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

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries Second Quarter 2023 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 11, 2023. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

All right. Thank you. Good afternoon, and thank you all for joining us for Dorel's second quarter earnings call for the period ended June 30. With me are Jeffrey Schwartz, CFO; and Frank Rana, VP of Finance. We will take your questions following our comments. Again, all figures mentioned during this call are in U.S. dollars. I'm pleased to report that both our businesses showed signs of improving trends during the second quarter. Underlining this progress is that adjusted operating losses for Dorel Juvenile and Dorel Home combined improved by $13 million compared to Q1 this year. The teams at Juvenile have done a great job, and the segment posted its first profitable quarter since Q3 of 2021. Europe posted substantial top and bottom line gains as new product launches, in particular, the 360 Pro Family car seat system drove a strong recovery. Dorel Home has also done a good job and is starting to turn things around. While the general softness in the demand for furniture muted their second quarter causing an operating loss, the good news is that they posted sequential improvement for the third consecutive quarter. A look now on our 2 segments in more detail. During the Q1 earnings call, I said that we were very upbeat about Juvenile and expected an imminent turnaround. That materialized in Q2 with turnaround led by Dorel Europe. Their highly innovative Maxi-Cosi 360 Pro Family, a new era of design and safety featuring Dorel's revolutionary slide tech technology has performed extremely well to date. As a reminder, the 360 is a range of world's first comfortable ergonomic car seat solutions with a base that can both rotate and slide towards parents. The 360 Pro Family sets a new standard in car seat innovation by making it easier than ever to secure children safely and comfortably in the car. Shipped in April, the product line is one of Dorel's most important introductions in a long time. 360 sales to date are most encouraging in Europe. For example, it was the U.K.'s #1 seller in May and June. Consumer feedback has been highly positive with a 4.8 out of 5 rating. We anticipate the months ahead to be rewarding as well, if not more so. An intensive marketing campaign is scheduled for France in September, and the new Mica 360 Pro SlideTech will be introduced in Q4, which is expected to boost sales as an innovative toddler solution. Dorel Juvenile USA had a very difficult comp to beat as last year. The second quarter was the best in a long time. In 2022, supply chain issues were considerably eased, which resulted in higher Juvenile sales. That was not the case this past quarter, plus the bankruptcy and closure of BuyBuy Baby in April meant there was 1 less retailer ordering and clearing old inventory. The U.S. division is, however, gaining market share. We foresee this turnaround will continue, and has noted the situation of Dorel Home is looking much brighter. Retailers, glut of high-cost inventory, bought at the height of COVID is increasingly being cleared. Costs have been coming down and sales volumes are starting to increase, a sure formula for margin enhancement. Our average daily orders have been increasing steadily since June as retailers are getting back to normal with marketing plans and are finally restocking. July orders were 30% higher than this year's first half, evidence that we are seeing light at the end of the tunnel. Retail prices are returning to pre-COVID levels and margins are holding. Replenishment on store shelves had been a problem the last couple of years. With many industries, retailers lack necessary employees to stock shelves, leaving consumers with limited in-store choices. This is now changing. Home's branded sales were also better with their 4 main brands up double digits. The cost of freight, particularly ocean freight, as well as warehouse and distribution costs decreased in Q2. Inventory came down significantly, both year-over-year and quarter-over-quarter. After a number of quarters of reduced activity, staffing is being increased in our -- at the Tiffin, Ohio and Cornwall plants to deal with the anticipated increase in domestic production. There are significant opportunities for increased business, which should materialize through the balance of the year into 3 Dorel Home factories. Looking ahead, we fully expect that the quarter-over-quarter earnings improvement that started in the first quarter to continue into the back half of this year. Dorel Juvenile is ahead of Dorel Home on that path and will improve its profitability across the quarters. We are also confident Home will return to an operating profit in the second half. The key to success in both segments will be continued growth in e-commerce and just as importantly, at brick-and-mortar where we are in a position to fully leverage our excellent long-standing relationships around the globe. Clearly, these are difficult times for consumers. We are working with the winners in our markets, and our heritage of retailer support and collaboration will enable us to win with our customers. This, combined with stable cost environment we have established, will also allow us to overcome the challenges in the market and should allow us to return to growth and profitability going forward. I'll now ask Jeffrey to review the financials. Jeffrey?

Thank you, Martin. I'm going to go pretty brief as this wasn't a great quarter compared to last year, but sequentially, we are getting out of the hole that we were in, and we continue to see better things ahead. So quickly, the second quarter's revenue decreased by 19.3% to $345 million from $427 million. Organic revenue decline was actually 19.6%, so almost the same. Gross profit for the second quarter decreased by $5.1 million. However, the gross margin for the quarter increased 210 basis points as a percentage from 15.3% last year to 17.4%. The decline in gross profit in the quarter was mostly -- was in the Home, and it was only partially offset by improvement in the Juvenile business. The operating profit at the end of the day, Dorel reported a loss of $13 million compared to $9.1 million, and excluding restructuring costs, it was $13 million versus $6.9 million last year. Again, much less of a loss than Q1 as we move forward. Finance expenses increased by $1.5 million to $6.1 million during the quarter. That's mainly explained just by higher interest rates that we need to pay. If we get into the segments, the Juvenile segment declined $6 million or 2.9%. Organic revenue declined by approximately 3.5%. Most of that decline was in the U.S. market, which was due to -- both the decline in revenue due to the network security incident we had at the beginning of April, as well we had a pretty substantial quarter last year in the U.S. The -- we saw improvements in the European, Canadian and Brazilian markets. Europe, in fact, experienced double-digit revenue growth in the quarter from the successful launch of new products [Technical Difficulty]. Gross profit for the second quarter increased by $8.5 million or 18% from last year. The gross margin in the quarter was 25.9%, representing an improvement of 460 basis points. The increase in gross profit in the second quarter was mainly due to lower product costs as the prior year second quarter included a much higher container freight and a significant impact from a strong U.S. dollar last year as well. Operating profit was $800,000 during the quarter compared to a loss of $4.7 million. If we exclude restructuring costs, we still had a $3.4 million positive adjustment versus last year. If we move over to the Home business, second quarter declined by 36% to $133 million. POS sales continue to far exceed replenishment orders. And this has been -- this has resulted in reduced inventory levels at our retailers, which is very important, and that should translate into increased order replenishment in the second half of the year. Gross profit declined by $13.6 million in the quarter, and the gross margin was 4%. That gross margin includes the lower factory absorption. And that's really -- like I'd like to tell people, we don't sell our products at 4%, but with a -- not absorbing enough through the volume in the factories, that's the net result of that. Also included in the quarter was a continuing sale of high-cost inventory acquired in 2022. On a sequential basis, however, the gross margins did improve 260 basis points. We are getting better costs, we are getting better freight and we are starting to get out of that low-cost environment -- high-cost environment that we had. The operating profit for the Home group declined by $12.2 million in the quarter to an operating loss of $10 million versus a profit of $2.2 million, again, significantly better than last year -- sorry, significantly better than last quarter Q1 as we continue to move ourselves out. Our optimism looking forward is based on a number of factors in both of our businesses. Lower costs, both from the freight and the fact that we're buying at significantly lower prices today, that will allow us to actually lower some retails of key items. When we lower items -- or lower prices of these items, we see an uptick in volume. In some cases, it's double digit or higher double digit. So we are starting to see a recovery from the fact that costs were so high in 2022. Better FX, stable FX is allowing us to price our product and not take losses like we did last year. Last year's high U.S. dollar was really, really difficult in many of our international markets. We're seeing the stability -- or even the reduction in the value of the U.S. dollar is allowing us to have a very nice business around the world, particularly in the Juvenile. One of the other areas that we're seeing, and again, I keep highlighting this because I can't emphasize it enough, particularly in the Home side, the reduced amount of inventory at our customers. It was terrible from the end of last year right through even into Q2. The difference between our POS and the reorders was huge. It is getting to the point where in some of our large customers that is going away. They now have the right amount of inventory they want to carry, and we're seeing closer matching to what is actually selling and what they're actually ordering. The customers -- because it's not an issue so much to clear, some of our customers that haven't really focused on merchandising and planning in new products are back in that mode again. And it's been a while because if we go back to the beginning of COVID, a lot of our customers were just chasing inventory. They didn't have enough inventory, and they were just looking where can they buy anything to put on the shelves. And then that changed dramatically last year when sales sort of dried up, and then our customers spent most of their time trying to figure out how to clear inventory. So it's been years since we've really been able to sit down and really plan merchandising strategy on products and all of that. But that's sort of coming back to normal again, which is great. And we're focused on the things that we used to do well. And the last piece of where we're going here is better product introductions. We've certainly done really well in Europe in Juvenile. We've gained market share in all our other markets in Juvenile. Most of that is just through better products. And I think our teams are really focused on bringing some great innovation to the market. We're seeing the results of that, and it's allowing our business to recover even quicker than have we not had these products. 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 and as always request that you limit them to 2 in the first round. Operator?

[Operator Instructions] Our first question is from Derek Lessard with TD Cowen.

I just wanted to maybe hit on your gross margin performance, specifically in Juvenile, Jeffrey. Maybe just talk about some of the drivers there as well. And when do you expect, I guess, the U.S. to close the gap with Europe? And are there any sort of incremental changes that you need to get there? The margin in Europe was clearly really good.

Yes. I mean, again, the reason for it, I just talked about it, lower cost, better FX, better volumes in the case of Europe. A lot of that has come from new product introductions. The U.S. -- again, I want to stress, U.S. has gained market share during the quarter despite having lower sales. And again, a lot of it -- I don't want to call it artificial last year, but because of our customers chasing orders, they just wanted as much inventory as they could, and we shipped a lot last year and then it all kind of ground to a halt even in Juvenile. So that's not going to be the case and the volume should improve. But new product is definitely guiding our margin recovery -- our gross margin recovery. Even in the U.S., we're selling more Maxi-Cosi product, which carries a greater gross margin. That's been successful. Our customers at the high end are doing well. It is again a challenging environment in the U.S. We've lost BuyBuy Baby. I mean it's coming back, somebody bought them, but they're -- I think what I heard is they're starting with 11 stores. So it's going to be a minor player for a while. So the market itself is still challenging, but we intend on growing through that. We've got a lot of nice stuff coming through the system. And we can't forget our international business. It's -- when the dollar is stable or coming down, it's got a meaningful impact. We are the #1 player in Brazil. We make a lot of money in Brazil, and that's continuing despite the difficulties in Brazil. So everything just kind of -- the way we've called it the perfect storm last year, it's kind of coming back along a lot of different lines. So we expect to see gross margins improving, especially not having that high-cost inventory in the system anymore, that's going to move our margins up as well. So we're expecting that to continue.

Okay. And you did call out some POS data in Home. Just curious about what you're seeing on the Juvenile side.

We're seeing -- I mean, again, it's a little bit of a mixed bag. We're seeing -- depending what customers. So some customers are down a little bit in POS than last year and others are up significantly, nice double-digit numbers. So overall, we're pleased and that's why we know we're gaining market share in a tough environment. And -- but that, to us, is the most important thing. We continue to gain market share. A lot of it is through innovation. I mean just a couple of ways to get market share. One could be lowering your prices to the point where you're lowering your margins, but that's not the case here. So we're pretty upbeat. We think it's been a long time since we've been restructuring and tweaking and -- but now things are in place, and we're starting to see the results. So we're very pleased with all the -- sort of the work we've done in the last few years to get to this place.

Okay. And another one on -- a good job on the working capital and taking down the inventories. Question is twofold. Any -- do you think there's any more room there? And the second one is, we're seeing this in a lot of companies in this higher interest rate environment, but your receivables are up as well. Anything you can point to sort of on the customer payments, any categories, like your 45 days or 90-day plus where you're seeing any signs of upward pressure? And maybe do you plan on stepping up the collection effort?

No. Actually, nothing of significance on the accounts receivable. I mean we've got a lot of good customers. We did not take a hit on BuyBuy Baby. We were protected. So I think our team did a good job there. We're watching it. I mean I will tell you maybe there are some places outside of North America and Europe that we have concerns on credit, and we're cutting back a little bit because of that. But that has not been material to this day.

The next question is from Stephen MacLeod with BMO Capital Markets.

Great. I just wanted to -- just follow on, on a couple of things here. You talked about -- you seem to have pretty good visibility into the inventory positions at retailers and seem very optimistic about those levels declining. And I'm just curious what kind of visibility do you typically have, or would you have now in terms of replenishment orders?

Yes. I mean that's another reason we're somewhat optimistic, particularly on the Home side, we're seeing them coming [ inside ]. So we've been waiting and waiting for certain orders that we know we'll sell this year. And finally, in sort of the June, July, August period, they're coming in again. So I think Martin made a comment, but orders -- receipt of orders in the last few months is substantially above where it was in the earlier part of the year for the Home business, which, again, our big problem is volume. I mean better volume is going to lead to better margins. And now we're starting to see those replenishment orders or those new sort of planning orders, where, like I mentioned, before it was just about clearing goods and now it's like, okay, we got to get back. We need to sell this folding chair, we need to sell this table, we need to sell this fireplace stand, whatever it is. So the orders are starting to come in, and they're priced right. So new merchandise coming in. It's coming in at, we'll call it, pre-COVID costs. So there -- the pricing in the marketplace is less. Our margins are good. Our retailer margins are good. So it's starting to get back, and we're starting to see that stuff coming.

Okay. Yes, that's great. And then maybe too soon to say, but again, you seem confident on the return to gross margin, particularly given some of the factors you talked about, sounds like in both the Juvenile and the Home businesses. Is it too soon to say sort of what those gross margins may get back to in terms of where they sit relative to historical levels compared to sort of the very low levels we've seen recently?

Yes. Less -- I don't have that visibility on the Home side point yet. But the Juvenile is looking to get back to sort of pre-COVID gross margin levels or maybe even better now. The more success we have with our new products and the more success we have selling Maxi-Cosi in the U.S., all of those are higher margin. So we're really focused on changing the mix to the higher end stuff. And so far, it's going well. So yes, definitely looking to get back to pre-COVID levels, but perhaps even do better than that.

Okay. That's great. But -- and then I guess, is it safe to say that -- it sounds like you're incrementally more confident on the Juvenile visibility than Home. Is that a fair thing to say?

Yes. And I think the reason being we've actually turned the corner in Q2. We've actually seen some really good data in Q2, not in April. So we're seeing, sequentially, Q2 is better than Q1, Q3 is going to be better than Q2. But within Q2, we saw that June was substantially better performance than April. So when you put that together, we just -- the trending is just good, and we see it -- we're more comfortable with our forecast this year. I mean a little -- the market is where I'm a little more concerned on the Juvenile side. I feel really good about what we're doing and our ability to get listings and our ability of our products to sell. Europe is definitely leading the way. But the U.S., I want to make sure people realize, we're also gaining share in the U.S. We don't have that spectacular one product. It's coming from a lot of different products. But the mixes are good. We're selling good margin products, and we're focused on that. So yes, definitely a lot more confidence on the Juvenile. The Home is just starting. Q3 is the turning quarter, while Juvenile was Q2. So I guess that's the confidence difference.

The next question is repeat from Derek Lessard with TD Cowen.

I just wanted to follow up on the visibility and the -- on the gross margin. Did you have a -- do you have a sense of the timing of getting that gross margin back up to the pre-COVID or better level?

Again, I think I'm expecting, in Juvenile, Q3 to be better than Q2 and then Q4 to be better than Q3. Exactly when we're going to be into the 2024 margin, it's a little early. But we are making some very good progress.

And then one final one for me and it pertains to the cybersecurity incident. Were the lost sales in Q1, were you ever able to recoup them in Q2? And if not, was there still an impact from the cybersecurity in Q2?

Yes, definitely. So it took us, I think, as late as mid-April, right, to get some of our systems back online. So we did lose a couple of weeks. Now, again, some of that sales gets pushed into another week. Some of it's done. We had a couple of other sort of quirky things. So I don't know that I want to get on that -- on this forum, but things that actually ended up impacting us right through the whole quarter by not getting goods out on a timely basis at the beginning of April. So there was definitely an impact through the entire quarter, mostly in the U.S., that's where the systems stayed down the longest.

This concludes the question-and-answer session. I'd like to turn the conference back over to Martin Schwartz for any closing remarks.

Thank you. I just want to thank all of you for joining us this afternoon, and I wish you all a very good weekend. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.