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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries' First Quarter 2025 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 12, 2025. I would now like to turn the conference 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 first quarter earnings call for the period ended March 31, 2025. 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. Dorel Juvenile had a strong start to 2025 with another quarter of organic revenue growth. Our new product introductions continue to resonate with retailers and consumers, and our pipeline of upcoming launches is robust. Another positive, the out of our control was the weakening of the U.S. dollar in the quarter against most major currencies, which helped earnings and should do so going forward. Conversely, Dorel Home faced a challenging start to the year with e-commerce sales much lower than expectations. As we said in our last earnings release, brick-and-mortar success will be the key to our turnaround, but the change in the e-commerce landscape means we significantly underperformed. We've lowered our expectations on what that channel can deliver. And as a result, we'll be taking further action to substantially reduce our footprint. Jeffrey will elaborate further on our results as well as what further changes we are making in the Home segment as well as our view on U.S. tariffs. But for now, I'm going to give more color on the performance of our 2 segments. For Dorel Juvenile, as stated in our release, we delivered organic revenue growth in the quarter. This is the eighth consecutive quarter of year-over-year organic revenue growth. This revenue growth is being led by our Maxi-Cosi brand, which grew 9% over prior year and now make up 37% of our sales. Importantly, we are gaining traction in almost all of our markets. The local safety standards make global product success more challenging. We have improved our ability to create one platform and then tweak it to match local standards. The best example of this is the Maxi-Cosi Fame stroller. We launched this item first in early 2024 in Europe and it was a huge success. This is the most premium stroller in our portfolio and competes well with the current market leaders. We have excellent product placement with our European customers, and now it is available in over 40 countries worldwide. We are building on the momentum of the Fame and at our most recent customer event in April in [indiscernible], Spain, introduced a small cabin version. What is particularly exciting about this new launch is that this category of strollers is the most popular around the world. So it has been the potential to be even more impactful than the original Fame. This lightweight stroller was introduced alongside a new and improved Coral Slide Pro car seat as part of the Zero-G travel system. This is the lightest ever as the Coral consists of a soft shell inside a rigid frame and the stroller can fit in the airplane overhead bins. The soft shell can be removed from the rigid frame in the car and placed directly in the stroller, the only infant carrier in the marketplace with the ability to do so. Of course, the Coral is part of the SlideTech family of car seats and could be used with multiple strollers. This travel system combo is really the best in the industry, and we are being recognized again for the incredible innovation that our teams are delivering. One of our underperforming markets has been the Chile, Peru. And as we announced in our March conference call, we recently installed new leadership. Early returns are good as Chile, Peru delivered an improvement in earnings of $1.4 million versus last year and posted a profitable quarter for the first time since the first quarter of 2023. In the U.S., the team has been working on launching new car seats for over a year that meet the new side impact regulations. And I'm happy to say we began shipping customer placements in the quarter. The team did an amazing job meeting these new standards and the products looks better than ever. With the current tariff environment, the team is already looking at incremental opportunities for our U.S. factory. We already produced 3 million seats a year and are the most competitive option for many price points. So this could be a major opportunity for us. Finally, on Juvenile, cost reduction remains a priority. And in the quarter, some changes were made, which will help our run rate going forward. And now turning to Dorel Home. It was a difficult quarter, far below our expectations. We have reacted strongly and since the end of the quarter, identified further cost reductions and operational improvements. In our last call, I stated there were key pillars to success. And as you can see in our results, we are not executing on all of them yet. So I want to give an update on where we see our progress. Leveraging our previous success with traditional brick-and-mortar and omnichannel retailers, though not fully reflected in our earnings, our brick-and-mortar sales remained flat with prior years. This should change going forward as we have some major launches coming with several key retailers. I will add to this that these relationships are proving to be particularly beneficial as we navigate the tariff environment. We have already had multiple meetings with several customers as they look to us to find solutions with them, a reduced product line with differentiation and value-added features. This has been difficult to start the year as our financial constraints have limited our ability to bring many new products to market, prioritizing fewer but more successful licensed brands such as Novogratz. As we have been unable to bring a lot of new products to the market as of now, this has not really been a benefit yet. This is part of our streamlined portfolio and remains a key deliverable for us and grow in new markets. Europe actually had a good quarter right on plan. It remains relatively small, but we want to grow it profitably from its current level of sales and an enhanced management team. As announced previously, Troy Franks has been installed as Dorel Home's CEO, and he is driving the initiatives to turn the business around. The management team has been streamlined and those remaining have a proven track record of success. We've also moved our Juvenile CFO over to be responsible for the Home segment. Ian Farthing has been with us for over 30 years, the last 12 at Juvenile. So he is perfectly suited for what we need to do. We are strategically rightsizing the business and have revitalized management team in place. I will now ask Jeffrey to review the financials as well as collaborate on tariffs and our home restructuring program. Jeffrey?

Thank you, Martin. Before discussing the quarter, I wanted to discuss some of the things that Martin was talking about some -- a little bit more information on the restructuring, which is ongoing as we speak. The lower-than-expected sales and margins has prompted additional restructuring activities and over and above what we announced in January. [Technical Difficulty] the operations of the Home segment, particularly the import part will be significantly altered with the sales, marketing and product development organization being merged into the successful Cosco division. So despite the difficulties we're having, as you can see in our numbers, we do have a division that is profitable and that is doing well. And that business, which is pretty lean and mean is going to take over additional product categories, allowing us to significantly reduce our footprint. Substantial number of positions will be eliminated as they have been identified as redundant and not necessary to support the anticipated sales level and activities because of the merging into the Cosco division. A lot of the back office functions, accounting, IT will also be consolidated with our Juvenile segment, allowing us to, again, significantly take some costs out of that as well. We are actively pursuing other opportunities that we believe can decrease our overhead significantly and allowing us to operate. We will be communicating our plan to the market by the end of June. As like I said, we're in the process right now of building it in some places, taking it apart. As far as dealing with our lenders are concerned, we still have the support of our lenders. We're working with them to build a go-forward plan, which focuses mostly on our growing profitable Juvenile business in a rather different smaller furniture operation, which will no longer lose money. From a tariff standpoint, while this is not pretty difficult, I mean we prepared all of these notes last week, and we got a surprise last night that the Chinese tariff is going to be down to 30%. That gives us optimism. We've had a number of products that have not been shipped out of China that was just sitting. Again, this is generally category. So it's not as if there were alternatives. We like to use things like strollers as an example. Whole industry is talking about the fact that all strollers are made in China. And I'm going to say for the last 5, 6 weeks, very few strollers have been sent out of China. So however, going forward, 30% is high, but it's manageable. In addition, it does still give us an opportunity to increase our factory. Martin talked about that. We've got a great factory that produces 25% to 30% of the units sold in America. We have additional capacity. We're looking to turn that up. And with the additional tariffs, we feel like that's an opportunity that's still there to grow that part of the business. So tariffs on the Home side, on the Juvenile side, although a pain and certainly in the short term, is going to cause a little bit of hiccups. It should actually be a net benefit for Dorel in the U.S. Moving over to the numbers. For the first quarter, Dorel's revenue decreased by $30 million or almost 9%. Organic revenue declined by approximately 7% after removing the variation of foreign exchange year-over-year. The revenue and organic revenue decline was all in Home, partially offset by some improvements in Juvenile. The gross profit for the quarter decreased by $8.1 million. The gross margin decreased by 60 basis points as a percentage of revenue. Excluding restructuring costs, the adjusted gross profit decreased by $7.7 million or 11% and by 50 basis points on the -- and again, all of this negativity is all caused at the Home level because the Juvenile level is actually doing quite nicely and moving according to our plan. The operating loss for the quarter for Dorel was $14 million compared to $7.7 million last year. All of that, again, is in -- is because of the Home. Financing expenses of $9.4 million was comparable to last year. And as we move over now to the Juvenile segment, quite pleased with the way that business is going. We are definitely going in the right direction. It's still a difficult environment between tariffs and just the economic environment. But nevertheless, our revenues grew by $3.2 million. Organic revenues improved by 4% after removing the foreign exchange environment. We're seeing improvements in most of our markets, which we're pleased about. Operating profits were $3 million during the first quarter compared to $0.5 million last year. Excluding restructuring costs, operating profit increased by $3.1 million to an adjusted operating profit of $4.2 million. Overall, like I said, the Juvenile business is going well in virtually every market that we have. Martin, you talked about Chile. That was the one fairly large market that's been a problem for the last number of years. We do see light at the end of the time, and we're extremely pleased to see the first quarter get into the block. So that's going well. Europe is going well. The U.S. certainly looking forward to increased activity in our factory. Over in the Home business, don't have much good news there. The business declined significantly by 33%. The decline in revenue is mainly on the reduced e-commerce sales, which we're taking significant action on that unit. Our gross profit declined by $10.5 million. The gross margin was 1.2%, which is really an indication of way too much overhead for the amount of volume that we're doing. And as far as the losses, as we talked about the losses of $7.9 million. So disappointing, we're disappointed. We're taking significant action. The first restructuring, I want to point out, although it doesn't look like you see much improvement, we have achieved all of the cost reductions that we plan to do in the first restructuring. What has limited us as the inability to sell up the volume we expected. This current restructuring plan is more significant, more -- a much larger plan to turn the business into a smaller, leaner and profitable business, and that's the plan. And we will be going back to everyone in the market in June when we finalize the plan, got a all our approvals, and we'll explain everybody to everybody what we're doing on the Home side. With that, I'll pass it back to Martin.

Thank you, Jeffrey. In our outlook -- finally, on our outlook, the tariff situation is clouding our visibility on expected performance as can be seen by this morning's changes. As Jeffrey laid out, we are actually in a better place relative to a lot of our competition, but the situation is difficult nonetheless. In the second quarter in both of our segments, orders from customers have slowed and even stopped entirely for some customers for Chinese-sourced products, but hopefully, we'll start to recover with lower tariffs. This will have an effect on our second quarter results, particularly in the Home segment. Giving a long-term resolution on tariffs is impossible to predict. The exact financial impact cannot be provided as of now. Longer term, our Juvenile segment is expected to continue to deliver improved earnings over prior years. Short term, tariffs could challenge earnings. But with our domestic manufacturing factory opportunities, this could offset the risk. For now in Juvenile, we continue to execute on our business strategy and has been successful over the past several years, adjusting as necessary for external factors like tariffs and currency. In Home, the focus is transitioning to the segment to a new business model that is more agile with a lower-cost infrastructure. The timing of these changes is made more difficult by the tariff situation, but this will not prevent us from making the internal changes necessary for success. We should have much better clarity soon, and we'll be able to provide better guidance thereon. With that, I now ask the operator to open the lines for questions and request that you limit them to 2 in the first round. Operator?

[Operator Instructions] And your first question today will come from Cheryl Zhang TD Cowen.

Jeffrey, this is Cheryl calling for Derek. First question is on tariffs. As you mentioned in the remarks, we saw you have taken down tariff quite a bit, now charging 30% of China imports down from 145%. Curious on your thoughts on do you think the 30% tariff is enough to turn the demand back on compared to the 145%?

Correct. Sorry. I was going to say that this is a difficult question given that we want to add an hour or 2 to deal with it. I would think that they will turn it on because most of the -- when it was 20%, most of the retailers were coming in high, but still moving forward, given the shock of 154% in many cases, just not -- we just couldn't bring in product, we couldn't get product. The 30% sounds reasonable, and it sounds like we can move forward with that. So I'm going to give you a qualified yes. But again, I don't know.

Okay. Great. That's fair. My second question and before I requeue is on selling expenses. It looks like as a percentage of revenue seems a little high compared to the prior year in both businesses. Curious if you can provide some color around that? And what would you expect on the SG&A as a percentage of revenue going forward?

Well, on the Home side, it's pretty easy to say that, that's just related to the drop in volume. And that is definitely one of the categories that we're looking at revamping, and I wouldn't -- on the Home side, we're looking at a different business. So I don't have a lot of comment there. On the Juvenile side, I'm not sure why that would be up. There's nothing radically different. I mean, we are increasing our marketing. Things are going well there. So perhaps some of the marketing programs went into that area. We've launched a lot of new products that will start picking up during the year. So I would guess that's it, but there's no real issue.

Okay. And if I may just follow up quickly on that. So you mentioned there's a new business model in Home. Curious if you can elaborate a bit more on how the new business model will change or compare to the one that you have currently?

Not -- yes. Cheryl, not until the end of June, right? We're in the middle now. I mean we weren't expecting such a drop-off and tariffs too. I mean that's had a big impact, customers not wanting to bring in inventory. There's a lot of things that hit this model. So we've been working on it for a while. But because of its -- the size and nature of it, I can't give you any sort of forward-look comment.

[Operator Instructions] And your next question today will come from Stephen MacLeod with BMO Capital Markets.

Just on the Home business. Understanding that it's still evolving with respect to the restructuring, but you did mention that your repositioning the business based on a lower expectation on revenues. So I guess I'm just curious, is there a level that you have in mind in terms of how to position this business as it relates to like that actual revenue number?

Not yet. I mean we're going to be -- we're in the process of doing is looking at all the various business lines that we have. We know that Cosco Home & Office area is a success. So taking other lines and other opportunities and running it under that way. If it doesn't make sense, we're not going to do it. So we're in that process of measuring everything to decide what's in and what's out. And we're going to be rather ruthless in that process. I mean, we don't want to lose money anymore. And the key to Dorel is really the Juvenile business. So we believe there is a Home Furnishings business, and it's going to be different than what it was in Q1, but I can't give you any more insight to that yet. I just don't have it.

Yes. That's fair. And certainly, last night's news throws another curveball. And then just maybe on Juvenile. Can you talk a little bit about your performance in North America? I mean I know you cited Europe being the most significant contributor in Q1, but wondering if you can give some color on North America? And then what was the contribution from FX to the operating profit this quarter?

North America overall was good versus last year. I don't know if it was up necessarily. It was similar. A lot of it's timing. I mean we know we have an increased market share. We know going forward, especially now with the tariffs and having the only large manufacturing facility in America that the opportunity to grow that is probably the best we've seen in many, many years. A lot of new products getting -- but a lot of it's timing based. So I'm going to say, overall flat for North America for Q1, but pretty optimistic about where we're going to go with that. Even though like I said in Q2, I could see some bumpiness there because we stopped bringing in some products for a number of weeks, right? I mean, as did everyone in the industry. So there could be a period where we run out of inventory. The industry is grinding off of inventory right now and hasn't been replenishing. So I'm not sure where that's all going to land other than car seats where we've been replenishing all the time. So that would be that. But overall, still optimistic. Just to remind you, North America is above, I think it's 45% of our overall Juvenile business. So the rest of the business continues to move forward.

Okay. That's good color. Jeffrey, and then maybe just another one if I could. Just on the -- you gave a long-term debt and financing update with the ABL facility availability down to $200 million. Can you talk about how that impacts potentially liquidity? And then I guess along those lines, when you think about other opportunities going forward, do you have other properties where you can execute on the sale and leaseback? And is that something you're looking at?

Right. Okay. Good question. So no, the impact -- we still have at the $200 million, we weren't using anywhere close to the facility and felt it was unnecessary to continue to have a large facility, especially in lieu of the fact that the Home business will be getting smaller and not larger. So we had no problem agreeing to dropping the size of that facility. So that's a nonissue. I forgot to mention something. We continue to work on a liquidity opportunity. I know I've been saying it now for a number of quarters. And that doesn't mean we're not -- it's the same opportunity. I don't want to -- until it's done, it's not done. But we are moving past gateways, and I hope to see something happen in Q2, which will give us some more liquidity as far as our business, which we can definitely use. In addition to that, yes, we do still have some properties, but we don't control -- they're not huge. They're not big, but we have some properties that we can sell that -- for example, there's a building in Tiffin, Ohio that we closed the factory on back in Q3, I believe, of last year. That building is still out there, but we don't control the ability to sell it, but we're actively looking. But a much bigger event is some additional financing that we're pretty hopeful on, and we continue to march through the process and getting all the paperwork and everything done. So I forgot to mention that in my speech. But yes, we continue to look for -- to have some more liquidity done by the end of the quarter.

And next, we have a follow-up with Cheryl Zhang of TD Cowen.

And just one follow-up from me. So in MD&A, you mentioned that there is some old inventory that you needed to move through in Home. Just curious how much of that old inventory do you need to move? And when do you expect to begin selling the newer products?

We are bringing in some products every day. I was just having -- the model that is the problem is the model where we bring in 1,000 SKUs. We inventory it and hopefully, it sells online. That's the model that's giving us the most problems. As you can imagine, it's competitive. Not just us, it's almost everyone in the industry. The idea that you're going to pick the right items, put them in the right warehouse and be able to ship it within 24, 48 hours. It is a very difficult model. And we've had a number of products that [Technical Difficulty] when we brought them in, they don't sell the way they're supposed to. So we are in the process now of selling those out. It's something we're always working on. Those models won't be reinvested in. It's -- they're nothing -- it's not as if they sat for a year, and we haven't sold any. It's -- they're slower moving. And the only upside we have is those were all bought at the old prices. And today, with whether it be Chinese tariffs or Vietnamese tariffs or Malaysian tariffs, people -- all goods are coming in at a higher price. So there should be a little bit more competitive. I mean we are lowering -- in some cases, we're lowering the price to move it. But we do have that opportunity. It's not the majority of the inventory [indiscernible] inventory is good. We're always working on this. So...

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

Okay. I want to just thank everybody for joining us today and listening to our story, and I wish you all a good afternoon. Thank you.

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