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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries Second Quarter 2026 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 6, 2026. I would now like to turn the call over to Martin Schwartz, President and CEO. Please go ahead.

Okay. Thank you, and good morning. Thanks for joining us for Dorel's second quarter earnings call for the period ended June 30, 2026. Today, we will review our second quarter performance, provide an update on strategic actions underway across the Dorel Juvenile and Dorel Home and discuss how these initiatives are intended to improve profitability, simplify the business and strengthen cash generation over time. With me today are Jeffrey Schwartz, CFO; and Jayson Kwasnik, VP of Finance. We'll take your questions following our comments. And please note that all figures mentioned during this call are in U.S. dollars. Dorel Juvenile delivered a resilient second quarter, supported by strong international performance and continued momentum in its premium brands. While softer market conditions in the United States affected sales, the segment continued to improve underlying operating performance with growth across several key international markets. Ongoing investment in innovation, consumer engagement and commercial execution continues to reinforce Dorel Juvenile's ability to navigate market challenges while strengthening its foundation for long-term profitable growth. As announced with our first quarter results, Dorel Home required a further reduction in its overhead structure. During the quarter, we advanced a new business model centered on Cosco product categories. In addition, our European furniture distribution company, Notio, will continue to supply key large retailers with select furniture SKUs. Although this transition resulted in a reduction in revenue in the quarter, we are very pleased that the Cosco business performed in line with expectations and was profitable under the new operating model. As always, Jeffrey will walk you through our results, but first, I want to add color to our press release of today, starting with the Juvenile segment. Juvenile results included some significant year-over-year foreign currency variations. When those are excluded from the figures, the underlying earnings actually improved both in the quarter and year-to-date. This was in spite of some challenges in our major U.S. markets and again demonstrates the resilience of our business model. The smaller international markets continue to excel, leveraging our product engine, mostly the European line, and we are winning in our smaller markets like Australia and our export markets. Maxi-Cosi continues to be the growth engine and has been established in many non-European markets as a preferred choice for consumers. The quarter reflected progress in several areas that are important to our long-term strategy: innovation, strengthening our brands and expanding product credibility. While these highlights are not financial results in themselves, they are meaningful indicators of the underlying health of the business. We saw encouraging momentum across several of our key brands during the quarter. At the ABC Kids Expo in Las Vegas, Dorel Juvenile USA showcased innovation and upcoming product launches across Maxi-Cosi, Safety 1st, Little Seeds and Tiny Love. This event provided an important opportunity to engage customers and partners, present new category initiatives and reinforce the relevance of our portfolio in the juvenile products market. External recognition also reinforced the strength of our product offering. Safety 1st received recognition for home safety and connected nursery products, including the 80-piece babyproofing kit and the smart humidifier. Maxi-Cosi also received recognition for its Embraced Forms Crib and Dresser, supporting the brand's expansion into the nursery category. Our focus remains clear: build trusted brands, deliver relevant products, strengthen execution with retail partners and support the teams that make us successful. We believe these priorities position Dorel Juvenile to continue advancing its strategy and creating long-term value for stakeholders. At Dorel Home, and as previously announced, we undertook a further comprehensive review of the Dorel Home business after the slow start in 2026. As a result, we have fundamentally reshaped the Home segment around the businesses we believe offer the strongest long-term return potential. The new structure is built around 3 focused platforms: Cosco products, youth furniture under Dorel Juvenile and select furniture opportunities supported by Notio. Throughout the restructuring process, Cosco has demonstrated resilience and remains the foundation of our Home strategy. It benefits from strong retailer relationships, leading positions in functional living categories and an operating model that can generate attractive profitability and supported by the appropriate cost structure. Importantly, the second quarter reinforced our confidence in this business. While Dorel Home overall remains burdened by legacy costs and restructuring activities, management's analysis show that Cosco itself performed in line with expectations and was profitable within the new operating model. The second component of our strategy is the transfer of youth furniture into Dorel Juvenile. This move leverages the natural connection between youth furniture, nursery furniture and Dorel Juvenile's existing product categories. Importantly, this business will remain subject to strict profitability requirements. Growth will only be pursued if it can generate appropriate returns without recreating the overhead structure of the legacy home organization. The third element involves transitioning the remaining viable furniture activities to Notio, our Europe-based furniture division. Notio is a lean furniture distribution business that possesses extensive furniture expertise, strong sourcing capabilities, established retailer relationships and a lower cost operating structure. The items being transferred to Notio to be sold in North America will be limited to active profitable SKUs to start and will be direct shipment -- or will be direct shipment sales or utilize third-party warehousing and do not require company-owned warehousing in North America. The dedicated home furniture organization has been further downsized with certain retained activities integrated into existing platforms at Juvenile or Notio. These actions are expected to improve profitability, increase flexibility and reduce risk going forward. I'll now ask Jeffrey to review the financials.

Thank you, Martin. For the second quarter of '26, Dorel's revenue decreased by $42.9 million, 14.7%. The organic revenue decline was 16.9%. The decline in revenue in Home was mainly due to the intentional reduction of active SKUs that are now considered noncore. So this is a continuation of our policy to drive down the business to get it to the new format that Martin described. In Dorel Juvenile, the decline was mainly in the U.S. The revenue declines were partially offset by some robust double-digit revenue and organic growth in most of our export markets. Places like Australia, Brazil, Canada are doing the best they've done in years and years. So we're pretty excited about that level of growth. On the margin line, the margins decreased by -- gross margin by $9.3 million or 18.7% and it decreased by 80 basis points from a percentage from 16.1% -- or to 16.1% from 16.9%. However, excluding restructuring costs, the gross profit decreased by $5.1 million, but improved as a percentage from 21.5% last year to 23.1%. In Home, the decrease in the gross profit and margin is mainly due to lower sales, which we talked about and a continuing sales of noncore SKUs at very low margins to help clean up and get us out of some facilities. We do, of course, have significantly lower overheads now, but that wasn't able to offset all of the margin pressure from the stuff I've mentioned before. On the Juvenile side, the decrease in gross profit and margin in the second quarter was primarily driven by year-over-year significant negative foreign exchange impacts due to the U.S. dollar weakening against the euro in the second quarter. Operating loss for Dorel was $24.3 million compared to $37.2 million. But when you take out restructuring, the operating loss dropped to $5.3 million. And furthermore, if you remove the impact of FX, we actually get a positive result of $1.5 million. From an FX standpoint, we had a loss, not a significant loss this year. However, there were some significant FX gains in Q2 of last year as the euro strengthened significantly against the U.S. dollar. So when you take the loss of this year and you add back or you take away the gain of last year, we would have been slightly positive. If we move over to the Juvenile now, the second quarter revenue was $209 million, decreased by 3.9% versus last year. The organic revenue line was down a little bit more at 6.8%. The revenue and organic revenue declines were mainly in the U.S. market. In the U.S. market, we were driven by some softer category demand. We did some reduced promotional activity compared to last year, the timing of certain programs with key customers. And in addition, some of our competitors engaged in what we thought was extremely aggressive promotional activity across a number of categories during the quarter, and that pretty much caused a lot of the decline in sales. The revenue decline described above was partially offset by double-digit revenue and organic growth, like I said, in our international area, Australia, Brazil, like I said, doing extremely well. Australia growth has now allowed our Maxi-Cosi brand to finally take the #1 position in car seats in that country with the leading retailers. So that's been a long time coming, and we're pretty excited about that. In Brazil, organic revenue growth was from every major product category and across all the brands. Both the export markets and Canada are all really working from the fact that our original plan of having all this distribution works really well when we have some great product being produced. And a lot of the product that's leading to the growth is the product that's coming out of Europe and allowing our various divisions around the world to really succeed. So while this used to be a very minor point of Dorel, it wasn't really influencing our export business or businesses outside of Europe and the U.S., are actually starting to contribute meaningful dollars to the bottom line. From a gross profit, gross margin standpoint, the numbers decreased in the Juvenile by $4.7 million, declined by 110 basis points as a percentage down to 27.9%. The decrease was really mostly part of the negative foreign exchange and some obviously lower sales in the U.S. and doesn't help us on that end, partially offset by higher sales volumes and better mixes in most of the other markets around the world. From an operating profit, it was $3.6 million during the quarter compared to $6.5 million. If we remove restructuring costs, adjusted operating profit declined by $2.7 million to an operating profit of $5.1 million. And again, if we look with the FX adjustments in both periods, we actually improved -- just the FX would have improved our earnings by $4 million. And again, that's mostly because of the large FX gain that we had in 2025 Q2. Switching over to Home. Again, very difficult to read a lot into the numbers. Sales are down significantly. But again, all of that is pretty much in the areas that we are just exiting the business. So you see a decline of 46.4% as I explained before, where that's coming from. The losses, Home loss was $11.3 million in the quarter versus $23.9 million. And adjusting -- excluding restructuring costs, adjusted operating losses decreased by $6.9 million -- $6.3 million to an adjusted operating loss of $6.5 million. The other thing just I wanted to address was the finance expenses during the quarter, increased by $8.6 million to $17 million. However, the cash portion of the interest was $11.1 million this year. So a significant chunk of that, just $5.9 million is noncash. So that's an important thing. With that, I'll pass it back to Martin for the outlook.

Okay. Thank you, Jeffrey. Dorel Juvenile enters the second half of 2026 confident in its strategic priorities and the strength of its global platform, building on solid performance in key international markets. The company expects improved earnings in both the U.S. and Europe, supported by significant new product launches. As an early indicator, U.S. sales improved in July, and we expect that trend to continue. Dorel Juvenile remains focused on sustainability, profitable growth while further strengthening its position as a global leader in Juvenile products. Dorel Home remains focused on executing its transformation strategy and building a simpler, more agile and financially sustainable business, supported by the continued profitability of Cosco and a stable European operation expected to contribute positively to earnings. The company is focused on eliminating legacy costs and scaling its most profitable platform. With that, I'll ask the operator to open the lines for questions. Operator?

[Operator Instructions] The first question comes from Cheryl Zhang with TD Cowen.

I wanted to first start on the Juvenile segment. So I think in the MD&A, you noted that part of the U.S. sales decline was due to the timing of certain programs with the key customers delaying sales to the second half of the year. I wonder if you could please elaborate on that. You also said U.S. sales improved in July. Can you maybe speak to what you're seeing that support continued sales improvement in the second half, please?

Well, the first part of your question, I mean, that's standard. There's rollouts, there's programs that retailers run, and they're not always the exact same time of the year. And I think that's more of a general issue. We looked at what programs we had all across in '26 versus '25 and see some of them have shifted to later in the year. So there's not a -- I don't have a hard number for you on that. On the second question, yes, we're getting a little more active in promoting so that -- and we're seeing the results. I mean we started in July, and we saw some instant results, particularly in some car seat areas that we're excited about. And I think it's just that. It's some of the timing of the year. It's coming back. I mean it was a particularly tough quarter on the top line, and I feel good that things are getting back to where they should be in the U.S., and July is a good indication that we're on the right track for that.

Okay. That's helpful. So is it fair to say that the improvement is from the promotional activity that you're doing, but will we also be seeing the retail programs coming back as a tailwind in the second half? Curious if you have any...

Yes. I mean I think that's the real key, and this goes for all markets is the actual introduction of the new items that we've been showing. And that's different for all different markets. We have a couple of really great products that we're waiting on. And I know in Europe, one of the great strollers that I'm very excited about is hitting in Q4, beginning of Q4, but that one is only hitting in the U.S. at the beginning of Q1. So that particular item, we'll have to wait 3 months more. But that's a key thing in Juvenile, right? It's about -- promotions are great and they drive some big numbers, but you really move the needle when you've got new products introduced. So that's what we've been focusing on. And that's what's driven our business so well in Europe over the last 2, 3 years and driven our international business as we're just really succeeding. We've got to get more of those introduced into the U.S. We do have some that are coming in Q3, and we have more in Q4, and we have quite a bit in Q1 and Q2 next year. So that's what's really going to drive meaningful numbers.

That's helpful context. Maybe switching gears to Home segment. You introduced like a new business model. And I wonder if you could give us a sense of how much of that Home sales currently is under Cosco? And when should we be expecting the transfer of youth furniture from Home to juvenile? And how much would that sales shift be between the segments?

Let me answer the second part first. So really, what it is, is I don't think you're going to see it per se. It is authorizing -- we've already moved the cribs over. As you know, that was about a year plus ago, maybe 2 years ago. And then the next logical step for us is what we call youth furniture. So youth furniture would be bunk beds and beds for children's bedrooms as opposed to just baby bedrooms. That's not a big, huge business. There's a couple of SKUs that we have, but it's just more of a focus. And so I don't think that's going to be a material number that you're going to see. On the flip side, your first question was about Cosco. Cosco represents about 70% of our business right now with 30% being Notio. I'm actually -- I mean, I'm excited not necessarily about the business, but I think we finally found the right footing. I mean it's been a while. This is a business that's been tumbling. As you know, many businesses in this area have just closed up. We have closed a lot of that business that just couldn't make the go at. And we finally found a place where it makes sense. And I think for you to think about it, and this is how we look at it now is we've got a Cosco business that was profitable in Q1 -- in Q2, sorry, not in Q1, will be profitable for the rest of the year. So we need to grow that business. We need to do a lot of things, but we're no longer burning money there. We finally turned that one around. And then the Notio business, which is already distributing furniture in Europe, will now add the U.S. to its model, and that business will be profitable in the second half. And then the third piece, what I call it as the legacy costs. So these are things that we're still paying for as we get out of the old business. So that's -- we still have some warehouses we want to exit. We're looking to sublease most of those. Some of them are running out sooner than others. We still have inventory in them that we need to sell. And some of that inventory is generating cash to pay for these legacy costs. But eventually, when those legacy costs are gone, and I don't have an exact date for you when they're all gone because they will be reducing every quarter, then you'll see a profitable business again on the Home side.

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

I just wanted to circle back around on the Home business. And I guess, post the most recent business transition or restructuring. If you look at the revenue base from where we are now, can you sort of size up what the go-forward business will be in terms of the top line?

Let's see. I'm just getting some feedback from my people. Yes, that's the number I thought. We're looking at an area under $200 million, just under $200 million for, I guess, like a forward-looking business over the next 12 months would be in that ballpark.

Yes. Okay. Okay. Okay. That's helpful. And then I guess just thinking about the more near term, how much -- how long are you expecting to see kind of sales declines from these proactive exits? I would have thought we would be close to lapping it in Q2, but maybe it's something that you expect to lap in the back half of the year.

Not sure I understand. Are you talking about Home, I'm assuming?