Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Dorel Industries first quarter 2023 results conference call. At this time, all participants are in 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. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. 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 5th, 2023. I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead.
Morning, thank you for joining us for Dorel's first quarter earnings call for the period ended March 31st. With me are Jeffrey Schwartz, CFO, and Frank Rana, VP of Finance. We'll take your questions following our comments. Again, all figures mentioned during this call are in US 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 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 FamilyFix 360 Pro, a new rotative ISOFIX base, and the Pearl 360 Pro, a new toddler seat. The product line features Dorel's revolutionary SlideTech 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 toward 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 seat 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 of the new Safety 1st Turn and Go 360° rotating all-in-one convertible car seat and the Turn and Go 360 DLX rotating all-in-one convertible car seat. These two new models feature innovative SafetySwivel, 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 a press event on opening day. Media pickup was excellent. The Dorel Juvenile booth was the busiest pack throughout the two-day show.
Many in attendance 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 Home's booth at the April High Point Market. 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 of 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.
Their inventory average cost was lower as the quarter began. We do not see them returning to operating profit until at least the third quarter. Inventory reductions in both our segments was good during Q1, generating over $50 million in cash. This had the double benefit of moving out higher cost goods and strengthening our balance sheet. Going forward, we have newer, 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.
Thank you, Martin. You know, as everybody knows, this was a pretty tough quarter. The numbers are not very nice to look at. I'm gonna go through them quickly, and 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 declines were in both segments. In Home, the revenue and organic revenue declines were in all divisions and again, mainly explained by low overall, a 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 had. In addition, you know, 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 $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, you know, the bigger culprit. Gross profit was down primarily to factory overhead absorption.
It's just, we're just not putting enough 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, well, reduced volume. 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. 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 a senior unsecured note of about $6.4 million.
During the quarter, the net loss from continued operations, $31.5 million and $0.97 per share, compared with $27.2 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 surge, 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.
Again, primary reason was the impact of a lower domestic manufacturing activity from lower sales that led to factory and warehouse overhead absorption issues. The 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, you know, we had most of the declines in the U.S.
However, we did see some improvements in Europe, which is important for us. In fact, Europe, despite having the security incident, they were able to improve their sales, which is 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%. 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. 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. With that, I will pass it back to Martin for the questions.
Okay. Thank you, Jeffrey. Now I'd like to ask the operator to open the lines for questions and request that you limit them to two in the first round. Operator?
Thank you, ladies and gentlemen. We will now conduct a question and answer session. If you have a question, please press star followed by the one o n your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be pulled in the order they are received. Please ensure you left the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from Derek Lessard with TD Cowen. Please go ahead.
Yeah, good morning, everyone. It sounds like you're feeling more optimistic on the business than I've heard you talk about in a while and around the operating environment, at least on the margin. Am I getting that right? If so, could you maybe just talk about some of the reasons behind that optimism and what you're seeing as, you know, the biggest improvements in the business and maybe what needs more work?
Yeah. You know, we have the two segments. They're not exactly at the same points as each other. The Home segment is still continues to suffer from, you know, I'll say a softer demand. We are getting to the point where that declining inventories at our customers are starting to bottom out. Our customers are starting to reorder again, which is a hopeful sign. Probably what's even more hopeful, Derek, is that they're actually discussing merchandising again, and it's been a really long time. If you go back, think about it, that during 2021 and beginning of 2022, 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.
That was the case for a long time, and that's all they focused on. They went and looked for new sources, and they would look for new, you know, places to buy stuff because they couldn't get what they needed. Then that all ended mid-2022, and they just all the stuff poured in. They've spent since, you know, the middle of last year trying to move the stuff. Every time we'd wanna discuss new concepts, new ideas, new merchandise, new products, it was, "Not right now. We got to clear out what we have so we have room for it." Finally now they're finally getting back to saying, "Hey, let's do some of that new stuff. Let's plan some programs for the end of the year. Let's do this. Let's do that." That's a hopeful sign.
Having said that, you know, it's still a little murky. It's still a little difficult for us to get the timing back on when that's gonna happen exactly and to what extent. It is sort of like, I guess you can call it a bottoming out of the market conditions. We definitely are seeing larger orders being placed now for shipping later in the year. That's a hopeful sign on the home side. The juvenile is quite different in that we're there today. It's not about tomorrow, it's about today. All the work we've been doing for 18 months, it looks like it's finally come together, and it's happening, you know, in Q2.
We're talking about a few weeks here and a few weeks there. We are seeing some of these new products do extremely well in the marketplace. We're seeing demand being significant even though the market's not great. There's one thing overhanging the juvenile industry right now that scares me a little, is the general market conditions are not great. 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 has had the best sort of reception that I've seen in years from any of our product categories, and it's a big category.
You know, it's infant and toddler seats and it's a whole family of products. 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. That's very exciting. You know, in Europe and U.S., we're also having a lot of success. You know, we're definitely gaining market share. We see that every month. We have a lot of new stuff that's just shipping now. Again, it hasn't really seen a lot of it at the POS. You know, that's something that I'm pretty excited about. You know, we...
Like, we've divided our business down to three areas, Europe, North America, and the rest of the world. Even the rest of the world with the currencies now, you know, easing up and the US dollar slowly getting less strong, we're seeing opportunities there and that business is picking up. Overall, Yeah, it is. There's a definite general good feeling in our juvenile business that we have finally launched the company that we've been talking about for a number of years.
Okay. Thanks for that, Jeffrey. It's helpful. 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 your competitors?
I mean, again, I don't have... You know, I'm not gonna give out the exact numbers. These are third-party market research companies, so you know, it's pretty good data. Why are we doing it? It's just that the products are right. You know, we're just hitting the right products with the right pricing and just a lot more confidence. Took us a while to get there and get all the right stuff. We're winning, you know. I mean, this is what we're supposed to be doing, and now it's happening right now. You know, it's... Again, we've been talking about it for a while, but now we're seeing it. Now we're seeing the numbers. Needles being moved. Particularly excited, like I said, with the European launch.
That's a great product. We're very excited about that.
Okay. One last one for me before I re-queue. Can you just maybe explain the difference, and I'm talking juvenile here again, between the growth rate in Europe versus North America? Excluding the cybersecurity, of course.
I'm sorry. Oh, the difference in growth rate?
Yeah.
I'm not sure.
in Europe sort of down
It's positive in Europe because, you know, again, the answer really is why is it negative in the U.S. if we've been excited about market share and all of that? 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. In many areas, we see POS tracking ahead of orders. Eventually, you know, that's gonna have to happen. We see that in many areas in home as well, that the sales aren't as bad as our shipping numbers. 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.
That's when all the new product hits and gets put on the shelves. What happened here is, rightfully so, they stopped ordering the old product even if it's sold. 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 wanna bring an old inventory. That caused a little bit of issues in Q1 as well. I think those are the two main reasons why sales were down in the U.S..
Okay.
In addition, the only other addition is, you know, Buy Buy Baby that went bye-bye, I guess. You know, we did have that last year. We don't have them going forward as far as we know. That also shipping there was also one of the reasons we were down.
I guess on the guidance, I mean, you're looking for operating profits starting in Q3 for Home. Does that mean you're looking for, you know, a positive operating profit in Q2 for Dorel Juvenile?
It's going to be close, so I'm not gonna comment on it. You know, it can be. It's gonna be better than Q1, that's for sure. We're making a lot of progress. I don't know exactly how far we're gonna get.
Okay. Thanks, Jeffrey.
Okay.
Your next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.
Great. Thank you. Good morning, guys.
Morning.
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, you know, how long or sort of what to expect in terms of the declines in that business, considering you're gonna start coming up. I mean, you already are, but you're gonna start coming up against some easier comps as well.
Yeah. Yeah, you're right. I think you hit it on the head. Those Q3, Q4 comps are going to be a lot easier. 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. You know, our cost base is so much better, too. You know, 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. Like I said, the gross margin, you know, 1% isn't really what we sell our product at. It's just the negative absorption. We are getting more items to be built in our factories in North America.
That volume should be going up, and that's gonna have a significant positive impact as well. You know, that's really it. You know, 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, you know, it's just getting the market conditions right. It's been really, really difficult. Probably the worst. You know, we've been in the furniture industry for a long time, and I'm even gonna say the lower-end furniture probably got hit harder than the higher-end furniture here just because of the inventory lag. With all of that, you know, it's taking a while to turn, but it'll turn.
Okay. That's great. Just in terms of the profits, you talked about profits in Juvenile. Or 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? You know, like margin-wise, or should we go back to prior levels for margins and dollars in EBITDA?
I mean, it's so dynamic right now that given our history of, you know, volatility, I'm not gonna give you a prediction. Yeah, I mean, ultimately, there's no reason we can't get back up there, especially if we can get the volumes moving. You know, 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. It's a little early. It's been a long time, you know, between the COVID and all the other issues that we had some stability here, but we're You know, that's why I'm not gonna give you a number, but we're definitely moving to, you know, having a lot more profitability in the business.
Right. Okay. Okay, that's helpful. Thanks.
Your next question comes from Derek Lessard with TD Cowen. Please go ahead.
Derek, you there?
Oh, sorry about that. I was muted.
Yeah.
I was curious, I have a few follow-ups. Have you taken the full charge for the cybersecurity or is there anything else that we should be sort of modeling in there for Q2?
Yeah, I think it's. I mean, the charge for the costs of it are in. The charge for. It's not a charge, but you know, we weren't shipping on April first either. Right? It took us depending on the location. There could be some weakness in there, too. I mean, We've caught up. I mean, the reality is some of the goods we just shipped later, there was a lot of online goods that weren't available and people bought something else. There is some permanent losses for sure that we had in April, but not hugely material and, you know, it's. Hopefully, we'll make up for it later in the quarter.
That's fair. I guess a few more on working capital, maybe inventory specifically. Obviously did a good job, just made some nice progress on the inventory front and it was ahead of our expectations. Just, you know, do you have do you still have some work left to do there and on inventory specifically?
Yeah. There's pockets of stuff we wanna move. We've done a really good job. I know in the U.S. in Juvenile, they've eliminated significant amount of SKUs. We're trying to do that. You know, same thing in Home. One of the areas that we were behind in, 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. We pushed off a lot of the new products that the development team had done, and that stuff's starting to come in now. That's for sure had an impact also on our top line.
I mean, part of our, you know, reason that we are successful is we're always having something new and exciting in that area, and that really slowed down the second half of last year and the first half of this year. Yeah, I mean, there's a little bit more room in inventory to do, but nothing drastic. Before you ask the next question, let me just address the, you know, everyone wants to know about liquidity. You know, we're, 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.
You know, it's just one of those things that, you know, we think we could be successful on both of them, and then we'd have a lot of liquidity. If one of them happens, we have enough liquidity. We're definitely working on those, and they're going well, and that's pretty much all I can say about that.
Okay. I know that's all you can say about it, no.
Yeah.
nothing on timing?
No. I mean, hopefully soon, you know. Hopefully in the next few months. You know, that's the type of thing we're looking at, so.
Okay. 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. You know, just, again, curious on success and collecting payments from your customers or how they're reacting in this sort of more difficult macro environment.
I'm gonna say the numbers just related to sales and timing. As far as collectibility, really no issues at all. Having said that, have some of our customers had problems? Yes. We had a very large problem in Brazil, but it was insured 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. Other than that, no, I think, you know, the customers we sell to, for the most part, have been in good shape, and we haven't had any issues.
Okay. Thanks, everybody. That's it for me.
Okay.
There are no further questions at this time. Please continue.
Okay. Thank you. I wanna thank all of you for joining us this morning and wish you all have a good week ahead. Thank you.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.