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

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries First Quarter 2024 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, May 10, 2024. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

Thank you. Well, good afternoon, and thank you all for joining us for Dorel's First Quarter Earnings Call for the period ended March 30. With me are Jeffrey Schwartz, CFO; and Frank Rana, recently named Executive VP and Chief Strategy Officer. Frank has been an integral part of senior management since the company's IPO in 1987 and this appointment recognizes his contributions in driving Dorel's growth. Also with us is Jayson Kwasnik, recently appointed VP of Finance, and Jayson has been with Dorel for 20 years. We'll take your questions following our comments. A reminder that all figures mentioned during this call are in U.S. dollars. Dorel Juvenile is making steady progress in all areas. The first quarter presented clear evidence that with adjusted operating profit improving by $10 million, Dorel went from last year's first quarter loss to a slight profit. We're optimistic the improvement will continue. The segment is capitalizing on the introduction of a diverse selection of exciting new products. Our retail partners and consumers have reacted well to the new offerings, resulting in additional market share gains. Growth came mainly in the U.S., Europe and Brazil as sales in the brick-and-mortar channel rebounded sharply. Dorel Juvenile USA had an exceptionally strong quarter with car seat sales leading to the increase in the division's various product categories. Safety 1st did particularly well, the result of a new product placement and a refreshed branding program now hitting the stores. From home safety [ pegged ] items to strollers and car seats, the new look of Safety 1st designed in-house goes beyond aesthetics, reflecting our dedication to innovation, quality and the desire to grow with families. The original and iconic Baby On Board sign still remains a best seller. In Europe, a major new product was unveiled to approximately 375 guests attending Dorel Juvenile's 2024 Customer Conference in Portugal. The all-new Maxi-Cosi Fame Stroller, the future of family travel-based debut. But Fame, our most advanced stroller ever is the first step of a new generation of premium travel systems by Maxi-Cosi, a premium product of high quality with special features. Just some of the features include a revolutionary suspension system, LED lights to light up the path ahead and an integrated cell phone charger. Fame will be available in stores across Europe starting next month. This entry is highly strategic for Maxi-Cosi, our flagship brand, recognized globally for innovation and quality. Maxi-Cosi has developed a proven reputation in car seats, a category that continues to do exceptionally well for us. We now want to replicate this with strollers, and we see the introduction of Fame as the perfect opportunity to accomplish that. This is just one of the reasons why there is a positive feeling across the entire segment. We are also focused on further reducing Juvenile costs and are more comfortable than ever that this business is in a good place. Turning to Dorel Home. They made substantial progress during the first quarter, despite dealing with a tough environment as interest rates and mortgage rates remain high. This does not bode well for furniture, which again lagged sales of all consumer products during the first quarter of the year. Despite these challenges, I'm pleased to say that the segment posted improvements. Post-COVID, now that there is more merchandise on shelves, which was not the case during the pandemic, there was a tendency for consumers to shop more in-store than online. Home has introduced many new products, which we expect will keep us ahead of the competition and has been successful in building brick-and-mortar sales with additional listings at its retail customers. The growth in this channel is solid but the brick-and-mortar cycle is slower to evolve than e-commerce. Therefore, we see the benefits occurring in the second half this year and into 2025. Cosco Home & Office was a significant contributor to Q1's improvement as the division's revenues and profitabilities were up materially. Cosco operates in a category where there is less competition and its legacy utility products such as step-stools and folding furniture, are well known for their high quality. Additional relationships are being cultivated with more mass merchants and DIY stores. Home's restructuring activities to simplify and combine certain key areas including the merger of Ameriwood and Dorel Home Products took effect in January and are starting to have the desired results. Everyone is working extremely well together, all focusing on the entire business. There's now one product team, one marketing team and one purchasing team for the combined divisions. Our customers have responded well to our change, and there are more benefits to come from streamlining. Savings are expected to be approximately $4 million annually. Dorel Home attended last month's High Point Furniture Market. Our showroom was busy throughout the show with many customer appointments. Reaction to our products lineup was excellent, and we anticipate follow-up orders. The segment is adding new customers in Europe and rather than being Germany-centric as in the past, it is branching out across the continent. Importantly, we are looking to structure Dorel Home in a manner that will ensure the business is resilient, profitable and will serve our customers well, no matter what the future holds. This will involve an extensive cost-cutting exercise, which is currently being developed. Decisions have yet to be made as to what the scope and timing of the project will be, but it will result in more streamlined low-cost operation. We are confident that even with a diminished furniture industry, should that be the case, Dorel Home will be able to work within it and be profitable. Regarding our outlook, Dorel Juvenile is positioned to continue its quarter-over-quarter earnings improvement. Several significant customer events are planned this second quarter, which are expected to increase sales beyond our current improving revenue line. It is anticipated that second half will be better than the first, driven by continued year-over-year revenue gains. At Dorel Home, the traction at brick-and-mortar experience in Q1 is expected to be maintained. Continued improvement in quarter-over-quarter earnings is anticipated, driven by new listings and increased product sell-through. However, as the brick-and-mortar sales cycle is naturally longer than e-commerce, the benefits will only be manifested during the second half and into next year. Home's efforts are continuing on cost reduction and on reigniting the e-commerce business. I'll now ask Jeffrey to review the financials.

Thank you, Martin. For the first quarter of '24, Dorel's revenue increased by $17.9 million or 5.4% to $351 million. Organic revenue growth was approximately 5.3% after removing the variations of foreign exchange. The revenue and organic growth improvements was in both of our segments, Juvenile and Home. Dorel Juvenile revenue improved even when excluding the reduction in revenue from the network security incident during last year's first quarter. And in Dorel Home, the revenue and organic revenue improvement is mainly explained by the increase in brick-and-mortar sales, which was partially offset by reduced online sales during the quarter. Gross profit for the quarter increased $21.5 million or 46%. The gross margin in the first quarter was 19.4% and an improvement of 540 basis points from the 14% last year. The improvement in gross profit and gross margin in the quarter was in both the Juvenile and the Home segment. In the Juvenile, the improvement was driven by improved pricing and lower input costs, better product mix and higher volume sales, particularly in the United States. In Home, the improvement was mainly due to reduced freight and material costs as well as higher factory overhead absorption from a slightly better domestic manufacturing activity. The operating loss in the quarter was $7.7 million compared to $28 million last year. Excluding restructuring costs, the adjusted operating loss was $6.9 million versus $28 million. The decrease was, again, primarily due to improved gross margins in both sectors and financing expenses for the quarter were increased by $2.8 million to $9 million, generally explained by higher average interest costs. We move over to the Juvenile segment itself. First quarter revenues increased by $12.7 million or 6.3%. Organic revenues increased by about 6.2%. The improvement in revenue and organic revenue was in the U.S. and Europe and the Brazilian market. In the U.S., even when excluding the reduction in revenues from the network security incident, the revenue improvement was across all brands and all product categories as market share gains continued in the quarter. In Brazil, the revenue improvement was in both specialist and the e-commerce segment. And in Europe, revenue improvement was in most markets, offset by declines in e-commerce channel as customers reduced orders to reduce their inventory in the quarter. Gross profit increased by $11.7 million or 26% compared to last year. So the margins in the quarter were -- the gross margin, 26.5%, an improvement of 410 basis points from last year, again, mainly driven by improved pricing and lower input costs, better product mix and higher sales volumes that drove, particularly in the United States. The operating profit for the quarter was $0.5 million during the first quarter compared to a loss of about $8.9 million last year in the quarter. If we exclude restructuring costs, the operating profit was $1.1 million versus the $8.9 million. If we move over to Home, quickly, Home's revenue increased by $5.2 million or 3.9% to $138.4 million. Again, the revenue increase was all in the brick-and-mortar channel. We actually saw a partial decrease in the online channel. The increased brick-and-mortar's channel was due, among other things, to order replenishment as the POS sales have far exceeded replenishment orders. Last year, we did see our customers reducing their heavy inventories that they started 2023 with. And we're back into a position where inventories are in a proper place. POS sales are trending very positively as well in the brick-and-mortar retailers, and we're hoping to see that last throughout the whole year. In the gross profit area, which was very important in this sector, we increased by $9.9 million compared to last year. So last year -- this year, our gross margin was 8.5%, still low, but an improvement of 710 basis points versus last year's meager at 1.4% gross margin. The operating loss for the quarter was declined by $10.3 million to $3.6 million from $13.9 million last year. Again, the decrease in the loss is mostly from the increased gross margin and some lower operating expenses relating to some of the restructuring we did last year. So with that, I'll 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] The first question comes from Derek Lessard with TD Cowen.

Really nice to see the Home improvement. I was wondering if you could talk about the success that you did see in the bricks-and-mortars channel. And then maybe on the other side, some of the challenges that you're still experiencing in e-commerce.

Sure. Well, we are seeing it pretty much across the board with a lot of our accounts at the brick-and-mortar. I think what leads to that is we're still one of the best suppliers overall when you look at everything from product innovation, price, service, the ability to store goods in the right place to be able to get product to our customer on time. And that's something that's very important in the brick-and-mortar channel. In the online channel, it often turns to just price and do you have a nice picture. And that's where it's a little more challenging for us, and we're finding that. As well, we are finding, in general, the brick-and-mortar stores are doing better at our customer level. If they look at how furniture is doing online versus in-store, their in-store sales are growing, and they're struggling on the online. It's certainly something -- we have some concerns about it as the channel seems to be sort of in a bit of a disarray online, but it's good to see that if we focus on where our roots were in this business that we're still among the best of doing that. Part of -- just explain -- I mean, we mentioned it a few times today, but some of our frustration is our sales are lower than we want them to be. So you naturally turn to your sales department, and they're out there doing a really good job placing items, listing items, showing good interaction with our customers. But all of that only gets placed later in the year versus online, if you have a good item, you put it online, it sells tomorrow. But we often have to wait for that placement or for the mod set to happen and all of that. So we're excited about where we're going. It's just taking a longer time because our successes are in a place where we can't instantly sell the product. That's kind of what's happening in our furniture business.

Okay. Cool. And I think -- I mean, over the last -- or over the previous 5 years, e-commerce was sort of the big driver of the business for you guys, and it seemed like you were leaving bricks-and-mortars aside. Is that sort of -- it seems like you're almost reversing trend here.

I -- you're right, but I don't know if it's we're reversing trends or the market seems to be reversing because like I said, our -- when you have omni-customers who sell both online and in the stores, and their online business is retreating and their store business is accelerating, we're following that trend. So I wouldn't say we're doing this because we can't sell online. It just seems to be where the market is moving right now. And obviously, online is not going away. And we're focusing more on what works online because we still sell a lot of product online. It's still -- I think it's around 50-50 or if not, it's still even more product online, but it's still quite a bit online. We're not giving up on that, but we are finding the opportunities and the growth is happening at the store level and will continue to happen because as we start placing those goods in the second half and into next year, we're going to see that channel continuing to grow.

Okay. And talking about -- you called out about $4 million in annual savings. Just remind us of some of the initiatives that's going on there. Have you realized any of that $4 million in savings? And how should we be thinking about the cadence there? And I think as well in your prepared remarks, you had talked about more cost savings initiatives coming up. Is that in addition to that $4 million?

Yes, that would be an addition. The $4 million is in there. It's happening. An example would be -- if you remember, we had a whole bunch of different divisions within our Home segment. So we've merged our what we call the Ameriwood with our Dorel, our DHP division. So we have one much larger business. That -- in addition to saving money, management is telling us that their efficiency levels are going way up. And they're able to get a lot more done because there's less sort of separation. So in addition to both saving money, we're also speeding up our ability to get products to the market and to do all the things, the marketing and all of those things. So that would be like one of the major areas where we've done it. We're looking -- we're reducing our overheads. We have less warehouses than we've had in the past. Most of that number supplies, labor anyways. But I would say we're probably not missing anything by not having that.

So that's already -- that $4 million...

That's $4 million is in there, I mean, we saw some of it in Q1. That's going to continue now. Is that enough? No, we want more. We want to look at even streamlining this business even more. We're not -- we're no longer waiting for the market to come back. I mean, to be honest, we did wait for that for a while and said, let's be ready when it bounces back. We're hoping it does bounce back. We are looking at increased sales in the future, but we can't wait. We have to deal with what we have today, and that's sort of the focus of that business.

Okay. And one final one for me before I requeue. When should we, I guess, expect further details on those measures or initiatives?

Probably the next quarter. I mean, we're working on different things. So I'm hoping by Q2 -- the end of Q2 when we announce in 3 months from now, we'll have more color to tell the market.

Our next question comes from Nevan Yochim with BMO Capital Markets.

You got Nevan on for Steve today. Hopefully, we could start on the Home segment. You talked about retail inventories in a proper place now. Just wondering what that means. Is it -- are we back in line with historical levels? And then what are your expectations on inventories for your retailers going forward?

Yes. I mean, I would imagine we might even be light now. The retailers are still nervous about furniture. So they really brought their inventories down. But we suffered a lot in 2023 with much better POS than we were shipping. So that's reversed now, and we're no longer suffering, if you want us to call it that. Will they increase their inventories? I don't know. But at least now we tend to be shipping along with POS. So that's a good sign. So again, they are still cautious. I mean, people are still not banging down the doors to buy furniture. But it is a little bit steadier now and certainly matching -- POS is matching our orders.

Okay. That's good to hear. And then maybe if you can just provide an update on gross margin in the Home segment. We acknowledge that, I guess, the product costs have come down quite a bit here. Can you talk about pricing and promotional activity that you're using today to get the sales?

Yes. What we've found is during COVID, yes, demand was up very, very high. But our costs went up quite a bit, and we had to push our retail prices up high. And in many items, those are not sustainable price points for those types of furniture and especially in this market where people have less cash available. So we've dropped -- our costs have come down, right, and we've dropped a lot of price points. And in some areas, price point is super sensitive. Like we have items that as soon as we've dropped them to a certain price point, we see 20%, 30% increases in sales. So it's still a game, if you want to call it, or an art to getting that right. Fortunately, with costs being down, we have the ability to do that. And if we get good cooperation from the retailers, which is more this year than last year, and the ability for us to drop our prices and then to drop the retail and then everybody wins when sales go up. So that's kind of the focus because that wasn't necessarily happening last year. Many retailers were just keeping the savings and trying to get as much margin as possible. They're a little more focused now on volume as well. So it's boding well. And like I said, on the brick-and-mortar side, it's working actually really well.

Okay. That's helpful color. And then what might that mean in terms of your gross margin percentage? I mean, a big increase here this quarter. Could you get back into the double-digit range in the coming quarters?

We're hoping to get to low double digits for now. And I -- again, we'll see next year as things move forward. We could use -- a lot more volume through our factories would certainly improve our gross margins. That's probably the most magic way to get those numbers up without a doubt. But yes, we are expecting to get into the lower double digits by the end of the year. And then hopefully, next year, we can continue to move upwards of that.

Okay. And then maybe moving on to the Juvenile segment, good gross margin this quarter. Can you talk about your expectations for the remainder of the year? And then how you think about margins longer term?

Yes. I mean I'm pretty -- I'd say, our whole team at Dorel is pretty excited about where we are, granted the numbers are still not necessarily where we want them to be, but everything is moving in the right direction. Margins can continue to move up. I mean one of the biggest ways we had on margins is it's foreign exchange, right? So we had a negative foreign exchange in Q1. It was a positive in Q4 of last year, which helped us. So far this quarter, it's somewhat neutral. I mean I don't expect -- again, I can't -- I don't want to use the word what I expect. I mean we have some hedging out there, but really a strong U.S. dollar is not good for us. And with interest rates kind of holding on the U.S. dollar is also holding on it. So I would expect to see if we do see a drop in rates in the U.S., a weaker U.S. dollar, which would really accelerate our gross margin. But really, again, the biggest -- I mean, costs are coming down, we're very focused on bringing down costs. As well, we're very focused on getting the mix better and selling more of our higher-end Maxi-Cosi product, which is so much better today than it's been in a number of years.

And so would it be fair to say -- I know it's been a number of years, but at one point, you guys were running with close to 30% margins in the Juvenile segment. Is that possible in the near term if sort of you get the mix that you're hoping for and the volumes keep trending the way they are?

Yes. I would say we are trending towards that. Again, it is possible. We're seeing -- when we have a great month, and I've always said this, if we can get our volume in a particular month above a certain level, both in the U.S. and in Europe, we see significantly higher margins. And the matter -- the challenge for us is how many months of the 12 can we get those, what I'll call the magic sales numbers. So we know it's possible. We know we make a lot of money, and we are -- margins -- both our gross and net margins go up significantly when we have these, what I'll call, spike months. So how do we get more of these months is the challenge that the management team is working on. And we're getting them. We saw them here and there. And I think in Europe, with the addition of strollers, which we're not a big player on in Europe, but some of the new ones that we've introduced late in the last 6 months have done probably better than any stroller we've introduced in the last 5 years in Europe. So we do have hopes that, that number would be added on top of our car seat numbers, which are really doing well and growing. So we're just optimistic that everything is just moving in the right way.

We have a follow-up question from Derek Lessard with TD Cowen.

Just a follow-up maybe on the Juvenile and you said improving the mix. But I was wondering if you could talk about the revamp of the Safety 1st brand, the work you've been doing there. You called it out as being really strong. And I was just curious, given where we are with the macro environment, if this is -- if the -- if that's been a function of the improvement in Safety 1st?

I think the strategy that we had, and this goes back a year -- over a year ago. In the U.S., to really make Safety 1st, the -- what we call the MPP brand, right? Some are between Cosco and Maxi-Cosi. And we locked our way there. You often had some really low-priced Safety 1st items and then you'd have to compensate for that low-price Maxi-Cosi item, so lower price than they should have been. And instead, we wanted to really conquer that middle ground and give really good value with a good brand. We've redone the graphics and the look. But I think we've been successful at staking an area which allows Maxi-Cosi to move higher up in the channel and have a higher perceived value because now Safety 1st has got sort of a higher-end value as well, and it's no longer the opening price point type of product. So I think what we're saying is that, that's been successful. We're seeing it in the marketplace. We're seeing our products doing well under that brand, and that's boding well for keeping all the brands in the right spot.

That's interesting. And is it still -- if I recall, it's more -- it's, I guess, North American-focused, like Safety 1st is not in Europe?

It is to a small extent, but you're right. It's mostly -- why don't we say the Americas because I believe we also use that brand in Latin America as well in some places. But yes, it is mostly an American brand.

This concludes the question-and-answer session. I would like to turn the conference back over to Martin Schwartz for any closing remarks. Please go ahead.

Okay. I want to thank all of you for joining us this afternoon. I wish you all a great weekend and extend our very best wishes for Mother's Day. Thank you very much.

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