revenue gains. And that's really good to see as we're still making improvements in a lot of places. Second quarter gross profit was 25.9%. This represents an improvement of 200 basis points to last year in the quarter. You remember, Q2 was very difficult for the Juvenile business last year and we've been able to improve on that. Our operating profit, $2.1 million during the quarter compared to a loss of $1.2 million in 2020 and excluding restructuring costs, operating profits improved by $2 million to $3 million versus $1 million last year. Few other notes on the balance sheet. Increase in receivables, $34.6 million due to the overall sales increase. Inventories have increased, particularly in Dorel Home and Sports. What it's saying, particularly on the Sports side which is interesting, is despite our inventories increasing in Sports, we still really don't have much bikes in stock. And that is just that the significant number of bikes that are on the water or being shipped to the warehouse or at the port has grown as demand has, but by the time they make it to our warehouse, for the most part, we turnaround and then send them off to the customers. So despite extra inventory on the books, we really don't have any inventory. One anecdotal story that I'd like to share is the amount of adult bikes that we have in stock at the Cannondale for North America. And that number has declined from Q1 to Q2. In Q1, we had 47 bikes salable for purchase that were not spoken for and we finished Q2 with 31 bikes available. So that's pretty crazy for a business as ours. If we -- I think with that, I will pass it back to Martin.

Okay. Thank you, Jeffrey. Okay. I now ask the operator to open the lines for questions. [Operator Instructions] Operator?

[Operator Instructions] Your first question will come from Derek Lessard from TD Securities.

Just a quick question. I was just wondering if you guys -- I'm curious if you have a sense of how much money you guys are leaving on the table because of the supply bottlenecks.

Well, I mean that the supply bottlenecks are 2 pronged, right? You've got literally supplier bottlenecks. And that will be the components and bikes or shut down factories and home and bikes for that matter. And then there's what can we not get that's built, what can we not get across the ocean to the various parts of the world. I don't really have answers for either, but even if tomorrow morning we were able to get the factories to build everything we needed, we still probably couldn't get it to our customers everything we wanted. And vice versa, even if the container -- suddenly there was 50% more container ships available, we would still have supply constraints because the factories are either closed or can't keep up with demand. So there's too many moving pieces, but it's pretty massive on the Juvenile -- on the bike side, less so on the Juvenile side. Juvenile side, I can throw out maybe $5 million to $10 million a quarter is what we're missing, but significantly more than that under the Sports side.

Okay. And that's helpful, Jeff. I guess maybe along the same lines. Like how are you dealing with the bike shops and retailers in terms of bookings and what have you going into the fall?

For the fall, those are already done. We're dealing with next year. So what's happening now is we're allocating -- we know what production we should be getting next year and we're starting to allocate that to dealers. And it's somewhat manual process, the way we're choosing to do it. And it's certainly not a first come, first serve or we had dealers that got nothing because they couldn't get an Internet connection and they find out there's nothing there. So there's still a limited supply for next year. We're hoping it's greater. We're looking forward on the Cannondale side to having more mid- to higher-priced spikes. We tended to order a lot more lower price bikes for 2021. I'm not sure where the market was going. And so we're expecting to see in the fall and the first half of next year sort of an average selling price to base on Canada because of that. But really, it's an allocation -- still on an allocation level.

Okay. And maybe just one last one from me. And great to see you guys finally get some nice organic growth in the Juvenile segment there. Margins are under some pressure. Just wondering what's the difference between I guess today's Juvenile segment and maybe the profits of like 2, 3 years ago.

Yes. Well, they're really focused. The decline that we had was focused in 2 areas: Europe and Chile. So if you take a look at some places like Brazil, we're actually doing significantly better. The U.S. has done well year-over-year. Canada is better. Australia is better. So really the problems -- and they were -- Europe and Chile were both high profit centers. So in Europe, we're definitely coming out on the right side. We've -- as you know, we've flash cost there. But more importantly, we really redeveloped our products. And Martin mentioned a couple of product lines that are doing well, but they really are doing well. The 360 family of car seats introduced a few months ago is exceeding expectation. Our Home product line, meaning high chairs, bassinets, are doing extremely well. So Europe is really -- we're feeling really good about Europe. We do have the issues of COVID and we're having sort of a restrained demand because of that, but very excited that we can hopefully get back in a few years to the profitability levels that we had in the past. And Chile, we've also done a similar thing where we've we flashed a lot of our costs. We've moved to a smaller facility. We've got large warehousing and we're seeing the turn in profits. So I mean we made money. We had lost money for a number of years now going back 2 or 3 years, and we expect to be profitable this year despite the chaos in Chile. I mean politically it's still a little bit unstable and they've had a lot of COVID issues. But we've survived, we've definitely gained market share. I think a lot of our competitors have sort of not been able to make it and we're starting to see that on the bottom line. So I think that's what needs to get done to get back to those levels that you're talking about. It's getting Europe and Chile back, and we're seeing progress in both of those.

That's very helpful. And I guess on -- just one last question on Europe. I remember you guys were a solid #1 and #2 in most of the product categories. Has that changed at all over time?

Yes. I mean I think we dropped -- we had a lot of competition back, I'm going to say, in '18, '19, and I definitely lost market share there. We made a lot of changes, as I said. I think overall, Europe was still #1. But country by country, that's not necessarily true. So we're coming back with a lot more product and it's working. That's all I can say, is we set out what we expect to sell and those numbers are being achieved.

Your next question comes from Stephen MacLeod from BMO Capital Markets.

Just wanted to follow up on the Sports, the bike business. I mean obviously, demand is -- continues to be very robust. Are you sort of -- notwithstanding like supply chain issues, but are you sort of sold out for 2022? Is that kind of where you are when you think about the ability to -- sorry, the ability for demand to continue to be strong?

Close to it, I'm going to say. I mean I can't give you a definitive number, but certainly in many models we probably are. We've got commitments and we've got orders from customers. That's not to say we won't have any inventory at all during the year that becomes available. But it's close to that.

Okay.

I mean I'm hoping I'm right there. I don't want to over scare any salespeople on our division in case. There are certain models. We are out there and we're looking for new orders. But we had -- demand is very, very, very strong. Again, we're -- 2022 is going to be another year of trying to get as much supply as we can. I think that's probably a better way.

Okay. I see. Okay. That's helpful. And then just curious, you talked about even if sort of the 2 types of supply bottleneck that you're seeing were relieved tomorrow, you'd still have bottlenecks. But like, is there any visibility into when both of those things will -- both of those components will sort of open up?

No. I mean the freight end of it is -- this is a worldwide situation for everybody and every industry, I'm sure as you know and you've heard stories. Yes. I mean part of our, let's say, Home Furnishing issues is that we do -- when the tariff shifts in 2019 in the U.S., a lot of production was moved to Vietnam, Malaysia, some to Indonesia. And all of those countries are under heavy lockdown right now. So that would ease. We do have some inventory. We're not out of inventory in Home Furnishings, but I do worry about certain products that have had 2-month delays. So we could be out of stock at the end of the year on certain products. We are beefing up our -- I'm going to say this globally now. We are spending money on increasing domestic manufacturing in all 3 businesses. We think there's an opportunity. We're putting money into our factories in Canada and the United States in Home. We're expanding our distribution as we've talked about in bikes in Europe. In Juvenile, we're looking to see what we can do domestically because we do still have factories in the United States and Brazil and Europe. So these are all becoming better assets now as -- for our business as the shipping and other issues affect us. So I don't have an answer, but we're responding in those type of [ plays ].

Yes. Okay. And when you talk about beefing up domestic manufacturing, that's interesting. Is that -- are you close to having manufacturing capabilities in terms of what you're referring to, the incremental investments that you're making?

I mean we have -- all of this is not additional facilities but upgrading these facilities so they can produce things faster and more -- yes, faster and I guess more profitable and ability to maybe upscale some of the production we do. Certainly in the Home segment, we currently have 3 factories. We haven't really invested in them in years, but are now investing in them. Similar like I talked about the bikes and even in the Juvenile, we're looking to see what we can do to keep those factories because I don't know this -- if it's freight issue. I mean it's going to get better. Things always get better, but if it's going to go back to the level we had back in 2018, '19, maybe not. And then having domestic facilities would give us some strategic advantage.

Yes. Okay. That's great. And then maybe just on the Home side of things, some of these higher costs. I know you talked a little bit about pricing. What's the timing to offset some of these -- some of those cost inflation?

We've introduced a lot of pricing already. In some cases, 2 rounds. Some cases, we've actually gone back with 3 rounds. It's happening. Sometimes like I said, it's -- especially online, if your product price goes up and your competitor takes another month to put their price increase through, they have a lower price online than you do for a month. And that definitely affects sell-through. So -- I mean, the reason I'm feeling good is we saw this when we raised prices on tariffs in '19. And we saw this exact thing where suddenly sales slowed down on items and we were -- had -- it was very, very bumpy. And then by the end of '19, all that settled down and we went into '20 and even the first quarter of '20, Home Furnishing was seeing increases in sales before the pandemic even hit. So I feel like we'll get there. We just -- when does all of these increases stop and then we can probably feel like, okay, now we can get back to the level of growth again.

Your next question comes from Derek Lessard from TD Securities.

Yes. I just wanted to follow up on the domestic manufacturing comment. I was just -- I was curious if that's across higher end bikes, Cannondale in particular?

Well, I mean in Europe, we're doing a lot of assembly, right? We announced a year ago, I believe it was, that we're reinvesting and building out a new facility in Holland to do increased assembly. So again what is assembly, assembly is basically getting the frame. And with the frame, we bring in all the parts and assemble the bikes to order. And there's a lot of advantage to doing that in this marketplace. And it's working. I mean imagine if you ran out of, let's say, a break and you were getting all your bikes from Taiwan, well you got to wait for the supplier and Taiwan to get the brakes and then put it on a container and then so on and so forth. Where in this case, we can actually fly boxes of brakes in to Europe and assemble, and probably not lose any time. So it's particularly an opportunity now in this environment to do your own assembly. And that's going well in Europe. Europe is growing at the fastest rate of any of our geographies in bikes.

And any plans to I guess replicate that in the U.S.?

We are looking at that. We haven't made the decision yet.

We have no further questions. I would like to turn the call over to Martin Schwartz for closing remarks.

Okay. Thank you. I want to reiterate that as discussed, companies the world over are suffering from increasing costs, a definite lack of ocean container availability and now the increasing emergence of another COVID wave. Even with this difficult backdrop, Dorel had a very good quarter in large parts thanks to our dedicated staff globally will have pulled out all the stops to work through these issues. On behalf of senior management, I thank them sincerely. I am confident that we will continue to deal effectively with the challenges and look forward to even better results once things settle down. That concludes today's call. Thank you for being with us and have a pleasant weekend.

This concludes today's call. You may now disconnect.