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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries' Fourth 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, March 12, 2025. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

Thank you, and good morning, and thank you all for joining us for Dorel's fourth quarter call for the period ended December 30.2024. With me are Jeffrey Schwartz, CFO; and Jayson Kwasnik, VP of Finance. We will take your questions following our comments. Again, all figures mentioned during this call are in U.S. dollars. When we released our third quarter earnings and outlook in November, we committed to acting aggressively to improve our earnings and deliver value to our shareholders. Since then, we announced both a substantial restructuring plan in our Home segment as well as the successful monetization of our Columbus factory in the form of a sale-leaseback transaction. I will leave Jeffrey to elaborate more on both of those shortly. But first, I want to provide color on our fourth quarter results by segment. Dorel Juvenile has maintained its trajectory of year-over-year revenue growth this quarter, achieving a 2.2% organic revenue increase. But this was below the trend of the rest of the first 9 months of the year as we saw lower sales in the U.S. in the quarter. This came after a very strong third quarter in the U.S., and it should be noted that for the year, our North American operation was the top contributor to our improved earnings and we gained market share. Notably, Europe achieved a revenue increase of approximately 18% in local currency. The momentum for our third quarter customer events and new product introductions enabled the growth. The major Omni-channel players and e-commerce are driving the sales increases. This includes our own DTC sites that continue to grow in importance. Market share gains continued and in the fourth quarter, we returned to the #1 position in car seats in the U.K. for the first time in many years. We are also growing market share in our other measurable markets, Germany, Netherlands and France. Our next major event is in the first week of April, and the customer attendance will include all of the major players, and we will be rolling out yet more innovation at that event. The strengthening U.S. dollar against almost all other major currencies negatively impacted revenue growth and earnings. In fact, currency was the most significant drag on earnings and accounted for $7.5 million of the miss to prior year. Currency rates have been really volatile since the end of the third quarter. We are talking to our suppliers and customers about how to best manage this. As we have seen in the past, the ability to recoup the cost of negative currency rates vary by market, but there is also a delay between the change in rates and our ability to offset it. As I said, currencies have been really volatile. And in fact, as of today, some are right back where they were several months ago. The euro, which is our most impactful currency rate is back where we planned for as is the Brazilian real and the Chilean peso. We have also done some hedging to lock in those rates. So as of now, we are less concerned about currency than we were. But of course, it's always a risk. Chile and Peru remains as challenging markets to operate in, and we have been reengineering those businesses to be less reliant on our company-owned retail locations, which carry a heavy fixed cost. We actually lost money in the quarter, which is usually the best quarter in the year for Chile and Peru, but we have made management changes there and our new General Manager has both retail and e-commerce experience. We are going to prioritize e-commerce, both our own e-tail sites and working with our third-party wholesale customers for Omni-channel capabilities. We believe this as coupled with the right retail brick-and-mortar footprint will allow us to get that business back to profitability this year. Now turning to Dorel Home. As we announced in January and as Jeffrey will elaborate more upon in his review of the financials, a big part of the turnaround in Home is our ability to reduce our footprint to match the new reality of our industry. We experienced it again in the fourth quarter and sales levels could not offset our fixed costs. We also continue to work through our excess inventory, which meant lower margins and a loss for the quarter. But beyond restructuring and reducing our costs, I want to lay out the pillars to success that we have identified and are building upon. Number one, leveraging our previous success with traditional brick-and-mortar and Omni-channel retailers. Our capability to offer real-time customer service and maintaining required in-stock levels for these retailers make us a preferred option, and we are having success in securing new programs with major retailers. Number two, a reduced product line with different and value-added features at outstanding prices. The ability to offer furniture store quality at mass and warehouse chain pricing is how Dorel became a leader in the industry, and we intend to regain that distribution. Number three, become the most efficient domestic manufacturer of wooden RTA furniture. Having domestic manufacturing can be a huge asset and our Cornwall, Ontario factory has been an industry leader for over 30 years. With new programs and higher volumes, this will provide an advantage over the competition in a lot of wooden furniture categories. Number four, prioritizing fewer but more successful licensed brands such as Novogratz. We have had success with some of our licenses and less so with others. We are going to focus on the winners, and this will enable better allocation of targeted marketing expenditures to drive sales and enhance both revenue and profitability. Number five, growing new markets. Europe today accounts for less than 10% of revenues, and we believe this is an opportunity that we have not fully leveraged with our Notio acquisition, something we believe we can improve on. And number six, an enhanced management team. Troy Franks has returned to Dorel as Dorel Home's CEO, and he has a record of proven success with our Cosco product line. The support team around Troy includes several dynamic members who will drive success. So our ability to execute and deliver on these key pillars, along with the reduction of costs initiated in 2024 and '25 will lay the groundwork for future profitability. In our outlook, I want to address the recent uncertainty brought on by the potential for tariffs, virtually as proposed by the Trump administration, but also possibly some of the other jurisdictions in which we operate. I want to break down our business a bit more to give you a sense of the exposure for both. First off, the U.S. Juvenile business is about 40% of our sales, which means the remaining 60% is mostly immune other than the macroeconomic impact of a possible global slowdown or the impact of exchange rates. But right away, that removes a lot of our exposure. Most of our car seats sold in the U.S. are manufactured in the U.S., something we are very proud of and that cushions the impact relative to our competition. Some of the imports of that factory might be subject to tariffs, but obviously, our exposure is much less. When it comes to imports from China, we have moved some to other countries, but it is true a lot of products still rely on China. The biggest one is strollers. This is true with all juvenile companies. So the playing field is level there. So overall, the impact on Juvenile will happen if all the potential tariffs go into place, but less so versus others and manageable in our view. For Home, it is a bit different because it is very U.S.-centric. So imports in China and possibly Canada will be impacted. Normally, I would also say that our Canadian factory is an advantage, but tariffs could become an issue there. However, the type of product that we make there is very competitive versus any other country of origin. So we think that we will continue to be -- it will continue to be the case. Our competition tends to source from the same jurisdictions that we do. So we are not at a disadvantage relative to them. This is where our excellent supplier and customer relationships gives us some confidence that we can manage the extra cost brought on by tariffs. But as of now, due to the unknowns, it is difficult to assess the potential impact on our supply chain, product costing, retail price points and ultimately on our consumer. But we believe we are well positioned relative to our competition to successfully navigate the challenges tariffs could pose. So now tariff impact aside, this is how we see 2025 for Dorel. Dorel Juvenile is poised for continued growth and success. Despite the challenges posed by foreign exchange fluctuations, we remain committed to our business plan centered around innovative new products, brand building, digital excellence and outstanding customer relationships. This will continue to drive market share gains and expansion efforts and enhance our competitive position. With a focus on improving profitability in underperforming regions, we have made management changes in Chile, and we expect better performance going forward. We are confident in the Juvenile segment's ability to achieve sustainable growth and create lasting value for our stakeholders. At Dorel Home, we are making progress in overcoming the challenges caused by the current market environment for furniture companies. The restructuring efforts taken are already delivering results. Our ability to move domestic production to 1 RTA factory has improved our efficiency and lowered production costs. We have reduced our workforce and our success on lowering inventories means we will be exiting one of our warehouses at the end of the first quarter with the balance of our footprint reduction scheduled for near end of this year. Additionally, we will continue to innovate and introduce new products, prioritize higher-margin items and successful licensed brands to grow with our Omni-channel retail customers and expand our market presence in Europe. With a leaner, talented and more agile organization, we are confident in our ability to capitalize on market opportunities and expect to return to profitability by the end of the year. I'll now ask Jeffrey to review the financials.

Thank you, Martin. Good morning. Look, the fourth quarter was not a good quarter. We got hit by a number of somewhat non-regular operating events as well as a number of non-operating charges that went through our financial statements. The big issues on the operating side, Martin mentioned the FX hit we took in Juvenile was significant as the U.S. dollar surged in strength right at the end of the year. In fact, I think it probably peaked right at the end of the year. On the Home front, we started the restructuring process, which has led us to significant inefficiencies as we shed our overheads in an effort to reduce costs. On the non-operating side, we had restructuring charges of about $14 million and a write-off of deferred taxes of about $35 million for the quarter. If we look at the total losses for the year, we're showing $171 million. But I want to point out about $100 million of that is made up of the restructuring, write-offs of goodwill and deferred taxes that occurred in 2024. In fact, of the $100 million, only $6 million is a cash charge. The actual operating loss for the year was $28.3 million versus $47.6 million in 2023. And that $28 million does include the FX hit that we took at the end of the year. Now of course, we need to get the operating business back into the black in 2025. To do that, we have engaged an aggressive restructuring plan for our Home business in 2025. We've given out the details of that in the previous press release. But just to remind everybody, we're downsizing our nonmanufacturing workforce, which is mostly done. The closure of a manufacturing operation, one we closed Tiffin, Ohio back in, I think, Q3 and then the Montreal manufacturing facility will also be closed in 2025. An acceleration of SKU reduction initiatives. We can't be everything to everybody like we've been in the past, and we're going to focus on the best, most innovative products that make money going forward. But of course, that's a process to get there. We still have to get rid of the old inventories and just not rebuy them again. And then a big one, of course, is the distribution footprint reduction in which we're going to be shedding some warehouse space throughout the year. One of the locations, as Martin mentioned, will be done at the end of the first quarter. We will see the results from this restructuring plan accelerate throughout the year for each quarter. So we hope to see better and better results as time goes on. And we are aiming to become profitable in the Home division by the fourth quarter. I'm going to skip this call reading out all the results that I normally have done because they are in our statements, but I'm going to point out a few things. In Home, excluding restructuring costs, the adjusted operating loss increased by $1.8 million to an operating loss of $11.7 million. Again, a result of production inefficiencies during the ramp-up of the Cornwall facility and the ramp-down of our other factories as well as an aggressive push to move out inventories of products, which we plan to exit in 2025. On the Juvenile side, fourth quarter revenues were $212 million, essentially flat. But when we take out foreign exchange, it actually improved by $2.2 million. Earnings disappointed, but we do not see this as a change in trend. The bulk of the decrease in gross profit, gross margin and operating profit in the fourth quarter was driven by the significant foreign exchange rate impact as the U.S. dollar strengthened. In year-over-year, the negative impact of the FX was about $7.5 million in that area. And now of course, we are seeing a reversal in the strength of the U.S. dollar so far in the Q and expect to see some of that loss coming back into gains in Q1, providing the U.S. dollar doesn't really strengthen between now and the end of March. In addition to the FX hit, however, we did have 2 other regions. Martin did talk about Chile. Chile, we have had a change in leadership and our business plan at the end of the year. We are seeing results already in Q1 improving, and we're really happy with the direction that that's going in. In the U.S., the U.S. was -- it did hit us in a major way was timing. Two things. One, we did have a strong Q3, which led to our customers having a good amount of inventory. But more importantly to that is there's going to be a change in standards in car seats in 2025. The NHTSA has included a side impact testing requirement for all car seats throughout the year. And what is happening is the major retailers slowed down purchasing of the older noncompliant seats in the quarter to make way for the new seats and not -- they don't want to get stuck. I don't know the date exactly, but at some point, they're not allowed to sell those seats. So they want to make sure that they are not -- they weren't buying aggressively like they normally do of the old seats. So that was probably the biggest single impact we had there. We have started -- by the way, we have started shipping many of the new side impact compliance seats in January and in the first quarter. So things are getting back to normal. The rest of those regions all had very strong sales and growth in Q4. We're very pleased. As Martin mentioned, 18% in Europe in the quarter, gaining market share. That's going well. And again, now that the euro has bounced back too, I think that's going to have a nice impact on our profitability as we move forward. We still remain very bullish on the Juvenile and expecting a growth year in 2025. I want to talk a little bit now about liquidity because liquidity is obviously an issue that Dorel is facing. It is tight. We did announce on February 21 that we entered into a sale-leaseback transaction. Dorel received $30 million gross, of which about just over $8 million was allocated to reduce debt, and the balance went in to help fund the operations. It actually had a pretty nice impact, and we were able to get some concessions from many suppliers because we were able to catch up on some of our payments. The transaction is part of our initiative to finance the growth of our Juvenile segment and the turnaround of the Home segment. We are actively working on a number of additional opportunities to further enhance our financial position. I can't disclose the nature or timing of these because until they're done, they're not done. But I want to make sure that everybody knows that this is of the utmost importance. And we feel we're making pretty good progress actually. Some of them we hope to get done in the short to midterm. All of the ones we're working on are independent, which is -- which what I mean is, although the more things we get done, the easier it will be to do other ones, but they're not one or the other. We have, like I said, a number. They could all get done and they're all somewhat independent of each other. And I feel good that there's numerous paths for us to improve liquidity without having to go down the path of dilution or any shares impact. And with that, I will pass it back to Martin.

Okay. Thank you, Jeffrey. I'll now ask the operator to open the line for questions. Operator?

[Operator Instructions] First question comes from Derek Lessard with TD Securities.

Jeff, I just maybe wanted to touch on the liquidity. Curious if -- and I think you said in your opening remarks, but are you able to give any sense of sort of the timing? When do you expect some of these initiatives to close?

I mean some should hopefully happen in Q2. I mean even the sale-leaseback, which I thought would be like a 4-week deal ended up being like a 7-week deal, just getting through the legal stuff. And there were no actually -- no issues. It's just things drag. But I'm hoping to have something in Q2 and then more as we continue to go through.

And thanks for the color around the Juvenile segment in the U.S. I was just curious on those -- the change in car seat requirements. Do you have any idea or sense of when retailers are expected to blow through their old inventory?

No. You know what, I should. I don't have the dates for you. I know we -- and I think a number of our competitors are shipping the new compliance seats now, and they just didn't want to continue to order big quantities of the old seats, given that we've already started shipping the new ones. So that had an impact. I don't have the dates. I can get them to you, but I don't have them.

And then maybe just one final one for me before re-queuing. Is there any -- or can you maybe contrast the differences you're seeing in European demand versus the U.S.? This is on Juvenile.

Yes. I mean, overall, it's still a bit of a weak demand. It's not as bad as it was maybe 2 years ago or 3. But demand is like -- the industry is not strong. Our performance is, I think, better than most in the industry, and that's what we're seeing in the numbers. But we're also not seeing a big drop sort of at the end of last year. So again, we're not looking at a rebounding industry. We're just doing things better and doing things right, and that's getting us the increase in sales and margin.

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

I just wanted to ask about the Home business. You gave some tariff color -- tariff exposure color for Juvenile. I just want to confirm with Home, sort of how much of the revenue is generated in the U.S., I think it's the vast majority? And then how much of your production comes from Canada or domestically in the U.S. versus imported?

It's a little convoluted. Production would be 10%, 15% maybe in Canada. It's growing. I mean, obviously, we closed down a factory in the U.S. That was not as efficient as the Canadian factory. We are getting significant -- we were losing money last year even in our Canadian factory, but now we're starting to see the efficiencies getting better, production is going up on a day-to-day basis. Things are getting better, but then this obviously puts a little bit of a curveball in. But we are -- to be fair, we're working with the suppliers. We're working with our customers. It's not easy to replace this production. The quality is good on what we're producing. The sell-through is good on what we're producing. It's not so easy to move. And there's not that many people that can do that domestically. Some of the business we picked up at our Canadian factory was from a company that was making theirs in Mexico. So I don't think that, that's really an option for that retailer to go to -- it's a whole supplier, let's put it that way. So retailers are going to go through a lot of pain, and customers, I think, are going to go through a lot of pain. We're going to go through some pain. But we're feeling like our factory in Cornwall should be okay at the end of the day. But again, who knows, right? I mean we don't know where -- what demand is going to be, what the final tariff is going to be, what currency it's going to be. I mean there are so many variables here. But we're feeling like at least the retailers, our customers and their suppliers are working well with us.

That's great. And then the balance, if that -- if it's 10% to 15% in Canada, is the balance imported? And then I guess, how much of that would be China?

Yes. There's a little bit of -- very little bit, but we did -- I mean this might end up being a good one. We did close the mattress factory or we will be closing the mattress factory in 2025 in Canada. We're replacing that with U.S. production, third party, but U.S. production. So that's going to be a nice move.

Okay. Okay. Okay. and then maybe how much of it is China?

I mean we did -- since the last set of tariffs, we moved a lot of product out of China. So it might still be 40%, rings a bell to me out of the imports. But I'll tell you, it's not across the board. It's very concentrated in certain categories in which we cannot find anyone that could even with the tariffs get the costs to make sense. So there might be some challenges there, but we do have some alternatives. We can move some of that product. And maybe now with the 20%, it tips the scale, and we'll move some of it. We're working again with our customers. I mean these are important categories for them. They've been with us for a long time. The product is good. We -- it's just a lot of turmoil, right? So far, we're managing through it.

Yes, certainly, not a lot of visibility, which makes it challenging. And then maybe just on the Home business, as you think about the improved or return to profitability by Q4, can you just give us a sense of how much of that profitability improvement comes from improved gross margins versus reducing your fixed cost footprint?

It's both. I don't have the number in front of me. It's both because, again, we've got a number of products that we produce. We've been really good at our R&D. We have not been able to bring everything in. We are still -- the liquidity doesn't allow us to increase our inventories quite yet, and that's sort of what we're looking to do. So there is some product coming in that has good margins on it, and we need to buy more of those and sell more of that stuff. So we are expecting that. The other thing is we had a significant number of negative margin when we cleared out old goods throughout 2024. We won't repeat that. I mean we can't because we don't have that amount of inventory to clear out or to reduce. So we know that, that won't be done again. So that in itself kept margins low. So again, we sold a bunch of products at good margins, but then we sold a lot to sort of get out of categories and stuff at low margins, which then shows up as an overall low margin base. And of course, getting more efficient in the factory and making money in the factory. And then the last piece is just shedding overheads. And we're not -- as I said for the last year, we -- during COVID, we thought this would be a $1 billion company and started building it towards that, warehousing and structures and people and offices and stuff. And now we're just trying to shed all of that and get down to a much more leaner competitive company. So it's all of those things.

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Martin Schwartz for any closing remarks.

Okay. Thank you. I just want to thank everybody for joining us today and wish all of you a good day. Thank you.

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