Dorel Industries' (DIIBF) CEO Martin Schwartz on Q3 2017 Results - Earnings Call Transcript

Dorel Industries, Inc. (OTCPK:DIIBF) Q3 2017 Earnings Conference Call November 2, 2017 1:00 PM ET

Executives

Martin Schwartz - President and CEO

Jeffrey Schwartz - CFO, EVP, Secretary and Director

Analysts

Derek Lessard - TD Securities

Dave King - Roth Capital

Eric Beder - B. Riley

Leon Aghazarian - National Bank Financial

Derek Lessard - TD Securities

Stephen MacLeod - BMO Capital Markets

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Dorel Industries Third Quarter 2017 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 on Thursday, November 2, 2017.

I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.

Martin Schwartz

Thank you, and good afternoon, everyone. On behalf of Jeffrey Schwartz; and Frank Rana, thank you for joining us for Dorel's third quarter earnings call. We'll be happy to take your questions following our initial comments and a reminder all numbers are in US dollars.

We are pleased that two of our business segments did quite well this past quarter. Dorel Home's positive revenue and earnings trend continued, with online sales again exceeding 50%, accounting for over 100 million of the segment's Q3 revenue.

Dorel Juvenile had its first quarter of organic growth in almost two years despite retail challenges in the US. This was a transitioning quarter for Juvenile, and the business is on track, moving to where we want it to be.

Results at Dorel Sports declined significantly as the segment is caught in the ongoing weakness of the global bicycle market and a very challenging North American brick-and-mortar environment, affecting mainly Pacific Cycle in the mass market channel. The Toys"R"Us situation resulted in an almost month-long sales disruption in all segments. We have agreed on business terms with them going forward. Jeffrey will detail the financials shortly.

First, some specifics regarding our three segments. Internet sales were up at all Dorel Home divisions, while brick-and-mortar sales decreased due to our decision to downsize at a particular mass merchant as well as a slight impact on sales of cribs due to the Toys"R"Us situation. Sales are also affected by the two major hurricanes, which also closed our Savannah distribution center for a week.

Q3 saw strong progress in the outdoor furniture business, and we expect the trend to continue through the fourth quarter as we are now a full year into being an online outdoor supplier. Relationships with online retailers continue to strengthen, and this is being reflected in the positive growth pattern.

Dorel Home's drive to improve speed and efficiency of distribution is a constant focus to ensure consumers get their goods delivered as quickly as possible. Additional investments are routinely being made in new equipment and in IT enhancements. Concentration at Dorel Home is to be faster online in order to sell more. The formula is definitely working.

The anticipated improvement at Dorel Juvenile is materializing with a number of factors combining to create the first quarter of organic revenue growth since Q4 2015. Things have turned around at our Chinese factories, where the manufacturing process has been stabilized and capacity constraints have been minimized. Investment continues to be made in automation and quality control to further bolster factory efficiencies.

Combined with reducing labor-intensive operations, increasing automations where practical and optimizing indirect headcount and costs, we expect to drive further improvements. The revolutionary Maxi-Cosi AxissFix Air, the world's first car seat with integrated deployable airbags, was launched two weeks ago through Europe. This is a huge breakthrough in Dorel's product development, and we expect excellent things from this going forward.

The groundbreaking safety technology sets a new standard in child car seats and puts Dorel at the forefront of innovation. In the event of a collision, the airbags will deploy and reduce the forces on a child's head and neck compared to standard forward-facing child car seats.

But to be clear, this is much different from airbag deployment used in cars, where airbags basically explode into your face and body. With AxissFix Air, the patented system detects a collision in 15 milliseconds, inflating the two airbags in the shoulder pads within 50 milliseconds to catch the child's head as it is being pushed forward from the force of the collision and to cushion it softly. Within the following seconds, the airbag automatically deflates. This will be a flagship product underlining the recent rebranding of Maxi-Cosi, our #1 brand.

Dorel Juvenile has rejuvenated the brand, committing to provide the utmost protection and comfort as well as modern, easy-to-use and stylish products, in line with consumers' real-world needs and diverse lifestyles. AxissFix Air does that and more.

Also launched in Europe was the Red Dot award-winning stroller, the Nova, the only product featuring effortless hands-free folding, thanks to a convenient foot pedal that allows a stroller to fold automatically. In the US, we introduced the Cosco Finale 2-in-1 Booster Car Seat, replacing the Cosco Highback, which has been an excellent seller. Partnering with Walmart, we plan to produce over a million made-in-America Finale 2-in-1 units at our Columbus factory.

Dorel Juvenile participated in various important industry shows in Q3. The fair in Cologne was very successful for us as we displayed more products and more innovation than in recent years in our large new exhibit, leading to overwhelmingly positive reaction from customers, media and colleagues.

We also attended the juvenile fair in Shanghai, which attracted nearly 200,000 visitors. There as well, feedback from trade and customers was most favorable, which shows strong confidence in our brands and products.

We are more than keeping pace with fast-changing consumer shopping behavior, which is driving rapid buying shifts. Our teams have adapted well to this reality and have been building and implementing juvenile omnichannel strategy. The US for example is gaining market share in the important e-commerce channel.

Juvenile also continues to focus on cost reductions in all areas to allow for adequate spending on brand support and new product development as they work towards their sales growth targets. After four consecutive quarters of year-over-year adjusted earnings improvement, it was a disappointing quarter for Dorel Sports, which became caught up in the continued weakness in the global bicycle market.

As a major player in the bike sector, Dorel Sports is not immune to this disruption in North American retail environment, which this year was amplified by persistent inclement weather across the United States and Canada. This was especially true in the mass channels, where Pacific Cycle has a leading position. Sales of bikes overall were down in both units and dollars at several of the large retailers.

In addition, floor space for bikes has been reduced, and there have been store closures. Add to that, consumers decided to either put off the purchase of a bike or not make it at all after the rainy spring. While e-commerce sales continues to grow, they are not making up for a dip in brick-and-mortar bike sales.

The September bankruptcy filing of Toys"R"Us halted bicycle and electric ride-on shipments temporarily, pushing sales into the fourth quarter. The situation is now well under control, and we are comfortable that things have stabilized.

Sales in the Cycling Sports Group decreased, but this doesn't tell the whole story as CSG is actually having a decent year. Much of the decrease is due to a continued reduction in discounted sales as our inventory management has improved significantly in 2017.

There's some optimism in Europe as key indicators continue to tick up, and consumer confidence is beginning to return. Brazil remains economically and politically challenged, although the FX rate has shown steady improvement through the year and certain economic indicators are starting to move in a positive direction for the first time in many years.

Caloi's Q3 saw increased sales volume for the first time this year, driven by the mass market. The fourth quarter is crucial for Caloi, and we believe we are well positioned in mass to capture and have a strong quarter.

For the full financial perspective, I'll now turn things over to Jeffrey. Jeffrey?

Jeffrey Schwartz

Thank you. The reported net income for the third quarter ended September 30, 2017, and 2016 include restructuring and other costs and remeasurement of forward purchase agreement liabilities. As such, I'll be discussing adjusted financial information as we believe that excluding these items is more meaningful comparison to our core business performance between the periods discussed. Please refer to the non-GAAP measures section of the press release or the MD&A for a reconciliation to the most directly comparable financial measures calculated in accordance with GAAP.

So, I'm going to comment on the third quarter and highlight a few key areas. First off, revenue for the quarter was down 4.3% to $642.6 million. After removing the variation of foreign exchange rates year-over-year, the organic revenue declined approximately 5%, all of that decline is going to be in the Sports division.

Gross profit for the quarter decreased 50 basis points to 23.5% compared to 24% last year. Included in last year's third quarter was a $9.4 million curtailment gain within Dorel Juvenile, which resulted from a planned amendment in the post-retirement defined benefits. So that was last year. So, when removing this contributor, the gross profit actually improved 90 basis points to 23.5% from 22.6% last year.

When removing the impact of the curtailment gain, the gross profit improvement is due to improved margins in Dorel Sports segment, driven by less discounting and selective price increases in key markets, and increased margins in the Dorel Home from increased online sales, and that's offset slightly by some lower gross margins in the Juvenile markets in Europe and in Chile.

Our third quarter operating profit declined by $5 million to $24.6 million from $29.6 million a year ago. Excluding restructuring and other costs, the operating profit decreased by $9.6 million or 26.9% to $26.2 million.

Our finance expenses in the quarter decreased by $2.4 million when adjusting - while the adjusted finance expenses, which exclude the remeasurement of forward purchase agreement liabilities, declined by $2.2 million to $7.7 million from $9.9 million last year.

Our third quarter net income decreased to $13.3 million or $0.41 per diluted share from $15.9 million or $0.49 [ph] diluted. Adjusted net income in the quarter declined by $6.1 million to $14.5 million from $20.6 million last year. On a diluted EPS basis, that equates to $0.44 for the quarter this year compared to $0.63 last year.

Our effective tax rate in the quarter was 21.3% versus 18.7% last year. The adjusted tax rate was 21.4% this year versus 20.4% last year. The company is stating again for the full year that we expect our tax rate to be between 20% and 25% this year.

We move over the Home. Home's third quarter revenue rose by only 1.3% in the quarter, again driven by online sales, which now represented 51% in the segment versus 44% in 2016. Brick-and-mortar sales were down due mainly to planned reduced exposures to certain mass market customers.

Martin also discussed the weather in the quarter, particularly in September, where two hurricanes certainly had an impact. They did shut down our East Coast distribution center, where we ship more than, I think, 50% of our online direct-to-consumer goods, and that was shut for a week. So that definitely had an impact on sales in the quarter.

Gross profit at 17.6% improved by 90 basis points over last year and again mainly - the main reason for the improvement is the increased online sales compared to last year. Dorel Home posted an operating profit for the quarter of $20.5 million, up from $18 million in the previous year. This increase was driven by improved margins from increased online sales, higher sales volumes and overall net decrease in selling and general and administrative expenses.

Moving over to the Juvenile. Dorel Juvenile's third quarter in sales increased by $13.9 million or 6.3%. Our organic revenue increased by approximately 4% after removing the impact of varying exchange rates year-over-year. This increase represents the first growth quarter since the fourth quarter of 2015.

Revenues increased in the U.S. by high single digits despite the disruption from the Toys"R"Us bankruptcy in September. A lot of that is driven by growing e-commerce sales .Dorel China's revenue - Dorel Juvenile China's revenue also increased through improved delivery performance that we achieved. Martin mentioned that as well in his section.

Third quarter gross profits were 29.5% compared to 34.2% a year ago. Gross profits for the third quarter last year included that $9.4 million gain, which resulted from the planned amendment in the post-retirement defined benefits. The adjusted gross profit for the third quarter of 2016 was actually 30% compared to 29.5%. So, the drop of 50 basis points is much more realistic than what we're showing.

And that 50 basis points, like we said, is a little bit lower gross profit in the European market as well as some challenges down in Chile, where the economy is a little tougher than it's been in the last few years.

During the third quarter, the segment's operating profit decreased by $0.9 million or 8.5% to $10.2 million compared to $11.1 million last year. However, again, last year's third quarter operating profit included a net impact of $2 million from the net effect of the gain that I've discussed in the post-retirement defined benefits, and that was offset by $7.4 million in higher product liability costs last year. So, we had that sort of onetime gain of $2 million.

When we look at the adjusted profit, removing the $2 million, our profits actually increased by $1.2 million this year or 11.8% to $11.4 million compared to $10.2 million a year ago. Over to Dorel Sports, a truly difficult quarter.

I mean, the year - the industry is tough. This was a particularly tough quarter for lots of small reasons that added up to a point where we had a revenue decrease of 18%. We don't believe that the business is that bad overall, and we've already seen a nice bounce back in Q4 starting in October.

But nevertheless, going through the quarter, if we remove exchange rates, the organic decline was actually 19%. It's mainly, as we said, weakness in the market, difficulties in the North American retail environment with various customers, and we can't discount the weather. Certainly, the weather from the beginning of the year set a negative tone, and then September was truly awful on the bike sales.

We saw weeks, I guess, during the storms and the post-storms where we had POS down as much as 20% or so from previous year for those weeks. That has come back now where we're not seeing that.

Pacific Cycle was affected also by the filing of - bankruptcy filing by Toys"R"Us, which halted shipments during the month. We shipped - in addition to bikes, we also ship a lot of battery-powered ride-on toys. And this is the season.

We have, as Martin mentioned, we've resumed shipping. We should see most, if not all, of that delayed stuff from Q3 going into Q4. So, we don't know that we're going to actually miss anything for the year on that. But certainly, it was just another headwind in Q3.

Sales of CSG decreased on a continued reduction of discounted sales as inventory management has again improved this year. And our closeout sales only represented 11.6% of volume compared to over 16% last year.

During the quarter, the gross profit rose 160 basis points to 22.3% from 20.7%. When we exclude restructuring and other costs, the - we take down that rise from 160 down to 60 basis points. And again, as I mentioned, the biggest cause of that is less sales of discounted products.

When we look at the operating profit, it decreased by $5.6 million to only $200,000, again a - probably the worst quarter we've had ever in our Sports business. When excluding restructuring and other costs, the adjusted profits declined by $10 million - $10.3 million to $600,000. The decline again is primarily driven by the lower revenue.

With that, I will pass it back to Martin.

Martin Schwartz

Okay. Thank you, Jeffrey. Regarding our outlook, we expect a very good fourth quarter, with all segments delivering improved adjusted operating profit. Dorel Home's momentum should continue with both higher sales and earnings expected, driven by online sales. Dorel Juvenile is introducing several significant new products through Q4, and this should translate into improved earnings, which will be similar to Q3's performance.

Revenue for the quarter is expected to be flat compared to last year as the benefits of these introductions will be seen mostly in 2018. Dorel Sports is expected to rebound from the disappointing third quarter, and we believe, at this point, that fourth quarter adjusted operating profit should be in line with the fourth quarter of last year. Therefore, for the second half, adjusted operating profits for Dorel Sports will not exceed prior year as we had previously announced.

I'll now ask the operator to open the lines for questions. [Operator Instructions] Operator?

Question-and-Answer Session

Operator

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

Derek Lessard

A quick question. It's nice to see organic growth again in Juvenile. Just wondering if you can maybe talk about the weakness that you're seeing in Europe both from a sales standpoint and gross margin. And as well, I was wondering if you were able to break down your Juvenile e-commerce sales similar to what you provide for Dorel Home.

Jeffrey Schwartz

First of all, for Europe, I mean, again, the weakness we've had over the years in Juvenile is really related to not getting enough new product to the market, and that's why we're confident the future is going to be better because we have a lot of good stuff coming. And that's really going to be the answer to your question as why are sales sluggish in Europe and even a little bit of the gross margin. Our gross margin still has held pretty tightly. It's probably not that material, the decline. And again, that should rebound nicely with the introduction of the new products. So really, that's really the only story I see there...

Derek Lessard

Sorry for cutting you off, but there's no competitive pressures you're seeing from...

Jeffrey Schwartz

Yes, I mean, there's always competitive pressures. There's no question, there's competitive pressures. But the best way to respond to that is with the new product. And sometimes, when your product is stale or dated, the only way to compete with that is to lower your price. So that's not a long-term strategy. But we've done some of that in some of the areas where there is some new items that might be challenging us. But we're comfortable that the new product that we have will maintain the margins going forward.

Derek Lessard

Do you have any advanced knowledge or sales knowledge as to how the - or advanced bookings, I should say, for those new products that you could talk to?

Jeffrey Schwartz

Well, not yet. I mean, the new one - the only one that's really out, and it came out, what, 10 days ago or something like that, was the new car seat as an airbag. I mean, it got a lot of publicity. We're still in the process of delivering the first round of products. We've heard good things so far, but it's still early. And the other stuff is going to be hitting the market in the next six months. So - and again, a lot of it is a new stroller, a new car seat. There's nothing quite as sort of groundbreaking as this airbag car seat.

Operator

Your next question comes from Dave King with Roth Capital.

David King

I guess, maybe also talking about the - I'm thinking about the strong growth you had in Juvenile this quarter, particularly even with the BRU impact. I guess I would have thought that given those trends, that maybe revenue might be up a little bit more in the fourth quarter. You've stabilized the factory runoff. It looks like you've had some of your third-party customers return there. And I mean, North America looks like it's going strong. So, I guess what are takes then that kind of keep you at kind of a flattish outlook? Is it Europe that has you concerned? Or is it just being more cautious? And I guess, just some of the puts and takes would be helpful.

Jeffrey Schwartz

Yes. I mean, I think that some of the areas that we're seeing - I think we're being a little bit cautious, right? We're not - we're hoping to see a little bit of growth. We've got a few markets that are a little bit struggling. Chile is one of them. As I said, we're a retailer in Chile, so I think we're feeling a little bit more retail pain than anything else down there. I don't - I would like to see better revenue. I think, at this point, we're just figuring, to be conservative it's going to be flat. It won't be declining.

David King

No, no. And it means it's a good issue to have. And then in terms of the Sports business, China better understands the decline there. I guess, of the 18% drop, do you think the end market's also down 18%? Or is it more or less than that? And can you talk a little bit about the buying habits of mass merchants, what you mean by those having changed? And then, I guess...

Jeffrey Schwartz

No, I mean, again, I don't like to use names. But if you look at the big players, some of them have a lot less doors than they've had before. Some of them have cut their space, actual space. Some of them have reduced inventory, particularly, yes, there's credit issues at some of them. There's different issues. That's kind of how we kind of threw it all into one word of sort of a difficult retail environment. Inventories are lighter. There's no question, inventories are lighter at the end of September than they were last year at some of the guys who aren't having problems. It was just area I don't like to use the word-perfect storm too often, but there's just so many different things going on at the same quarter. And I'll tell you, across the board in all the three of our businesses, September was a terrible month. I mean, it was - in US, particularly. It was absolutely terrible for retail in our three categories.

David King

I was just going to say hurricanes is probably a piece of that, I would assume if that makes sense.

Jeffrey Schwartz

Absolutely. Like I said, we closed - we shipped - when you look at us - when you look at our business on the Home side, we almost have the timing of a retailer. So, if a customer buys something online, they're going to get it shipped from our warehouse within the same day or the next day, and they will have it that week. If our warehouse is closed for a week, it's like our retail store was closed for a week. So that definitely had an impact on that. We had other issues in Juvenile that we talked about. And then just coming off of a weak year and then having that weather in September, I mean, people just weren't buying bikes.

We've actually seen a bit of a rebound in October. POS was better than - much better than September, and we've actually had - I think somebody wanted to know why we're confident we're going to have a bounce back in Q4 because basically, October was really good. October was either at/or above plan in all of our bike businesses. So that gives us the confidence that - it's still tough out there. I'm not going to say everything is rosy because it's not. But the quarter we had in Q3 is not normal, and that's not something that we think is going to repeat, having such a bad quarter. We should be getting back to a more normalized earnings number quickly.

Operator

Your next question comes from Eric Beder with B. Riley.

Eric Beder

Can you talk a little bit about the inventory levels? I see that inventories were up year-over-year. Revenues were down. How should we be thinking about the inventory?

Jeffrey Schwartz

Certainly, the inventories were up, yes. So, Home is - let me just look. I mean, Home, obviously with the growth in our business, Home, we expect it to be up. It's up, I would say, in a normal area. But Q4 is a big quarter for the Home Furnishings, and we're going in with the proper inventory amounts. We certainly - the bike business is up over last year. We probably have too much inventory in bikes because of the drop in sales, but we are scheduled to be in a good place by the end of the year.

We do think we're going to ship a lot of this product throughout the year. It's just a timing thing. Juvenile is slightly higher than we want it to be as well. So, we're a little bit higher than we want to be, but nothing material, nothing to worry about. And we're expecting a reasonably good, as Martin said, actually a very good fourth quarter in all 3 groups compared to Q3.

Eric Beder

Okay. And in terms of the debt, are we like going to do any more pay-downs on that? Or how are you looking about the debt going forward for this year and next?

Jeffrey Schwartz

I mean, it's on our revolver right now. So, I would imagine Q4 is generally a good cash quarter and has been for numerous years. I expect it to follow that. So, I do expect that to be down. I don't have a number for you now but...

Operator

Your next question comes from Leon Aghazarian with National Bank Financial.

Leon Aghazarian

Just a follow-up on that previous question on the inventory. I mean, would that entail also that you'd have to maybe do some deep discounting in order to get - to kind of get rid of the inventory for lack of a better word?

Jeffrey Schwartz

No, because it's not really seasonable inventory, like we don't bring in stuff - it's not Christmas goods. So, no, this is stuff that's going to carry through. All the Christmas goods - I shouldn't say we have no Christmas goods. All the Christmas goods will be shipped or is being shipped right now. I mean, we had some stuff that was supposed to go into September for, I'd say, Toys"R"Us. It's shipped now. I mean, our - we've come to terms with Toys"R"Us. We're all in a good place now. So, we've resumed shipping, and all of that stuff that you might call timely is going out the door. So, no, I don't believe there will be any deep discounting.

Leon Aghazarian

Okay. And then if - maybe, it's not something, I guess, we discuss regularly, but I mean, the - can we talk about a little bit the difference in margin between when you sell on the mass merchant side versus when you sell to - on the IBD side? Because my understanding is that on the mass merchant side, as obviously that was where you had more difficulty, but maybe on the Cannondale side, things are a little bit better. So, can you tell us a little bit about - more color about the margin profile for either selling on the mass side or on the IBD side?

Jeffrey Schwartz

Well, the gross margin on the IBD side is always higher, but it covers a lot of cost. We have to cover a lot of costs, and that's the challenge. So, it is still a revenue issue, I would think. The gross margin is much lower on the mass side as you're dealing with large customers. However, we're at scale there and the volume allows us to bring in a much better net profit. So that's come to relationships. So, if we were able to - a large part of our margin problem at Pacific this quarter was just volume-related. Our margin dropped even at Pacific, and it's strictly related to overhead absorption because of the sales volume.

Operator

Your next question comes from Derek Lessard with TD Securities.

Derek Lessard

Yes, I forgot to ask if you were able again to get to provide the breakdown for Juvenile and even across Sport.

Jeffrey Schwartz

No, we don't have that yet. We don't have that.

Derek Lessard

What, is it sizable? And given that it's about 50% of your Dorel Home, is that sort of a level that you guys want to get?

Jeffrey Schwartz

No, I don't think that's where the market is. I would classify us as saying, in Dorel Home, we're ahead of the market on the e-commerce side. In the Juvenile, we're gaining. We've had double-digit gains in that sector throughout the world. I would say we're a little bit behind the market. And if you took the average of all the juvenile players, we'd be a little bit behind. But we're also probably growing faster than the others because we're playing more catch up. The bike side is very strange. The bike side, it's certainly - e-commerce is definitely a part of the bike business, particularly on the mass side, not so much on the more expensive bikes. But it's not growing that much. In fact, I would say, in Q3, from what I know, the bike sales online, as a general statement, was actually down, which is...

Derek Lessard

Okay. And maybe just a follow-up. Yes, I mean, you guys did a good job of laying out the landscape for mass. Just wondering if you can maybe just add some color on CSG, some of the trends you're seeing there, competitive behavior, E-bikes versus your traditional bikes?

Jeffrey Schwartz

I mean, again, E-bikes continue to be a big play in the - in Europe, less so in America, although I think it's growing. We do have some new E-bikes for America. It's a little bit - it's a little difficult this time of year, right? Everybody's getting ready for the bike season starting in February and March. So, it's difficult to give you insights into what other people are doing now or what the industry's doing. Everybody's kind of planning for that time. Certainly, by, I would say, our fourth quarter call, we'd have a lot more insights. Right now, everyone's kind of just doing their thing. There's a lot of changes out there in the industry. We're trying to focus on keeping the best profit that we can and designing the best new products.

But certainly, a lot of people are going in different routes, and they're all looking for how to get the most out of the industry right now. So, it is still, like I said, it's still challenging. It's - I guess some of the trends I'm seeing, if we look at bikes, road bikes are still struggling. I believe they're trending down. Mountain bikes are trending up still. We're seeing places like BMX doing well. There's a few other smaller categories that are growing. But certainly, we're responding to the fact that road bikes are down, E-bikes are up, mountain bikes are up. So, these are kind of some of the trends we're seeing in the industry.

Derek Lessard

Congratulations on the innovation there. I was just wondering, are the IBDs, are a lot of them still sort of gun-shy, still waiting for the last minute to sort of order their own inventories?

Jeffrey Schwartz

Yes, I do think that's changed. You're right. That was something that's changed a bit last year, and I think given the poor weather we had, that was a good strategy, right? They didn't load up on inventory and then sit out at all spring while the weather didn't turn. So, I'm expecting to see a similar strategy this year. And I think we've accepted that. We pushed back some of our inventory to come in. By now, we were shipping - a couple of years ago, we were shipping so much product in Q4, and it's changing a little bit.

I mean, there's still Q4 product to go in. But you're right, I do think the buying habits have changed a bit. What didn't happen, I think there was a suggestion last year that perhaps by waiting, they would get all the great discounts and be able to buy everything at a discounted price. And given the fact that everybody didn't overbuy last year, there wasn't as much discounting going on. So, I don't know that, that - I think we're still going to be able to sell at good margins, but it is - seems to be more delayed than it used to be a few years ago.

Operator

[Operator Instructions] Your next question comes from Stephen MacLeod with BMO Capital Markets.

Stephen MacLeod

I just wanted to just get a little more color around the Sports business. I mean, I'm just trying to get my head around the revenue and how that ties to the EBIT. I was just surprised to see EBIT down so much. Is that just you didn't get enough revenue to lever those costs? Or was there something else going on to make - to basically have the $600,000 profit number?

Jeffrey Schwartz

That's pretty much it. I think we have a 20% drop in sales with - because it was such a surprise, you don't have very - other than maybe certain selling costs, all the costs are there in the operations. So yes, it's mostly operating leverage really. And Q3 also happens to be a heavy expense quarter from a marketing standpoint. There's a number of trade shows, there's a number of things we do in that quarter and spend money there. So...

Stephen MacLeod

Right. Okay. Okay. No, that's helpful. And then just on the Juvenile business, you cited a few new product introductions that are mostly weighted to 2018. Are you able to give any sort of directional indicators around what you think that could represent in terms of annual revenues?

Jeffrey Schwartz

That's a good question. I don't have that yet because the budgets are still being put together. But I will tell you that's something we can maybe address the next time we have a conference call and we give you a preview of the year. That would be an interesting thing. I would think - I'll see if I can get a comparison, but I think it's going to be pretty interesting as a comparison of new product in the budget for this year versus new product last year. So, I just haven't seen it yet because it's still being - the budgets in Dorel don't get done until the end of November.

Stephen MacLeod

But you do have - all signs would point to a positive reception by the market based on your takeaways...

Jeffrey Schwartz

Yes. I mean, we've shown on a lot of these products to the market already. We've gotten great feedback. A lot of comments, like Dorel is back, I heard that in Cologne. Certainly, the sales team is invigorated. They feel like now they have something to sell instead of taking the old product and putting a new color on it. So, I do feel very good about the future in Juvenile. I see much more of a clear path on how we're going to get to where we want to go. It's not as clear in bikes yet. I do think we'll be okay in the mass side. We are investing in more non-bike products at Pacific Cycle, things like ride-on toys, like we have a scooter line that we introduced that's doing well. Products like that, we will be doing more and more of those products. And I think that's one way to keep the sales momentum going in the volatile bike space.

Stephen MacLeod

Yes. Okay. And then just going back to Juvenile, like are the new products that you're introducing, category-wise, are they car seats, strollers, sort of your core categories? Or is there more...

Jeffrey Schwartz

Yes, they're mostly core categories. There's some new items, but I'm - I would say they're mostly core categories. I mean, we do have, for instance - I mean, we've been in the business - one of the products that's being introduced in Q4 is a new video monitor system, which I've seen operate. And I'm very excited because it's not just a me-too product, it's a product that really works well.

Martin Schwartz

The internet.

Jeffrey Schwartz

It's just - everyone we've shown it to, the quality of the video, the bandwidth that it uses, I mean, we really got - we went a layer deeper than most companies go in designing this. It works with an app. It's similar to other products. But if you do get a chance to see it by the end of the year and have a look at it, we're expecting some really big things from it, it's the new video monitor.

Operator

Mr. Schwartz, there are no further questions at this time. Please continue.

Martin Schwartz

Okay, thank you. Well, this concludes our call for this afternoon, and I just want to thank everybody for joining us and listening to Dorel's story. Thank you. Have a good afternoon.

Operator

This concludes the conference call for today. Thank you for participating. Please disconnect your lines.