Dorel Industries Inc. (DIIBF) Q4 2022 Earnings Call Transcript

Dorel Industries Inc. (OTCPK:DIIBF) Q4 2022 Earnings Conference Call March 14, 2023 11:00 AM ET

Company Participants

Martin Schwartz - President & CEO

Jeffrey Schwartz - EVP & CFO

Conference Call Participants

Derek Lessard - TD Securities

Stephen MacLeod - BMO Capital Markets

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time for you to queue up for questions. [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 14, 2023.

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

Martin Schwartz

All right. Thank you. Well, good morning, and thank you for joining us for Dorel’s fourth quarter and year-end earnings call for the period ended December 30th. With me today are Jeffrey Schwartz, CFO and Frank Rana, VP of Finance. We'll take your questions following our comments. Again, all figures mentioned during the call are in U.S. dollars.

Our fourth quarter was disappointing. Dorel Home sales were down considerably in all channels and pretty much all product categories as our major retail partners continue to reduce their ordering due to their high stock positions. In addition, excess inventory across the entire industry resulted in discounting to move higher cost inventory, further pressuring profitability. This combination of less favorable pricing and significantly reduced overhead absorption at our factories severely reduced Q4 earnings.

Substantial cost cutting and inventory reductions have been implemented at Dorel Home, which will help earnings going forward. At Dorel Juvenile, the situation is more optimistic as things are moving in the right direction. Bill (ph) major U.S. retail customers continued to curtail orders and therefore segment sales declined despite a generally positive POS performance. While the quarter was soft, Juvenile is in a recovery mode with positive signs notably in Europe. Several new products were launched during the quarter and importantly, we have gained market share in key juvenile categories.

Inflation and potential recession pressures continued to weigh on the economy, but let's remember that Dorel is traditionally done well during these periods. As our wide diversity of opening price point products have consistently proved popular with consumers. The priorities at Dorel Home are to clear their old high cost inventory and to start building sales volumes again. There has been some slight improvements during the last few weeks in demand, but it's a full process that is dependent on three things: retailers getting more product out on the floor, replenishment of retailer stock but that won't happen until they clear what they have now, then clearing the pipeline of the industry's over inventory position.

In conjunction with this transition process, a great deal has been accomplished and continues to be done to cut costs and improve operations, so that things are firmly in place as demand ramps up. Warehousing and factory efficiencies, staff reductions as well as decreases in sales costs will result in savings through the year of some $13 million. Demurrage and detention costs are now close to nil. Ocean freight is down significantly from last year. And importantly, inventory has been reduced by close to 20% from the peak back in May.

Equally important is that the cost savings measures will help mitigate Q4's poor overhead absorption, while volumes build. The investments made in the segments ready to assemble furniture factories to facilitate domestic production flexibility and speed the time to market have not yet had a significant impact due to slower consumer demands, but all is set. New equipment is now in operation at Montreal's Dorel Home Products plant to manufacture coiled spring mattresses, which were previously imported from Asia. [indiscernible] mattresses are also being made locally.

The segment is also implementing a dual strategy to more aggressively address the huge furniture store channel. Dorel Homes team handed by account managers are now dedicated to growing sales at the top 100 furniture chains with a two-pronged approach. The first is to obtain additional floor placement by offering differentiated categories in store, and secondly, by what we call extending the aisle, selling home products on retailers' websites, many of which were enhanced during the peak COVID period.

To address the 87,000 North American independent furniture stars and boutiques, the new website called dorelshowroom.com allows these smaller retailers to easily order exactly what they need in small quadrants. The site is up and running with online purchasing available 24 hours a day, seven days a week, year round. There will be a big push at next month's High Point Furniture Market to introduce retailers to the new concept and explain the benefits to them. This project is in the infant stage with excellent potential.

Demand at Dorel Juvenile during Q4 was somewhat softer and the U.S. retailers continue to reduce orders to lower their overall inventories. The good news is that point of sale of Dorel's Juvenile products remain generally positive. Europe, in particular, showed strong revenue growth versus prior year in almost all markets. Canada, Brazil and Mexico also improved from last year. It is also most encouraging to see that the segment has gained market share in the last few months in many categories that Dorel markets in. While much of the competition has been down, some of the biggest gains have been in high-chairs, car seats, baby gates (ph) and activity seats.

Product development has moved back into high gear. New product introductions were reduced last year as they came in at higher prices due to the container costs. Now that this situation has improved considerably, several new products were shipped last quarter. The U.S. launched new Maxi-Cosi, safe defense (ph) and Safety 1st car seats as well as a new concept MonBebe wagon stroller. Connected range products, including monitors, humidifiers (ph), trim lights were introduced under the Safety 1st brand in the U.S. and Maxi-Cosi in Europe.

Consumers in Europe have given the high ratings, which provides a good foundation to accelerate sales this year. For the first time in several years, Dorel Juvenile attended a Hong Kong fair in early January. Vendor relationships were solidified following the prolonged pandemic downturn period.

Regarding our outlook, our retail partners remain cautious with the current soft consumer environment and are focusing on carefully managing their inventories and their cash flow. This is particularly in the case of Dorel Home, as the segment is working to rebuild sales volume, efforts continue to further reduce inventories and deplete existing high-cost items as aggressively as financially possible, while also implementing additional cost cutting initiatives.

The transition to new lower cost inventory is a process. The timing of approved earnings at Dorel Home in the short-term is difficult to predict. We are more upbeat about Dorel Juvenile’s ability to return to profitability. As mentioned, POS is strong and we saw market share gains as we started the year.

Juvenile also faces the issue of transitioning out of high cost inventory in an aggressive marketplace, but the consumer demand for our products coupled with a lower cost environment and a more favorable foreign exchange environment should translate into positive earnings by the second quarter.

I remind you that Dorel has always shared well with our wide diversity of Home and Juvenile opening price point products when consumers trade down in difficult economic times, such as these. Coupled with a lower cost environment, we expect Dorel to be on the path to recovery through 2023.

I'll now ask Jeffrey to review the numbers. Jeffrey?

Jeffrey Schwartz

Thank you, Martin. Not a lot of fun these numbers, we agree. But let's go through them and then we can talk a little bit about 2023. So for the fourth quarter, Dorel's revenue decreased by $95 million, or 21.8%. When removing the prior year's revenue from the China manufacturing facility that was disposed in the fourth quarter of '21 and the current year revenue from Notio Living that was acquired in November of '21, the adjusted organic revenue declined by about 20% -- 25%. The revenue, organic revenue, adjusted organic revenue declines were in both Home and Juvenile.

Gross profit for the quarter decreased $20 million, or 41.2% to $28.6 million and from $48.6 million last year. When excluding restructuring costs, adjusted gross margin decreased 600 basis points as a percentage of revenue. This, of course, is probably that the most important part of -- or the biggest impact that we had in Q4 was the drop that we have in gross margin and a lot of that is volume related as well as other issues that we're going to get into.

The operating loss for the fourth quarter was $40.7 million compared to $26.2 million in 2021. The increase in the operating loss was mainly due to the decrease in the gross profit dollars from lower sales, as well as the lower gross margin in percentage of revenue partially offset by the overall lower expenses. Finance expenses decreased by $1.3 million to $6.8 million. The decrease is basically explained by a decrease in the overall average debt balances, offset by the increase in average interest rates on those balances.

Getting into the divisions now, the Home business declined by $79 million or 34.4%. Organic revenues declined by 33.8%. The decrease in the revenues in the fourth quarter were -- which was the largest in any of the quarters was basically both in online sales and in brick-and-mortar. A lot of the brick-and-mortar were explained by some reduced POS, as well as the retailers inability to properly stock store shelves. We did a lot of studies on a lot of our retailers, brick-and-mortar and found that throughout the fourth quarter, many of our items were not on the shelves, despite the goods being in the systems of the retailers.

Everyone remembers pretty chaotic then, we were still in the throes (ph) of the supply chain crisis and I think that retailers had to make a choice between -- do we want to have enough food? Do we want to have certain categories in, do we want to have the Christmas goods in and, unfortunately, furniture was always seem to be at the bottom of the list of getting the store shelf stock. So that is -- that continues to be a problem. Although it's less than it was in [indiscernible]. And of course, inflation, which in Q4 was rising. Fourth (ph) people will make decisions between purchasing items and furniture seem to be less important at the time.

Moving over to gross profit. It decreased by $22.9 million compared to a year ago. The fourth quarter decline was due to aggressive promotional incentive offerings across all the categories to increase sales and most importantly, to move that high cost inventory out of the system. And again, why high cost, we've talked about this for a year in Q4, we still had significantly high ocean freight, substantially increased board prices, overseas, cost of goods in Asia was relatively high. And our reduced sales volume, obviously, had a big impact.

And then one of the big things that we're facing and continue to face in Q1 is the negative impact of the lower domestic manufacturing activity and its impact on a negative factory overhead absorption. So that is something that we're very focused on, and that had a big, big impact. The net result was Dorel Home operating profit declined by $22.6 million for the quarter to an operating loss of $18.3 million from a profit of $4.3 million in the previous year.

The Juvenile business now moving over there had a difficult fourth quarter. Revenues declined $15.6 million, or 7.6%. Organic revenue declined 3.2% versus last year. The decline in revenue was mainly in the U.S. and in Chile. In fact, we had -- in the U.S., we had a double-digit decline. We are not concerned about that given that our POS customers are selling of our goods remained very strong in the quarter. And this was just an attempt by our customers to reduce the amount of inventory they had in their system. And it was -- in many cases, it was a general reduction and not necessarily due to slowdown in demand or anything like that.

In Chile, we also had a decline as overall demand affected that country, particularly in the fourth quarter because inflation is running extremely high there or was running extremely high there and that had a big impact. However, we did have increased sales in most of the European markets. Q4 was very strong. Brazil again continues to show growth. Mexico, small market, but that did very well. And Canada also had a very good fourth quarter now that the product shortages that they had through most of the year had disappeared.

On gross profit, our gross profit increased by $2.9 million or above 10%. Fourth quarter's gross margin was 16.2, representing an increase of 260 basis points for the quarter. The operating loss, however, was $23.5 million during the quarter compared to $26.7 million in the previous year. That is pretty much it for that quarter.

We'll talk a little bit about 2023. We've seen, as Martin mentioned, we've seen a good start to the year for Juvenile. Our market shares are continuing to grow. We're seeing good continued growth in Europe. We're seeing strong growth in the United States as well. We are still fighting a little bit with the retailers' desire to keep inventories low, but given a strong POS that we're seeing. We don't think that's going to last very long and are expecting to see some good growth later in the year.

We have a lot of new listings in the United States. And over in Europe as well, a lot of new listings, a lot of new product coming to market this year. So as Martin said, we're pretty upbeat on the Juvenile side. Unfortunately, we don't have the same visibility on the furniture side. It still remains tough. We are doing everything we can to get out there. But on the fortunate side for us, our costs have now significantly come down.

But I want to just caution people that the impact of the cost reductions won't see much of that in Q1 because we still have the overhang of inventory that we made at very high levels are still in the system and getting sold in Q1. So that impacts the margins in Q1. But nevertheless, we are being set up for a good -- a much better year than we had last year.

And with that, I'll pass it back to Martin.

Unidentified Company Representative

Martin, you're mute.

Jeffrey Schwartz

Yeah.

Martin Schwartz

Okay. With that, I'd now like to ask the operator to open the lines for questions and request that you limit them to two in the first round. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from Derek Lessard from TD Securities. Please go ahead.

Derek Lessard

Yeah. Good morning, everybody and thanks for taking my questions. The first one I just want to hit on Juvenile was, I was curious about why there was such a performance difference in terms of sales growth between Europe and the rest of the world versus the U.S., wondering what the drivers were there?

Jeffrey Schwartz

I mean the big driver is the desire of our large customers in the U.S. to reduce their inventories and carry less inventory going forward. As you know, it's also Christmas season. A lot of them had very, very full warehouses and storage capacity. And I think they chose Christmas goods over all other goods. So we saw a large double-digit decline in the U.S. in sales, but our sales of the products through their channels was strong. So it's just -- we look at that as temporary, and we're seeing a lot of that coming back in Q1.

So I don't look too deep into that, the decline, because it was really just for them to get their house in order. And Europe, we're making progress. We're finally getting the progress we needed and expected. The new products are hitting. The new sales channels are doing well. Everything that we've been working for the last 18 months is finally starting to click in Europe, and we're seeing the numbers. .

Derek Lessard

Okay. You did mention that you did secure some new listings for 2023 with some bigger accounts. Just curious on how those sales are trending on those products so far and what we have to look forward for the remaining of the year?

Jeffrey Schwartz

Yeah. In the U.S., a lot of them have just started to ship and aren't in place yet. I know we've had a delay in the setting of the modular set on a few of our customers who postponed it a few weeks. So we haven't really seen the new product click yet, but it's listed, it's being shipped or will be shipped shortly. So it's a little early to get a read on that.

Some of the new products we have in Europe have done well as we can see in the fourth quarter. There are some new stuff we are going to show the market very shortly, some stuff that we're pretty excited about. So we haven't quite seen that yet, which is good given that we've already gotten sort of a good start in Q1, and there's still a lot of new products to be seen out there.

Derek Lessard

Okay. One more for me, and I'll requeue. What is the reasonable time frame, I guess, to expect those high cost inventories to be right-sized for both segments?

Jeffrey Schwartz

Yeah. I mean we are making a lot of progress on our inventory. So probably Q2, more again, upbeat about Juvenile there because we are getting through the system, and we do a lot more internal manufacturing. So there's less of, when you make something in the U.S., there's less of that inventory sort of out there. So I think early Q2 is probably the right answer for Juvenile and a little bit later in Q2 on the furniture side, probably the right answer.

Derek Lessard

Okay. Thank you.

Operator

[Operator Instructions] Your next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.

Stephen MacLeod

Thank you. Good morning. Good morning, guys. Jeffrey, I just wanted to clarify, just in response to the last question, did you say that early Q2, probably the right answer for Juvenile. And then did you say maybe Q3 for Home returning [Multiple Speakers]

Jeffrey Schwartz

Later in Q2 on the Home side.

Stephen MacLeod

Later in Q2. Okay. And then [Multiple Speakers]

Jeffrey Schwartz

I mean, Home had...

Stephen MacLeod

Yeah. Sorry, go ahead.

Jeffrey Schwartz

Yeah. Go ahead. Sorry, go ahead.

Stephen MacLeod

No, I just wanted to clarify, you were responding about -- is that for return to profitability or is that for working through high [Multiple Speakers]

Jeffrey Schwartz

Yeah. That's for getting -- like, I said, we said a lot of our costs are down, and we have the ability now to both reduce some of our pricing on specific items and also improve our margins. But again, the stuff that came in, in, let's say, October, that might be sitting in inventory and only getting shipped this month, those items are still at high cost. So at what point do we kind of replace that high cost inventory. And we're estimating that it's sort of mid to late Q2 on the Home side.

Stephen MacLeod

Right. Okay. That makes sense. And then, when you look at the full year, is it reasonable to expect that you'd be back to profitability levels that you saw in 2021 or is that something that you think maybe is pushed out a bit considering the near-term headwinds that you're seeing?

Jeffrey Schwartz

We're expecting a significant return to profit. I'm not sure which line item. I mean, profitable EBITDA for sure, we're looking at in our plan. We're seeing -- we're already seeing the progress in Juvenile. The Home is still lagging. We really need to get that volume up. We're doing everything we can.

We don't believe this is about us losing the market share as much as it's about just the chaos sort of still from supply chain where importers -- if you got to -- if you remember, there was so much demand in Home furnishings that there were a lot of small importers were doing very well during the pandemic and bringing in lots of stuff. And then what happened was when demand slipped, these guys said, okay, there's no business for me, and they continue to try and they continue to dump their stuff. So they were still facing that issue.

Stephen MacLeod

Right. Okay. And sorry, did you say, you would expect EBITDA to be back to 2021 levels in this current fiscal year?

Jeffrey Schwartz

No, I'm not predicting a number. I'm saying it's going to be positive again. We lost a lot of money last year, but the EBITDA will be positive this year. That's our intention. I'm not going to give you an exact [indiscernible] number.

Stephen MacLeod

Yeah. No, that's fair. That's fair.

Jeffrey Schwartz

You got to remember, 2021 had a very, very strong furniture demand. We couldn't keep up, if you remember about that. And now we're in a post-pandemic level where a lot of people have bought furniture. I mean there's -- people are still buying. It's just that X, that sort of huge amount of inventory that got into the system, whether it be our competitors or retailers or ours that needs to be reduced. And we've done a really good job on our own inventory now. So we're feeling good about that, and we just have to worry about our customers and other competitors.

Stephen MacLeod

Yeah. Okay. No, that's helpful. Okay. And then maybe just in terms of Europe, you talked about Europe being positive with Juvenile, is that really on the back of new product launches or are you seeing sort of -- just sort of ongoing more better retailer strength in the European market versus the U.S.?

Jeffrey Schwartz

I mean let's say it's much more on our new product and our -- we kind of reinvented the way we went to market in Europe, and there was some pains going through that. and it's all kind of working out now. So our go-to-market strategy, how we deal with our customers, our pricing regimes. There's a lot of different countries there. All of that has now been stabilized, making it easier to do business with our customers. Our new products are selling well. I'm not sure there's a lot more strength in the retail market in Europe. We're not seeing that as much.

Stephen MacLeod

Okay. That’s fair. That’s all I have. Thank you.

Operator

Your next question comes from Derek Lessard from TD Securities. Please go ahead.

Derek Lessard

Yeah. Thanks. Back to the Home, I guess I was wondering, if there's anything or maybe you can point to some things that you think you can do better to get the segment better positioned over the next quarter or two?

Jeffrey Schwartz

We've reduced a lot of, we'll say, overheads, some expenses. So we've done what we can there. Obviously takes time to kick-in. The other -- I mean, we're getting great -- like a lot of reduced costs that come to the system. Our biggest problem by far, is just volume. We just need to get that volume back up because not only -- for the obvious reason that if you don't have the volume, you don't have the margin, but the impact on negative overhead absorption has been really, really big.

And that's why I like to think that when that volume comes back, it's almost going to be a super charge because we're going to get less negative absorption plus we're going to make a margin on that extra volume. And we can see our earnings rising significantly. And that's one of the reasons you see our earnings drop so much. I mean it really did drop a lot in a short period of time, and it's really related to that. So we're focusing everything we can on dealing with the challenges of the increased margin. We -- there are a lot of smaller accounts that we're -- our sales are up on. We are definitely going after smaller accounts, doing well, but it doesn't replace the big guys, unfortunately.

There is a little bit less competition out there. I mean, there's been some large bankruptcies in the furniture industry in the last year. I'd expect there'll probably be more, there's definitely less importers, especially small guys coming in. So it's a real transition the whole industry is in, and that's -- we're kind of waiting for a lot of that to go away.

I mean we've already picked up business from companies that have gone bankrupt. So we know that, that's a plus. It's just a transitionary period. It's a difficult period, probably the worst period I've seen in the furniture industry. And we just kind of wait it out and do everything we can to promote and do the right things.

Derek Lessard

Okay. Maybe I then ask in a different way. Like do you have a sense of consumer demand. And again, this is on furniture, like consumer demand on the retail side? In other words, I think the consumers just pull forward their Home purchases during COVID and they're still working through that and sort of, we're approaching a replenishment or upgrade cycle in the near future?

Jeffrey Schwartz

You know what, there are so many moving pieces, and that's one of them, right? But for sure, there's less demand, but I mean, people still need furniture all the time and this is not expensive furniture. So that's one of the factors. Another factor is just retailers, as I mentioned, wanting to reduce their inventories. That's a big factor. Another factor is on the brick-and-mortar side is not having our goods on the shelves.

I mean that's a real issue where -- it's in the system. It's in our retailer system somewhere. Is it in the warehouse? Is it in the back of the store. We've heard that could be stuck in containers sitting somewhere between the warehouse and the store, and it's not on the shelf. So they're not ordering more, but the consumer is not buying it either. So that's not something we expect to stay long term.

But I can't tell you how much is on each. You know, what I mean, these are all factors together. We do believe people aren't going to stop buying furniture. I think you used the term, pulled it forward, for sure, but now we're getting past that section, right? We're probably almost getting to a year since everybody slowed down buying, and we do expect people to get back to normal. And hopefully, the inventory balance will be in the right place. And like, I said, there's less suppliers. So we hope to move forward that way.

Derek Lessard

Jeffrey, any of the retailers that you've spoken with given you an indication as to why some of these products or the product is not on the floor?

Jeffrey Schwartz

What, I think it's just -- I don't think people appreciate the volume of goods, in general, that's not Dorel goods or even our categories that was poured into the warehousing system when everything slowed down. As you know, if you remember, a year ago, everyone was talking about we can't take goods, they're very expensive. We can't get them on our containers. There's always shortages. So everybody ordered, ordered, ordered. And then it all -- the gates opened and everything poured in. And warehouses got so full and strained and that is much better today, but it continues to be a bit of an issue, and we have to deal with that.

I mean, that's a big [indiscernible]. I mean we're dealing with it. We're getting through it. We're doing the best we can. It's a bit of a crisis element. There's a lot of retailers that have -- in the furniture instead of bringing it in directly from Asia, they are looking to reduce the pressure on their warehouse system. They're asking us to bring it in and ship it directly to their customer, which we're capable of doing. We're one of the few people that are really good at that.

And our ability to turn around and ship orders is back to like one day. That got strained a couple of years ago, and it was in multiple days. So that's something that's good. I mean we make a good margin doing that. The problem is, is that instead of them buying 10,000 pieces and shipping directly, they're buying one at a time every day. And that's a process, that's a transition. They have to get out of all of the stuff in their warehouse system before they transfer the orders to us. So that's another piece that's adding.

Eventually, they will get out of it, and they will turn it on, and we will be getting a lot more direct orders. So it's just a transitional phase that we're in. And we -- I don't know how long it's going to last. That's probably the next question you have.

Derek Lessard

Okay. That's fair. Last one for me. I just wanted to get your thinking around potential future divestitures and what you need to get there and any thoughts around the timing of that?

Jeffrey Schwartz

Yeah. I had no real comment on that, other than that still continues to be the plan. We are -- we want to get the business. Our priority right now is to get the business is cash flow positive, get them moving again, gaining market share. A lot of the stuff that we're doing on the Juvenile, we need to continue to do and it got to show the results, obviously. At Home, it's a little bit more. I feel like out of our control. We're reacting as best we can to the market transition, and we're waiting for that period at which point we will hopefully get back there.

Another point I didn't mention before in dealing with compression is one of our strengths has always been the ability to bring new exciting products to the marketplace. Well, 2022 is really difficult in that area. We had created a lot of products. But when we went to the market, we found out that the prices were significantly higher than we expected during the beginning of last year. And that by the time we brought them in, we said this isn't the value anymore. It might be a nice-looking product, but we said we can't really add to the extra inventory and bring in this expensive inventory.

So we didn’t bring in a lot of new items last year, and that’s also sort of, pave the way for, again, less excitement from the consumers on some of our products. We are now that inventory of Dorel is dropping. We are now increasing that new product pipeline. And hopefully, this year, we’ll have a lot more of that new stuff in the marketplace. That was another thing that affected last year.

Derek Lessard

Thanks for that Jeffery.

Operator

Presenters there are no further questions at this time please continue.

Martin Schwartz

Okay. We’d like to thank everybody for joining us this morning and wish everybody a good day. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.