DIIBF - Dorel Industries Inc. (DIIBF) Q1 2023 Earnings Call Transcript
2023-05-15 21:45:23 ET
Dorel Industries Inc. (DIIBF)
Q1 2023 Earnings Conference Call
May 15, 2023, 11:00 AM ET
Company Participants
Martin Schwartz - President and CEO
Jeffrey Schwartz - EVP and CFO
Conference Call Participants
Derek Lessard - TD Cowen
Stephen MacLeod - BMO Capital Markets
Presentation
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Dorel Industries First Quarter 2023 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 is being recorded today, May 15, 2023.
I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.
Martin Schwartz
Good morning, and thank you for joining us for Dorel's first quarter earnings call for the period ended March 31. With me are Jeffrey Schwartz, CFO; and Frank Rana, VP of Finance. We will take your questions following our comments. Again, all figures mentioned during this call are in U.S. dollars.
Our first quarter was another challenging one for sales, as retailers refrained from reordering, focusing instead on trying to lower their excess and high-cost inventories. Order replenishment was not the only thing affecting the top line, consumers were forced to make purchasing choices for more essential goods due to inflation, which limited disposable income.
This was particularly in the case for Dorel Home. While there was also market weakness in the overall Juvenile products industry, I'm pleased to say that Dorel Juvenile has been able to grow with continued market share gains in many of our categories.
As we announced, both Juvenile and Home were hit by a late quarter network security incident, which prevented shipping for up to two weeks in some locations. The two segments combined, this resulted in a reduction in sales and net income of $13 million and $4 million, respectively. To be clear, we are now fully operational.
Specifically as concerns each of our businesses, let's first look at Juvenile. We are very upbeat there and expect a positive turnaround starting as soon as this month as we have introduced some of our best new Juvenile products in years with several more to come.
Innovation is very much in evidence. In Europe, Maxi-Cosi's 360 Pro Family, one of Dorel's most important introductions in a long time, was shipped in early April with additional significant shipping scheduled throughout this quarter.
The 360 Pro is truly a family of products, including the Pebble 360 Pro, a new infant car seat; the Family Fix 360 Pro, a new rotative ISOFIX base; and the Pearl 360 Pro, a new toddler seat. The product line features Dorel's revolutionary slide tech technology, a new era of design and safety. This is a range of world-first comfortable ergonomic car seat solutions, with a base that can both rotate and slide door parents. By making it easier than ever to secure children safely and comfortably in the car, the 360 Pro Family sets a new standard in car seats innovation.
With COVID restrictions behind us, Dorel Juvenile has been attending Juvenile product shows and numerous sales events across Europe. The response to the 360 Pro has been nothing less than spectacular, with hundreds of orders to date. Not to be outdone, in the U.S., shipments also began the new safety-first Turn and Go 360 rotating all-in-one convertible car seat and the Turn and Go 360 DLX rotating all-in-one convertible car seats.
These two new models feature innovative safety swivel 360-degree rotational technology that allows the car seat to turn easily, bringing parents and caregivers face to face with their children, while getting them in and out of the car. They now have the flexibility to choose the side of the car in which to install the turn and go, which is another plus.
North America's premier show, ABC Kids Expo, took place earlier this month in Las Vegas. Dorel highlighted some of its best new products with the press event on opening day. Media pickup was excellent. The Dorel Juvenile booth was the busiest -- packed throughout the two days show. Many in attendants commented that it was the best new product lineup they've seen in many years.
What was particularly satisfying was how excited our people were seeing firsthand how all their hard work and effort is paying off. In short, this is a great deal of optimism. This round of new products is hitting the mark with customers much better than we have seen in a long time. We're definitely starting to see the needle move at Juvenile.
Juvenile's cost base has also stabilized and FX is currently much less of a concern. At Dorel Home, it was a tough quarter with a challenging climate as sales continued their downward trend in several categories, both in-store and online.
The two key issues were homes, customers still reducing their internal inventories and the weaker demand from consumers. The push continues to bring sales volumes back up, which will also ease the negative factory overhead absorption issue.
Progress has been made bringing operating costs down with continued headcount reduction and expense controls. We can now say there is some light at the end of the tunnel. Notwithstanding some lingering issues with retailers, notably inventory and staffing shortages, buyers are finally starting to talk about new products, and they are starting to slowly reorder.
There was excellent representation of the top 100 furniture stores visiting Dorel Homes booth at the April High Point Furniture Show. As well, fresh new looks and new advertising strategies are being introduced to invigorate the segment's many brands, which have done well over recent years.
There are additional bright spots with a number of opportunities for increased business expected to materialize by the second half this year and improve homes volumes, particularly at their domestic facilities. Dorel's outlook included in our year-end March release remains much the same. The retail environment in the U.S. has not materially changed and substantial orders from our retail partners have not yet picked up, especially Dorel Home.
While Dorel Juvenile slightly underperformed, market share gains and the extremely well-accepted new product announcements led us to be optimistic about a quick turnaround. The network disruption dampened early April Juvenile sales, but May and June look strong. We expect this strength to continue for the balance of the year based on our latest product portfolio and a stable cost environment and to translate into profits beginning this month.
At Dorel Home, we are encouraged by the latest order levels. As well, their inventory average cost was lower as the quarter began. However, we do not see them returning to operating profit until at least the third quarter. Inventory reductions at both our segments was good during Q1, generating over $50 million in cash. This has a double benefit of moving out higher cost goods and strengthening our balance sheet.
Going forward, we have lower cost inventory and our gross margins are expected to improve. Q1's positive currency and cost environment is expected to remain unchanged and will also contribute to better earnings. I thank our entire organization for their genuine efforts on turning around our business and look forward to better results ahead.
I will now ask Jeffrey to review the financials.
Jeffrey Schwartz
Thank you, Martin.
As everybody knows, this was a pretty tough quarter. The numbers are not very nice to look at. I'm going to go through them quickly, and then we can talk a little bit about our outlook.
For the quarter, revenue was down by about $95 million or 22.2%. Organic revenue declined by about 21% after removing the variations on foreign exchange. The revenue and organic revenue declined towards both segments. In Home, the revenue and organic revenue declines were in all divisions. And again, mainly explained by low overall -- lower overall demand from consumers and probably more importantly, retailers continuing to reduce their high inventory, whether it be online companies or even in-store brick-and-mortar companies.
In Juvenile, the revenue -- organic revenue decline was mainly in the U.S. And again, a lot of that was caused by the incident that we have. In addition, like we said, the first quarter was hit by that $13 million revenue security incident. Gross profit for the first quarter declined 25.5% or 35 -- $25.5 million or 35%. Gross margin for the quarter declined by 290 basis points as a percent of revenue to 14% versus 16.9%. The decline was in both Home and Juvenile.
Home was the bigger culprit. Gross profit was down primarily to factory overhead absorption. It's just -- we're just not putting out volume to the factories to get that number where we want it to be. In Juvenile, the decline was, again, just a little bit of volume over -- reduced volume. But we did have some favorable foreign exchange and some favorable absorption as well in the U.S.
The loss for the quarter was $28 million compared to $15.5 million last year. And like I said, not something we're very happy with. Finance expenses decreased by $6.4 million to $6.2 million, but that's mainly explained by a prepayment fee we had last year on the reimbursement of the senior unsecured notes of about $6.4 million. And during the quarter, the net loss from continued operations of $31.5 million or $0.97 per share compared with $27.2 million or $0.84 per share last year.
We move over to the Home segment, again, not pretty numbers here. The revenue declined by $78 million or 37%. Organic revenue declined by 36.7%. The decline in revenue in the first quarter, which represents the second sequential quarter of a marked decline, really comes down to two main reasons: softer demand from consumers coming off of their COVID sales search as well as importantly, the continued destocking of retailers' inventory which surged in the mid-2022.
Gross profit for the quarter was decreased by $21.3 million. Gross margins only showed up at 1.4% for the quarter. And again, primary reason was the impact of the lower domestic manufacturing activity from lower sales that led to factory and warehouse overhead absorption issues. Operating profit declined by $19.4 million for the quarter to an operating loss of $13.9 million versus a profit of $5.5 million last year.
Over in Juvenile, the revenue decline was $16.5 million. More than half of that was from the closing down of shipping in the last three days of the quarter from the security incident. Organic revenue declined by 5.6% after removing the foreign exchange impact. The declines we had most of the declines in the U.S. However, we did see some improvements in Europe, which is important for us.
And in fact, Europe, despite having a security incident, they were able to improve their sales. That's great. Gross profit declined by $4.2 million or 8.6% compared to last year. Gross margins were 22.4%, only down 20 basis points from 22.6%. And the operating loss is $8.9 million this year compared to the operating loss of $12.5 million last year. Excluding restructuring costs, the operating loss declined by $1.1 million to $8.9 million from the $10 million last year.
A couple of notes on the balance sheet. We decreased our inventories by $47.9 million. That happened in both segments. Compared to the end of last year, we also decreased our long-term debt by $20 million. And cash flow provided by operating activities in the quarter was $37 million this year compared to a usage of about $100 million last year when we were building up our inventories.
And with that, I will pass it back to Martin for the question.
Martin Schwartz
Okay. Thank you, Jeffrey. I 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
[Operator Instructions] Your first question comes from Derek Lessard with TD Cowen. Please go ahead.
Derek Lessard
Yes, good morning, everyone. It sounds like you're feeling more optimistic on the business than I've heard you talk about in a while around the operating environment, at least on the margin. Am I getting that right? And if so, could you maybe just talk about some of the reasons behind that optimism? And what you're seeing is the biggest improvements in the business? And maybe what needs more work?
Jeffrey Schwartz
Yes. So there -- we have two segments. They're not exactly at the same point as each other. The Home segment is still continues to suffer from, I'll say, a softer demand, but we are getting to the point where that declining inventories at our customers are starting to bottom out. So our customers are starting to reorder again, which is a hopeful sign probably what's even more helpful, Derek, is that they're actually discussing merchandising again. And it's been a really long time.
If you go back, think about it, during '21 and beginning of '22, all the retailers wanted was they were chasing inventory from us. And they needed this, they needed that, and they were running out of this. And that was the case for a long time, and that's all they focused on.
And they went and looked for new sources, and they would look for new places to buy stuff because they couldn't get what they needed. And then that all ended mid-2022, and they just all the stuff poured in. And they've spent since the middle of last year trying to move the stuff. And every time we want to discuss new concepts, new ideas, new merchandise new products.
It was not right now. We've got to clear out what we have, so we have room for it. So finally, now they're finally getting back to saying, "Hey, let's do some of that new stuff. Let's find some programs for the end of the year. Let's do this. Let's do that. That's a hopeful sign. But having said that, it's still a little murky. It's still a little difficult for us to get the timing back on when that's going to happen exactly and to what extent.
But it is sort of like, I guess, you can call it a bottoming out of the market conditions. And we definitely are seeing larger orders being placed now for shipping later in the year. So that's a hopeful sign on the Home side.
Juvenile is quite different in that we're there today. It's not about tomorrow, it's about today and all the work we've been doing for 18 months, it looks like it's finally come together and it's happening in Q2. Obviously, we have to be -- we're talking about a few weeks here and a few weeks there. But we are seeing some of these new products do extremely well in the marketplace. We're seeing demand being significant, even though the market is not great.
I'm not -- that's -- if there's one thing overhanging the Juvenile industry right now that scares me a little is the general market conditions are not great, but we are gaining market share within that area, and that should be enough to move us forward and improve sales and significantly improve earnings.
The new product range Martin referenced, the Pro -- the 360 Pro in Europe is -- had the best sort of reception that I've seen in years from many of our product categories, and it's a big category. It's infant and toddler seats and it's a whole family of products. So very excited.
All we've done so far is we've shipped it in the U.K., and we intend on shipping it to the continent, starting later this month and into June. So that's very exciting. And then in the U.S., we're also having a lot of success. We're definitely gaining market share. We see that every month. We have a lot of new stuff that's just shipping now. So again, it hasn't really seen a lot of it at the POS. And that's something that I'm pretty excited about.
And then we -- like we've divided our business now to three areas: Europe, North America and the Rest of the World. And in the Rest of the World with the currencies now easing up in the U.S. dollar slowly getting less strong, we're seeing opportunities there, and that business is picking up. So overall, just -- yes, it is -- there's a definite general good feeling in our Juvenile business that we have finally launched the company that we wanted -- that we've been talking about for a number of years.
Derek Lessard
Okay. Thanks for that Jeffrey. It's helpful. And maybe if I just ask a few follow-ups on it and speaking to the share gain, in particular, can you maybe just -- are you able to quantify or give any evidence behind that? And why you think you're getting the traction there against the -- against your competitors?
Jeffrey Schwartz
I mean, again, I don't -- I'm not going to give out the exact numbers. I mean these are third-party market research companies. So it's pretty good data. Why are we doing it? It's just that the products are right. We're just hitting the right products with the right pricing and just a lot more confidence.
It took us a while to get there and get all the right stuff and we're winning. I mean, this is what we're supposed to be doing, and now it's happening right now. So it's -- again, we've been talking about it for a while. But now we're seeing it. Now we're seeing the numbers. So the needle is being moved, and particularly excited, like I said, with the European launch. That's a great product. And we're very excited about that.
Derek Lessard
Okay. And one last one for me before I re-queue. Can you just maybe explain the difference? And I'm talking to Juvenile here again between the growth rate in Europe versus North America, excluding the cyber security, of course.
Jeffrey Schwartz
I'm sorry, the difference in growth rate?
Derek Lessard
Yes. The positive in Europe.
Jeffrey Schwartz
It's positive in Europe because, again, the product. I think the answer really is why is it negative in the U.S. if we've been excited about market share and all of that. And the answer is sort of twofold. One is the market conditions still are not great, and the retailers are still pushing down overall inventories in Q1 making it difficult.
So in many areas, we see POS tracking ahead of orders. So eventually, that's going to have to happen. We see that in many areas of Home as well that the sales aren't as bad as our shipping numbers. So that's going to stop.
The other big event in the U.S. is one of our major customers pushed back their reset from Q1 to Q2. So that's what all the new product hits and gets put on the shelves. And what happened here is rightfully so, they stopped ordering the old product even if it's sold. So we got to a condition where maybe an item was out of stock.
They wouldn't reorder it because they haven't launched the new one yet, and they didn't want to bring an old inventory. So that caused a little bit of issues in Q1 as well. So I think those are the two main reasons why sales were down in the U.S. And in addition, the only other addition is Bye, Bye Baby that went bye-bye, I guess. We did have that last year. We don't have them going forward as far as we know. And that also shipping there was also one of the reasons we were down.
Derek Lessard
And then I guess on the guidance, I mean, you're looking for operating profit starting in Q3 for Home. Does that mean you're looking for some -- a positive operating profit in Q2 for Juvenile?
Jeffrey Schwartz
It's going to be close, so I'm not going to comment on it. It's going -- it can be. It's going to be better than Q1. That's for sure and we're making a lot of progress. I don't know exactly how far we're going to get.
Derek Lessard
Okay. Thanks Jeffrey.
Operator
Your next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.
Stephen MacLeod
Great. Thank you. Good morning, guys. Just a couple of quick questions for you. I know you gave a little bit of color, but in the Home business, do you see positive sales growth on the horizon? Like I'm just trying to get my head around how long -- or sort of what to expect in terms of the declines in that business, considering you're going to start coming up -- I mean you're already -- you're going to start coming up against some easier comps as well?
Jeffrey Schwartz
Yes, you're right. I think you hit it on the head. Those Q3, Q4 comps are going to be a lot easier. And now that the retailers are starting to reorder again and not deplete their inventories anymore we are going to see better comps in the second half of the year, for sure.
Our cost base is so much better, too. We -- even today in May, we still have some dollars that remain from last year's high cost inventory, but that should be all gone by Q2. And like I said, the gross margin of 1% is really what we sell our product at. It's just the negative absorption.
So we are getting more items to be built in our factories in North America. That volume should be going up, and that's going to have a significant positive impact as well. So that's really it. People still buy furniture, right? They might be buying less than they were buying during COVID, but they're definitely still buying.
We're still a major supplier to all our customers. That hasn't changed. It's just getting the market conditions right. It's been really, really difficult. Probably the worst -- we've been in the furniture industry for a long time. And I'm even going to say the lower end furniture probably got getting harder than the higher in furniture here just because of the inventory lag. So with all of that, it's taking a while to turn, but it will turn.
Stephen MacLeod
Okay. That's great. And then just in terms of the profits, you talked about profits in Juvenile. Like -- sorry, Home by Q3, Juvenile potentially this month. Are you able to give just sort of some color around the magnitude as you see sales returning and you get some of that fixed cost absorption? Like margin-wise, should we go back to prior levels for margins and dollars in EBITDA?
Jeffrey Schwartz
I mean it's so dynamic right now that I -- and given our history of volatility, I'm not going to give you a prediction. But yes, I mean, ultimately, there's no reason we can't get back up there, especially if we can get the volumes moving. We have some really good months forecasted later this year. We should make a lot of money in one month just because we get that volume up.
So it's a little early. It's been a long time between the COVID and all the other issues that we have some stability here, but we're -- that's why I'm not going to give you a number, but we're definitely moving to having a lot more profitability in the business.
Stephen MacLeod
Okay. That's helpful. Thanks.
Operator
Your next question comes from Derek Lessard with TD Cowen. Please go ahead.
Jeffrey Schwartz
Derek, you there?
Derek Lessard
Sorry about that. I was muted. I was curious, I have a few follow-ups. Have you taken the full charge for the cybersecurity? And -- or is there anything else that we should be sort of modeling in there for Q2?
Jeffrey Schwartz
Yes, I think it's -- I mean the charge for the costs of it are in. The charge for -- it's not a charge, but we weren't shipping on April 1 either, right? It took us depending on the location. So there could be some weakness in there, too. But I mean, we're -- we've kind of -- I mean the reality is some of the goods we just shipped later, and then there was a lot of online goods that weren't available and people bought something else.
So there is some permanent losses for sure that we had in April, but not hugely material. And hopefully, we'll make up for it later in the quarter.
Derek Lessard
Okay. That's fair. And a few more on working capital, maybe inventory specifically. Obviously, you did a good job just made some nice progress on the inventory front and was ahead of our expectations. Just -- do you have -- do you still have some work left to do there on inventory specifically?
Jeffrey Schwartz
Yes, there's pockets of stuff we want to move. We've done a really good job. I know in the U.S. in Juvenile, they've eliminated significant amount of SKUs. So we're trying to do that. Same thing in Home. We -- one of the areas that we -- we're behind on the Home side, was new product development, not development, sorry, new products because we couldn't really afford to bring them in last year.
We had so much inventory. We had buyers that didn't care about new items, and we had a very high cost. So we pushed off a lot of the new products that the development team has done, and that stuff is starting to come in now.
And that's, for sure, had an impact also on our top line. I mean part of our reason that we are successful is we're always having something new and exciting in that area. And that really slowed down in the second half of last year and the first half of this year.
So yes, I mean there's a little bit more room in inventory to do, but nothing drastic. The other -- before you ask the next question, let me just address that everyone wants to know about liquidity. So we're making it through here, but we do want to have more liquidity. We are working on a couple of projects. That's all I can call them at this point. They are moving along nicely.
I can't say anything else about them. It's just one of those things that we think we could be successful on both of them. And then we have a lot of liquidity. If one of them happens, we have enough liquidity. But we're definitely working on those, and they're going well. And that's pretty much all I can say about that.
Derek Lessard
Okay. And I guess there's no -- I know that's all you can say about it, but nothing on timing?
Jeffrey Schwartz
No. I mean, hopefully, soon. Hopefully, in the next few months, that's the type of thing we're looking at.
Derek Lessard
And I just wanted to touch on, again, on the working capital and accounts receivable. They were down from Q4. I'm curious if that's tied to the lower selling prices or if there was other drivers to that? Just again, curious on success in collecting payments from your customers or how they're reacting in this sort of more difficult macro environment.
Jeffrey Schwartz
I'm going to say the number is just related to sales and timing. As far as collectability, really, no issues at all. Having said that, how some of our customers have problems? Yes. So we had a very large problem in Brazil, but it was in short, and we're good over there. I think we've even collected already. Buy, Buy Baby has had issues, but we were on top of that, and we're good with that one as well. It's all -- and other than that now, I think the customers we sell to, for the most part, have been in good shape and we haven't had any issues.
Derek Lessard
Okay, thanks, everybody. That's it for me.
Operator
There are no further questions at this time. Please continue.
Martin Schwartz
Okay. Thank you. I want to thank all of you for joining us this morning and wish you all have a good week ahead. Thank you.
Operator
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.
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Dorel Industries Inc. (DIIBF) Q1 2023 Earnings Call Transcript