Earnings Call: Q1 2021

May 7, 2021

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries First Quarter 2021 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. 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, May 7, 2021. I will now turn the conference over to Martin Short, President and CEO. Please go ahead. Thank you. Good afternoon, and thank you for joining us for Dorel's Q1 earnings call for the period ended March 31. On the line with me are Jeffrey Schwartz, CFO and Frank Rana, VP of Finance. We'll take your questions following our comments And a reminder that all figures are in U. S. Dollars. We are very pleased with Dorel's Q1, which exceeded our expectations and ended with a for the month of March. Demand remains strong at Dorel Sports, Dorel Home with Dorel Juvenile seeing improvements as well. Our solid quarter is a tribute to our teams who did an excellent job of mitigating severe supply chain difficulty. Now looking at each of our segments. Dorel Sports had another huge quarter with momentum in all three divisions, recording its 8th consecutive quarter of growth. Cannondale benefited from significant double digit growth in all geographies. Sales of Cannondale's e bikes and mountain bikes Help drive the revenue increase in Europe. The Motera and Habit Neo ebikes as well as the Scalpel and Trail mountain bikes are extremely popular among cyclists. In the U. S. IVD channel, organic growth has been very strong. The demand for bikes continues to outpace supply, keeping inventory low and margins up. Dealers are now actually placing orders into 2022 to ensure supply. Pacific Cycle sold whatever it received as retail POS was very strong. E commerce was a significant factor in the growth as online sales of bikes, ride ons, parts and accessories were up substantially. In Brazil, 1st quarter saw product mix improvement and growth in the IBDs and e commerce. Caloi finished the quarter with an operating profit, a vast year over year improvement. While economists in Brazil are predicting the tough economy in the second half, It is expected that bike demand will remain strong. Dorel Home had another good quarter with Top line growth and a very solid increase in operating profits. E commerce sales increased low single digits, But as a percentage of the segment's higher gross sales, it represented 57.4% of revenue compared to 64% a year ago. Rick and mortar once again did very well with sales up quite a bit from a year ago, helped by strong POS in most categories and major mass merchants. It was also another great quarter for the segment's branded sales as Little Seeds, ClearEye, Kosmos and Novogratz All combined to beat prior year numbers substantially. The new Mr. Kate collection launched in February has had a very good run up to this point And we anticipate this trend will continue. While not significant for the segment as a whole, but sales in Europe were again strong and growing. Resources have been added to expand opportunities outside of the UK into Mainland Europe. COVID-nineteen related store closures persisted in a number of Dorel Juvenile's markets, notably parts of Europe, South America and Canada. The segment posted another quarter of improved adjusted operating profits. Europe posted 3 consecutive months of good performance, Yet revenue was down from last year as some regions reentered lockdowns. Limited in store sales were somewhat compensated by an uptick in The late shipments from Asia compounded the situation resulting in out of stock for certain products. An important new introduction in Q1 was the Maxi Cosi 360 family of products, the rotating base with multi age group car seats. The full rollout in Europe is being held until markets improve when more stores reopen. The U. S. Did well due to a combination of pent up demand and government stimulus checks. Sales were strong in all product categories, Most significantly in car seats as consumers began to shop for mobility products with travel increasing. Brazil had a strong double digit increase from continued e commerce dominance and a gradual recovery in brick and mortar as stores began reopening. Sales in Chile in local currency increased as well there. The proportion of e commerce continues to rise. Dorel Chile has made many important changes and the organization has really turned around nicely. In addition to closing some retail stores over the past The warehouse has also been closed and has been outsourced to a third party and office space has been reduced. The e commerce platform is far more agile and more mature. As a result, online has grown substantially. The sale of Dorel's Juvenile Major China factory closed on March 31, And the transaction thus far has been smooth. The transaction is part of the overall strategic direction of Dorel Juvenile that includes the co op development of innovative new products with a diverse supplier base, of which the purchaser is 1. Sales and earnings for all divisions would have been even higher had it not been for increased prices in Asia, shortages of parts, Not enough supply to meet the high demand and ocean container costs and availability. But this situation is not unique to Dorel. Rising prices, shortages of supply and cost of transportation have affected companies worldwide. To offset this, we will have to work on price increases to our customers throughout the rest of the year. Looking forward, higher import costs and supply chain issues are expected to pressure earnings for all our businesses. Dorel Sports sales remain very strong and the 2nd quarter will be similar in earnings to last year. Sales are expected to be at a record level, but bike component availability will remain an ongoing issue. Dorel Homes demand also remains strong. However, year over year earnings are expected to be lower as higher input costs We'll pressure margins until needed price increases are implemented. In Juvenile, the second quarter will be significantly better than prior year, which was heavily impacted by the COVID-nineteen pandemic. COVID remains very present and this is limiting sales in the key markets of Europe, Chile, Peru and Canada. This has continued into April and May will likely be similar. This is being offset by better sales in Juvenile's other markets, but overall is limiting our expected performance. In addition to the higher costs on imports, Dorel Juvenile's domestic manufacturing capabilities in North America And in Europe are not immune to higher cost, with car seats and resins in particular double what they were for most of last year, particularly in North America. We believe we can overcome most of these supply chain challenges and cost increases. So higher sales, cost reductions and price increases, they do pose a risk to our earnings going forward. I will now ask Jeffrey to provide the financial perspective. Jeffrey? Thank you, Martin. For the Q1 of 20 'twenty one, Dorel's revenue increased by $128,000,000 or 22%. Organic revenue improved by about 20 point 5 percent after removing the variation of foreign exchange rates year over year. These revenue and organic revenue improvements For all three segments, as mentioned, Dorel Homes revenue increased due to strong POS in the brick and mortar channel As last year's Q1 was impacted by the start of COVID and the closure of a lot of stores. In Dorel Sports, revenue improved for the 8th consecutive quarter with organic revenue growth coming from all three divisions. And at Dorel Juvenile, several markets, primarily the United States and Brazil, saw organic Revenue improvements that were partially offset by declines in other countries because of COVID. Gross profit for the quarter increased by about 250 basis points to 20.8 versus 18.3 last year. The improvement in gross profits in the quarter was in all three segments, despite some raw material and cost increases, as well as the freight increases that we've been talking about for a while. We're going to talk a little bit about restructuring costs Just to make sure everybody understands what's happening to our statement. So for 3 months ended March 31, we recorded 9,700,000 Compared to 1.3 last year, the restructuring costs are mainly related to a loss on the disposal of The Chinese factory. During 2019 now, Dorel Juvenile initiated a new restructuring program across several regions. Main objective there was to simplify the organization and optimize its global footprint in order to improve its competitive position in the marketplace. These restructuring initiatives were expected to be completed in 2020. However, in the light of the COVID pandemic, some initiatives were delayed and will only be completed this year. So the total cost relating to the restructuring activities of $1,100,000 was recognized during the Q1 compared to 1 And then as mentioned on the end of the month, Dorel Completed the sale of its Juvenile factory in China for gross proceeds of 51,000,000 of which was received during the Q1. And in that, we incurred a loss of $8,600,000 that we recorded with our restructuring cost. If we look at finance expenses in the quarter, they decreased by $6,400,000 to $8,900,000 during the Q1 compared to $15,300,000 last year. And the decrease is mainly explained by A decrease in interest on the long term debt of $3,400,000 due to lower average debt balances And the loss of the debt modification of 3.7% recorded last year in the Q1 in connection with the modification of an I want to point out too that our balance sheet that our debt To EBITDA ratio now is below 2.5%, while last year we were above 5%. And I think that says a lot about the turnaround on the balance sheet of Dorel in just 1 year. If we look over at net income during the Q1, net income was $2,700,000 or $0.08 per share versus a loss of $57,000,000 or a loss of $0.0178 per share in 2020. However, when you exclude the impairment charges on goodwill last year and the restructuring costs of both years, adjusted net income For the Q1 increased by $25,800,000 to $12,200,000 or $0.37 per share versus a loss of $13,600,000 or $0.42 a share last year. So a good turnaround there. If we move over to the segments now, Dorel Home, 1st quarter increased by 15.8% to 2 $228,700,000 The increase was mainly explained by strong POS In the brick and mortar channel, which is something again that we haven't seen in a number of years. We also had last year delayed shipments in the Q1 from China, which resulted in supply chain distributions Because that's where if everyone remembers, that's where the outbreak was and that's where the first signs of disruption were last year on good ship directly Online revenue gains were partially offset by supply constraints of imported products. So In this sector, we are definitely still feeling the container shortage issue. There are a lot more products we would like to get to be able to bring in, but we sort of are have Upside limit based on the amount of containers that we can access. Gross profit at 13.7% is an improvement of 130 basis However, it is down from where we were The later half of last year. And that again is due to raw material price increases, some mix. Unfortunately for us, some of the product that is the most in demand right now is also the product that is undergoing the most Cost pressures, things like steel chairs, anything made out of steel is definitely Seeing their prices increase more than other commodities. And if we look at the operating profit, we finished Up 44.2 percent to $14,800,000 versus the $10,300,000 last year. Again, improved revenue, a big part of that, as well as higher gross margin versus last year. But like I said, it is down from Where we were at the end of 2020. And of course, that's all offset partially by a little bit of increased That occurred in doing business. If we move over to sports, a great quarter. Our revenue increased by $82,000,000 or 43.6 percent versus last year. When we removed the varying foreign exchange rates, the organic revenue was still up by 41.5%. This is the 8th consecutive quarter that we've been able to do this. So we are definitely seeing a lot of strength in the category. Revenues continue to grow with unprecedented consumer demand for bikes around the world since COVID started as people are continuing to seek outdoor activities or transportation methods that are safe and respect social distancing guidelines. In addition, Dorel Sports is able to deliver sound operational execution across supply chain in the Q1 Despite extremely challenging global shipping environments and shortages of bike components in the marketplace. So we are performing well, But we definitely have limits put on us by the availability of containers, as well as the availability of component parts, which limits the amount of product we can manufacture. We do see also a difference between our Cannondale's Higher end business and the mass business, we're seeing more pressure, both on costs And on container availability for the mass businesses because just the sheer volume of product That we need to sustain that business, it's just putting a lot more pressure there than we're seeing on the Canoville side. Gross profits during the quarter improved by 390 basis points to 22.9% versus 19%. The increase was favorable volume absorption of fixed overhead costs and favorable foreign exchange in many markets. And that's offset by, of course, rising freight costs, rising cost of raw materials and the weakening of the U. S. Dollar versus Chinese currency. Overall, the operating profit was $21,800,000 compared to a loss of 600 1,000 last year and like we said, the increased revenue the increased profit was explained by an increased revenue and gross margin improvements in the channel. If we move over to Juvenile, again, a little bit of a different story. This business is not being helped Sorry, COVID, although we're seeing different parts of the world now moving in different directions. So overall, We increased our revenue $14,700,000 or 7.5 percent or an organic sales improvement of 5%. So we're pleased to see that despite the challenges we have. Several markets, United States and Brazil particularly, We're seeing improvements. With the U. S. Being very strong, we coordinated with the checks that went out for stimulus late in the quarter. We did see other areas, primarily Europe and South America, I should say Chile, Peru, Brazil, where the resurgence of COVID is continuing to have a negative impact on revenue and making it tough Gross profit is up 25.8%, representing an improvement of 210 basis points. The improvement in gross profit in the Q1 was mainly due to higher sales volume and better efficiencies in the factory as well as the weakening of the U. S. Dollars against most And that's partially offset by the increased freight costs and people costs in last year's Q1 Saw reductions, if we all remember during the time because of uncertainties and where there were layoffs and furloughs and stuff like that last year. We get down to the operating profit. The loss was $7,600,000 versus A loss of $46,200,000 last year, but that includes, again, impairment losses on goodwill last year and restructuring In both years. So the adjusted profit improved by $4,000,000 to a profit of $2,100,000 this year. So we're glad to see that's moving in the right direction. Little comment on the long term debt. As you know, we're still refinancing the debt. We are very confident that we will be closing that relatively soon. We do have Until the end of the Q2, there's no real issues here. It's just taking a little bit longer than we expected, But we have a lot of confidence that we're going to get that done with plenty of times there. So with that, I will pass it back to Martin. Okay. Thank you, Jeffrey. I'll now ask the operator to open the lines for questions and request that you please limit your first Questions to 2. Operator? Thank you. Ladies and gentlemen, We will now conduct the question and answer session. You will hear a tone acknowledging your request. Your questions will be pulled in the order they are received. Your first question comes from Stephen MacLeod with BMO. Please go ahead. Thanks. Good afternoon, guys. I just wanted to look at just looking at the sports business here, which obviously had a very strong quarter with very robust growth And it doesn't seem like demand is abating at all. And you have a positive outlook for Q2. Can you just talk a little bit about sort of how you would expect Based on what today's sales to unfold considering last year's Q2 was so strong, like would you expect The growth rate to be strong, but moderated from Q1 or is it even so strong that you might see Q1 growth rates again? I mean demand is very strong, right? So demand, I think Martin mentioned, we're taking orders now. And again, what I'm going to say Goes to the whole industry. So we're pretty much taking orders for 2022 today because 2021 is done. There's no excess Availability in 2021 for bikes. So and again, production is good. I don't want anyone We keep complaining about problems in production. That's because we can't get everything we want. But at the same time, we're getting a lot of bites in every day. So we are expecting a good strong second quarter. And again, particularly on the Cannondale side, that should go pretty steady right through the whole year. We don't see a lot of ups and downs in that business. The Pacific Cycle mass business is a little more variable. Their demand is very, very strong in there as well, But it's that's where container freight becomes an issue. And We don't have any inventory in our channel, and I'm going to say most retailers have very little inventory. There is some inventory in China, Bet we just can't get enough containers to get it over here fast enough. So that is definitely an issue. I don't know when that's going to abate. So that could have an impact on Q3 or Q4, as well as we're finding the price increases on the Lower price spikes are significantly more than on the higher price spikes as a percentage, right? So those are the challenges we have, but demand is not one of the challenges. Demand seems to be going I don't believe that the industry is going to be able To fulfill the demand this year and what we're seeing is going to continue into next year. Interesting. Okay. That's great. And then just turning to the home business, you talked a little bit about inflation Seeing an impact for Q2 and even Q1, I guess, to a degree as well. When would you expect to put Price increases through to offset that inflation. Is it safe to assume that you'd see some Q2 margin pressure, but then maybe that begins to moderate in the back half of the year? Yes, if prices don't continue to climb, so that's the big if. We don't know where it's going to stop. We have commodity commodity, we have items, some furniture items that were on our 3rd price increase since the fall of last year. So that's a lot. The markets aren't used to it. We saw what happened to markets when tariffs came in, Right. So tariffs are already in there, and we're okay with tariffs. But as I mentioned a couple of years ago, the implementation of Price changes are always difficult and that's kind of what we're going through. But again, so is the whole industry and It's just always a bumpy ride because like you said, we put some price increases in Q2, it's going to affect Q2. And if nothing goes up after that, we should be stable by Q3, Q4, but we don't know that yet. So that's kind of the bumpy part of this, but Demand is pretty good. Demand is solid. We have a lot of new items that are doing well. We have a lot of new brands that are doing well. Our customers are all doing well in this sector. So, it's just going to be a bumpier Margin issue than it is a sales issue. Okay. Okay. That's Good. Thank you. And then maybe just one more if I could on the Juvenile business. Just with respect to the sale of the China manufacturing facility, You've given gross proceeds, but I'm just curious, can you tell us what net proceeds were and how much of that you used to pay down debt? And then what kind of operational efficiencies do you expect to achieve having sold that facility? So, I mean, most of it there was very little difference between gross and net, I think just over $1,000,000 It was all used to pay down debt. So that's where the cash went. It's going to give us flexibility. It's going to give us the ability now we're going to continue to buy from that factory for sure, but it gives us an opportunity To find items and find technologies from other factories And not have to worry about funding all of the R and D that we have to fund. So we're going to see a good improvement as less cash, Less CapEx because we don't have to fund as much of the R and D. We don't have to fund the actual factory anymore. It gives us more flexibility as to go in the direction of the best ideas and best factories that are out there. We've had some lot of success in Europe doing things this way in the last couple of years, And now we're going to be able to do it sort of worldwide. So we're pretty excited and it just takes the pressure off. Our focus needs to be On product design, marketing, branding and not on running a factory in China, which was never our strength, although we did improve Quite a bit over the years, but still. Okay, that's great. Thank you. I'll pass the line over. Of Tarek Lasser with TD Securities. Please go ahead. Yes, good afternoon everybody. A couple of more follow-up questions. You said the Sports and then furniture business should remain strong. I was just wondering how you guys think about those businesses in particular, Sort of in a post COVID world where people and the discretionary spend might go away from bikes Back to things like vacations and driving and those types of things? Yes, I mean, there are probably going to be some of that, but I do think we've seen a lot of people rediscover bikes. That seems to be what we're finding out. Again, demand has not been satiated. So we still have, I think a lot to go. There's very little inventory in the system. So we're not we think that when it does happen, it will be more of a soft landing They are hard landing. And we don't have the answer to that, but We don't see a slowdown, like I said, anytime this year and certainly into next year, the way the market It's reacting and some of the new items that are coming out and sort of a shift to e bikes, which are really starting to In a foothold in North America, we still see a lot of runway to go. I'm sure it's going to soften some of the demand here and there, But it's not like we're filling that demand anyways. Okay. And on the home side, the home side, It could level off a little bit, but so much of our business has moved to online Retailers, although brick and mortar has been pretty strong in the last little while. But again, we're focused so much on our online customers. And I do believe that the move from brick and mortars to online retailers is probably permanent. I don't think all those people are going to move back to brick and mortar once they bought furniture online. Okay. Thanks for that, Jeffrey. And maybe one final one for me, again, on more specifically on the Chinese business I was just wondering if as you look through maybe your organization over the last several months years, There are other opportunities to divest of some of the things that you would consider non core? I think it's a lot harder because what we have around the world is marketing and distribution businesses that sell Dorel products. So it's not so easy to sell your it's not impossible, but You're selling your distribution of your items in a country, maybe we can do that. But I wouldn't think it's There's another material piece like the factory that would be available. Okay. Thanks, guys. And your next question from the line of Stephen MacLeod with BMO Capital Markets. Please go ahead. Thanks. I just had a follow-up question. More modeling question than anything else, but the tax rate has really moved around quite a bit over the last Couple of well, a few quarters. So I'm just curious what you would expect in terms of the tax rate for maybe the balance of this year or next year? Is that yes. So I think we're looking Probably in the 25% range, given all everything being equal and not having sort of adjustments. Okay. Thank you. And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks. Okay. Well, thank you. Okay. Well, this concludes today's call. I want to thank you all for being with us. Have a pleasant weekend and a very happy Mother's Day to all the moms out there. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.