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

Good morning. I'm Norm Steinberg, Co-Chair of the Board of Directors of Dorel Industries. Welcome to Dorel's 2022 Annual Meeting. [Foreign Language]. In light of the ongoing public health concerns relating to COVID, we've asked our shareholders to stay home and to vote by proxy prior to the meeting, which many of you have done. Thank you for doing that and to participate in this meeting by audio webcast. I know Dorel shareholders appreciate why we're doing things this way, and we thank you for your understanding. [Foreign Language] We will first conduct the official business of the meeting, after which Martin Schwartz, Dorel's President and CEO, will discuss recent developments at Dorel. We ask shareholders to submit their questions prior to the meeting. After the official business of the meeting, Martin and Jeffrey Schwartz will be happy to respond to your questions. [Foreign Language] Based on proxy forms and voting information form submitted prior to the meeting, I can report that all motions to be considered today will be adopted. The election of directors and the vote on motions to amend 2 of Dorel's incentive plans will be held by ballot. All other votes will be conducted by voice [ vote ] unless a ballot is requested by a registered shareholder or proxy holder. [Foreign Language] Colleen?

Mr. Chairman, I, the undersigned scrutineer from Computershare Investor Services Inc., hereby report that there are at least 6 shareholders and/or proxy holders present at this meeting, representing in person or by proxy 15,502,182 subordinate voting shares and 4,024,868 multiple voting shares for a combined vote of 55,750,862, being 79.8% of the total votes attached to all outstanding shares of Dorel Industries, Inc.

[Foreign Language] Next we will say that the notice calling this meeting, together with the proxy form, management proxy circular and related documents have been made available to our Dorel shareholders and mailed to Dorel's auditors. With the consent of the meeting, we will dispense with the reading of the notice and of the minutes of the last meeting of shareholders held May 16, 2021. And now I direct that the minutes be taken as read and approved and that they be signed as being correct. Moving to the financial statements. The first item of business is the presentation of the annual report and the financial statements and the auditor's report thereon. I now present to the meeting the annual report and the consolidated financial statements of the company for the fiscal year ended December 30, 2021, and the auditor's report. Copies of these documents have been made available to shareholders. I'll now move to the next item, the election of directors. [Foreign Language]

Mr. Chairman, I am Ian Farthing, Chief Financial Officer of the Juvenile segment of Dorel Industries, Inc. and a proxy holder. I nominate Martin Schwartz, Alan Schwartz, Jeff Segel, Jeffrey Schwartz, Alain Benedetti, Brad A. Johnson, Sharon Ranson, Norman M. Steinberg and Maurice Tousson as Directors of the company to hold office until the next Annual Meeting of Shareholders or until their successors are elected or appointed.

Thank you, Ian. Are there any other further nominations? Not hearing any. I declare the nominations closed. As Dorel has a majority voting policy for the election of directors, we will vote by ballot in order for the votes to be accurately compiled. Martin Schwartz has already signed and submitted a ballot in its capacity as proxy holder as did the other proxy holders. As all ballots have been submitted and tabulated, I now call upon the scrutineer to present the results of the vote on the election of directors. Colleen?

Mr. Chairman, I report that each of the 9 nominees has received a vote of at least 95% in favor of all those attached to the shares voted or withheld from voting.

Thank you, Colleen. Based on these results, I declare that the 9 nominees have been elected as directors of Dorel to hold office until the next Annual Meeting of Shareholders or until their successors are elected or appointed. Dorel will issue a press release announcing the results and file a detailed report of voting results on SEDAR shortly after this meeting. The next item deals with our auditors. [Foreign Language]

It is resolved that KPMG LLP chartered professional accountants be and they are hereby appointed auditors of the company to hold office until the next Annual Meeting of Shareholders at such remuneration as may be fixed by the directors and the directors be and they are hereby authorized to fix such remuneration.

May I ask Ed Wyse to second the motion.

Mr. Chairman, I am Ed Wise, Senior Vice President, Global Procurement of Dorel Industries, Inc. and a proxy holder. I second the motion.

All those in favor, please say, aye. All those again, please say no. [Foreign Language] The next item on the agenda is a motion to amend Dorel's 2004 directors' deferred share unit plan. I will ask Ian Farthing to present his motion.

Whereas on March 10, 2022, the Board of Directors adopted an amendment to the 2004 directors' deferred share unit plan so as to increase by 400,000 the number of Class B subordinate voting shares, which are available for issuance under the DSU plan from 350,000 Class B subordinate voting shares to 750,000 Class B subordinate shares, representing approximately 2.6% of the currently issued and outstanding Class B subordinate voting shares and 2.3% of the aggregate number issued and outstanding Class A multiple voting shares and Class B subordinate voting shares. Whereas the foregoing amendment to the DSU plan has been approved by the Toronto Stock Exchange and whereas pursuant to the policies of the Toronto Stock Exchange, the foregoing amendment to the DSU plan must be approved by a simple majority of the votes cast by the holders of the Class A multiple voting shares, and Class B subordinate voting shares either present in person or represented by proxy at a shareholders meeting. It is resolved that the amendment to the DSU plan increasing to 750,000 the number of Class B subordinator shares, which are available for issuance from treasury thereunder, as approved by the Board of Directors of the company and as described in the magement proxy circular of the company dated April 12, 2022, is hereby ratified, confirmed and approved.

Thank you. May I ask Ed why just to second the motion?

I second the motion.

[Foreign Language] Colleen?

Mr. Chairman, we report that [ 47,331,353 ] votes were cast for the motion, representing 89.26% of all votes cast 5,933,513 votes cast against the motion, representing 10.4% of all votes cast.

Thank you, Colleen. I declare the motion adopted. The next item on the agenda is a motion to amend Dorel's 2009 executive deferred share unit plan. And again, I will ask Ian Farthing to present his motion.

Whereas on March 10, 2022, the Board of Directors adopted an amendment to the 2009 executive deferred share unit plan so as to increase by 1 million the number of Class B subordinate voting shares, which are available for issuance under the EDSU plan from 750,000 Class B subordinate voting shares to 1,750,000 Class B subordinate voting shares, representing approximately 6.2% of the currently issued and outstanding Class B subordinate voting shares and 5.4% of the aggregate number of issued and outstanding Class A multiple voting shares and Class B subordinate voting shares. Whereas the foregoing amendment to the EDSU plan has been approved by the Toronto Stock Exchange, and whereas pursuant to the policies of the Toronto Stock Exchange, the foregoing amendment to the EDSU plan must be approved by a simple majority of the votes cast by the holders of the Class A multiple voting shares, and Class B subordinate voting shares either present in person or represented by proxy at a shareholders meeting, it is resolved that the amendment to the EDSU plan increasing to 1,750,000 the number of Class B subordinate voting shares, which are available for issuance from treasury thereunder, respectively, as approved by the Board of Directors of the company and as described in the management proxy circular of the company dated April 12, 2022, and is hereby ratified, confirmed and approved.

May I ask Ed Wyse to second the motion?

I second the motion.

We will vote on ballot by -- sorry, will vote by ballot on the motion. Once again, Martin Schwartz has signed and submitted a ballot in his capacity as proxy holder, as did other proxy holders. As all ballots have been submitted and tabulated, I will now call upon Colleen Nielsen, the scrutineer, to present the results of the motion to amend Dorel's 2009 executive deferred share unit plan. Colleen?

Mr. Chairman, we report that 49,325,266 votes were cast for the motion, representing 89.25% of all votes cast, and that 5,939,600 votes were cast against the motion, representing 10.75% of all votes cast.

Thank you. I declare the motion adopted. Well, we will now ask Martin Schwartz, the President and CEO, to talk a bit about recent developments at Dorel. Martin?

Good morning, everybody, and thank you, Norm. The year since our last annual meeting has seen a continuation of the pandemic-related headwinds we faced prior year, plus we are all dealt new ones. Dorel has been doing its best to manage those things we can control. A major achievement was value creation for our shareholders by selling the bike business. After building a truly solid organization, we distributed USD 390 million through a onetime special dividend of USD 12. The net proceeds have also considerably reduced our debt, placing us in a firm position to withstand the current environment. The world is still attempting to determine what the new normal will be. The fact that this meeting is virtual for the third year underlines the longevity of the pandemic and the hesitancy people have in putting it behind. It has been difficult for everyone. A term almost never heard 2 years ago is now part of our daily conversations. Supply chain has become the universal catch phrase to define the disruption to daily life. It has caused chaos across every local, national and global supply chain, from facility closures, primarily in Asia, to the availability of ships and ocean containers and their increased costs, the warehousing and logistic problems, the labor and raw material shortages and many more, all of which have created a scarcity of everything from paper towels to food to vehicles. Whatever is available is at a much higher price. It has been an evolving series of problems as one is resolved or at least mitigate it, another one pops up. The disruptions are not over yet. As a consumer product company, Dorel has experienced the ups and downs of the pandemic. In some cases, we could only be reactive. But in others, we were able to anticipate and fix problems as well as prepare for the future. We had great success during the early months of COVID as the lockdown prompted consumers to buy a record number of Dorel products, resulting in superlative performances at the Dorel Home, further growth limited only by the availability of supply. Our teams in all of our businesses demonstrated sound operational execution in dealing with these challenges. Since the earliest days of Dorel, we have paid a great deal of attention to our supplier relationships, particularly in China. We have had offices and staff there for years, with locals consistently in close contact with our suppliers. This helps secure product to meet the tremendous demand, but it still wasn't enough to fully satisfy customers. The supply chain ramifications became even more wide-ranging during the second half of last year. At Dorel Home, this created labor shortages and logistics problems at the U.S. distribution center, resulting in detention and demurrage charges as well as domestic production at their factories was affected by a lack of availability of certain materials. Dorel Home tackled the problem head on. Management and operational changes were made, mainly at the large Savannah facility, and the footprint there was changed. This resulted in vast improvements as the backlog of incoming product was cleared and the speed to ship products increased. At the Dorel Juvenile, the disruptions caused a backlog of hundreds of containers in Asia, resulting in product shortages and out-of-stock conditions of certain key products. The Juvenile supply chain team has secured some alternate sources, not fully resolving the matter, but at least mitigating things. Dorel Juvenile USA has benefited from consistent strong consumer demand. In Europe, inventory shortages, among other things, have hurt sales. Being proactive, several changes in personnel in both Europe and the U.S. were made, including senior management positions. Emphasis has also been on recruiting individuals to the marketing and digital media management who are more attuned to the needs of today's tariffs. Price increases last year did not fully compensate for decreased margins due to continuing cost hikes, the lag time of implementation and lower demand for some of our products. Additional increases have been made in recent months, and these we feel are starting to have positive effects. While dealing with the supply chain headaches, there is optimism across Dorel as we proceed with many projects to increase market share and further improve customer relationships. We are confident that we will be well placed to benefit once the current environment improves. Dorel Home's new machinery at its North American ready-to-assemble furniture factories, is up and running, and there have already been productivity efficiencies. This will permit the segment to produce more goods domestically and will allow for the manufacture of higher-margin and value-added on-trend products to better serve our customers. New mattress production lines at Dorel Home products in Montreal are also running. There are several benefits to our owning our own Canadian mattress operation, notably not having to deal with antidumping issues and tariffs, no high freight costs, better quality control as well as our ability to be faster to market. We see exciting potential with this addition. Last fall's acquisition of Danish-based Notio Living, a home furnishing firm, is an important advantage to promote further European expansion. Combining Dorel Home's strong portfolio of products and brands with Notio's strong Mainland Europe distribution will provide significant upside. While the war in Eastern Europe is currently delaying progress, things are in place to capture more business when the situation calms down. There has been increased emphasis on Dorel Home's branded furniture. Sales have grown every year by double digits, validating the strategy to expand into this lucrative area. And Notio customers in Europe have also expressed interest in the branded collections. Dorel Home has also upgraded several marketing, digital and product design positions and has added a Chief Merchandising Officer. Dorel Juvenile has set its sights on future growth with several initiatives. The divestiture of the 2 China factories last year underlines a new strategic direction to simplify the organization, co-develop products with a diverse supplier base, accelerate the product pipeline and ensure less FX volatility. Juvenile has always been known for its powerful and trusted brands. Their brand channel strategy has been streamlined with a focus on Maxi-Cosi as a powerful global brand. Maxi-Cosi has been growing in the past several years and is now positioned in Europe as the main mid- to high-end brand in car seats, strollers and home equipment. Bébé Confort is the mass market channel brand, with other Dorel brands marketed on specific product categories. New products introduced lately have had positive consumer reaction, including a new sustainable car seat using recycled fabrics, which will be expanded to all product categories. This leads me to a few comments on Dorel's sustainability initiatives, designed to minimize the environment impact of our operations. Standard practices include the recycling of packaging material, and increasingly, corrugated cardboard is replacing the use of styrofoam. Energy management systems include the use of energy-efficient lighting, controls for intensity levels and motion detectors to turn off lights in unoccupied offices and facilities. We have developed programs to encourage employees to use bicycles, carpools and mass transit to commute to and from work. The addition of hybrid working schedules allows employees to work remotely certain days per week, further reducing our carbon footprint. Measures to protect the environment and conserve energy work in tandem with Dorel's overall goal of increasing shareholder value. Our commitment to sustainability represents an important component of our corporate strategy. Our efforts in this regard are regularly reviewed. In terms of our outlook, given the current condition, it's best to look forward only a few months at a time. Our earnings will likely continue to be pressured in the near term, given rising inflation and direct impact on input costs and the potential of slowing consumer demand. Trying to predict further with accuracy is not possible these days. The war in Ukraine is also affecting the economy. Russia's invasion is adding to the increase in energy prices everywhere, further feeding record inflation. There is some good news with an improvement in supply chain situation out of Asia as there is better container availability. Container prices, while still high, have at least stabilized. With the attitude towards COVID changing in most geographies, people are now spending more on services, while purchases for the home have slowed and are not what they were at the peak of the pandemic. Dorel Home is challenging at this time, but as I have outlined, we are working on many changes and upgrades, which we hope will help during the second half. In Juvenile, the market most impacted is Europe. The devaluation of the euro to its lowest level in over 5 years relative to the U.S. dollar has a big impact on us. Many of our goods are purchased in U.S. dollars, and our reporting currency is also U.S. So when expenses and sales are transacted and translated back to U.S. dollars, we take a hit. Retailers are also ordering more cautiously, all of which means Q2 outlook is less optimistic than it is -- than it was. With a slowing world economy, we are being approached by factories in China seeking work. This presents an opportunity to better negotiate new business. But to be clear, we will not allow the current difficult economy to detract from our strategy of building Dorel Home and Dorel Juvenile for the future. We have made and will continue to make changes in both segments to strengthen the business. The potential exists for greater profitability, and we will be ready when the clouds lift. We have a solid plan, and we are sticking to it. On behalf of senior management, I wish to sincerely thank our employees worldwide for their consistent efforts to keep things moving forward, particularly under these tough conditions. Our Board of Directors have been extremely helpful in guiding us through the challenges and for their great work in helping conclude the sale of Dorel Sports. A special thanks to longtime board member, Dian Cohen, who has stepped down after many years of valuable service to Dorel. We are pleased that our shareholders were meaningfully rewarded, and thank them for their belief in the Dorel. Norman?

Thank you very much for your comments and your review of our business and your insight as to where we're going. We now come to the question period. I understand that we have not received any questions, so there will not be a question period. So on that note, as there's no further business, I will turn to Ian Farthing to ask him to present his motion to terminate the meeting. Ian?

I move that the meeting be terminated.

I will now ask Ed Wyse to second the motion.

I second the motion.

All those in favor, please say, aye. Against, please say no. I declare the motion carried and this meeting is terminated. So, again, may I thank everyone for participating in Dorel's Annual Meeting. [Foreign Language] And hopefully, next year, we'll see everybody in person. Thank you.