Dorel Industries Inc. (OTCPK:DIIBF) Q3 2022 Earnings Conference Call November 4, 2022 1:00 PM ET
Company Participants
Martin Schwartz – President and CEO
Jeffrey Schwartz – EVP and FO
Conference Call Participants
Stephen MacLeod – BMO Capital Markets
Derek Lessard – TD Securities
Operator
Good after, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries’ Third Quarter 2022 Results Conference Call. At this time all participant lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [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, November 4th, 2022.
And I would like to turn the conference over to Martin Schwartz, President and CEO. Please go ahead.
Martin Schwartz
Thank you. Good morning and thank you for joining us for Dorel’s third quarter earnings call for the period ended September 30th. With me are Jeffrey Schwartz, CFO; and Frank Rana, VP of Finance. We will take your questions following our comments. And again all figures mentioned during this call are in U.S. dollars.
It was another difficult quarter as retailers continue to grapple with the ongoing supply chain problem and as well foreign exchange hit our earnings. As was the case last quarter the dynamics have changed previously. Not enough product to currently — far too much now.
Moving into Q3, the supply chain bottlenecks eased creating a considerable influx of merchandise. However, consumer sentiment turns negative of goods piled up across many product categories, including ours, creating a significant drop in orders from our US brick-and-mortar partners as they right-size their inventory. As well retailers did not have the ability to stock shelves and shoppers were and still are finding less of a choice on the floor.
The operating environment remains challenging with high inflation and the surging US dollar, factors beyond our control, having a definite impact on the performance of our two businesses.
Consumers are being forced to make some tough choices, do they put food on their table and gas in their vehicles or buy hard goods. More often than not purchases are for staples, rather than products and that is fair enough.
At the rail home, issues experienced last quarter persistent and sales decreased further from Q2 levels. It’s noteworthy that while brick-and-mortar took a significant hit, internet sales held their own.
Categories for the Dorel Home has traditionally been opening price point furniture, but recently consumers struggling to make ends meet don’t have the disposable income for even these budget priced items.
Branded sales continues to perform well, reinforcing the segment strategy to differentiate products through key partnerships with a growing number of well-known names.
The Dorel Home participated in the October High Point market unveiling its newly redesigned showroom, which accentuates its many brands. Several new products were on display, many of them from the branded collection, which generated considerable excitement.
Some of Dorel Home brands are being introduced in Europe over the coming months. Dorel Home is also expanding DIY business, which is attracting an additional category of shoppers. This initiative has met with good success this year as these accounts are growing steadily.
A new website, the Dorelshowroom.com was recently launched which allows smaller retailers to easily order smaller quantities. There are many hundreds of independent furniture stores in North America, and this is an excellent way to reach them, therefore providing excellent potential for growth in this sector.
Online purchasing is available 24 hours a day, seven days a week year round. Customers can browse by category or visit the output section for extra discounted products and new products are added daily. Promotional pricing at lower margins help reduce inventories by 27 million from the end of Q2. This also lowered warehouse and distribution costs.
Results at the Dorel Juvenile were disappointing particularly after last quarter, which recorded the highest revenue since 2019. Q3 decreases were driven mostly by key US retail customers, drastically reducing orders, much more slowly as expected.
Mandy had too much inventory on hand and did not reorder due to overstock, and trouble getting goods out of the warehouse. Sales opportunities were minimized as many stores have a limited merchandise assortment due to out-of-stock position. The other major factor which hurt Juvenile was the FX loss from the strong US dollar. And Jeffrey will discuss this shortly.
Europe continues to feel the effects of ongoing geopolitical issues, including recent lockdowns in China and the war in Ukraine. While most of the world has largely moved on from COVID, towns and cities are still being shut down overnight in parts of China.
Economic activity remain in Europe, with continuing disruptions expected in energy and inflation still moving up. Customers are even more cautious due to the continued instability and the acute fall in the value of the euro, which had a 20-year low. In September the pound sterling in a 37-year low, but has recovered somewhat with the change in UK political leadership.
To be clear, there are bright spots in the number of areas in Juvenile. Partially offsetting the sales decline with strong ecommerce sales and recent points of sale data, indicating that there is continuing demand for Dorel Juvenile products and POS is normalizing. Positive contributions to revenue in the quarter came from Brazil, Canada, and Mexico, with all three regions performing well.
Ocean freight costs are coming down, and their procurement landscape in Asia is now showing a positive trend, all of which augurs well for smoother operations and an improvement in margins going forward.
As for our outlook, Dorel Home reduced inventory significantly in the quarter, despite our retail partners also reducing their inventories. This effort by the segment will continue through Q4.
This is also a priority at Dorel Juvenile where inventory levels are higher than needed due to the unexpected drop in Q3 orders by retailers. ecommerce sales and point of sale data is encouraging. Therefore, we believe this phenomenon cannot continue indefinitely, and there is demand for our products from our consumers. As of now however, we expect this trend to continue through the balance of the year and we remain focused on reducing inventories in preparation for 2023.
With no real change in the value of the US dollar versus other currency, continuing — continued lower sales in the US in the short-term and ongoing challenges in Europe, we do not expect an improvement in Q4.
Both segments are reducing costs across the board to offset lower revenue. As we looked at 2023, better margins are expected and as mentioned last quarter, we have also secured new listings for 2023 with many of our major accounts.
I’ll now ask Jeffrey to review the numbers. Jeffrey? Jeffrey, you’re on mute.
Jeffrey Schwartz
Thank you. Sorry about that. Difficult quarter indeed, from financial statements. I’ll talk quickly about the Q and then talk a little bit about where we see the future. So, third quarter, Dorel’s revenue decreased by $63 million or 14.4%.
Adjusted organic revenue declined by 12.7% after removing the impact of various foreign exchange and the current year revenue from Notio Living, which was acquired in November 2021. The adjusted organic revenue declines were both in Home and in Juvenile. In Home, the revenue — the adjusted organic revenue decline was due to the reduced sales, primarily in brick-and-mortar channel in the US and a little bit at the online in Europe.
Dorel Juvenile revenue and organic revenue declines were mainly in the US due to the high inventory levels as key retailer — brick-and-mortar retailers and in Europe where we’re seeing a much bigger impact on our business because of inflation and then the continuing war in Ukraine and all of the things that are affected around it, like heating issues and other issues that have grabbed people’s attention.
From the gross profit, I mean, this is really where we’re getting hit right now is gross profit decreased by $35.3 million, the margin in the quarter decreased 660 basis points. And that’s really again, happening in both segments.
In Doral Home, gross profit margin came down, increased promotional incentive to get rid of the in recurrent inventories that we have. And then just higher costs, I mean, even though today freight costs might be down, the freight costs that we incurred in Q3 were record costs. And the same with cost of raw materials and goods from Asian suppliers. The goods that came in and were sold were at higher cost.
Similarly, in the juvenile, the same thing costs are very, were very high in Q3, the inventory that was purchased, and on top of that, the exchange rate. And the US dollar was, was significant and caused a lot of pain,
Finance expenses, that did decrease because of the huge drop in the amount of debt at Dorel House versus last year. We were down by almost $11 million to $5 million — just over $5 million from $16 million last year.
Overall, for the quarter, Dorel reported an operating loss of $9.1 million compared to a profit of $8.1 million last year. Then excluding restructuring and other adjustments, operating profit or adjusted operating profit decreased by $16 million to an operating loss of $6.9 million.
If we look at the individual groups now, Dorel Home, the third quarter declined by $30.7 million or 14%. Adjusted organic revenue, like I said, after moving foreign exchange, and the Notio Living acquisition declined by approximately 16.4%.
The increase in revenue is primarily brick-and-mortar channels, a huge discrepancy between what we sold to the brick-and-mortar versus what we sold online, particularly in the US where the online sales are holding up fairly decently.
The — what’s going on at the brick-and-mortar, they have — on their books, they have a lot of inventory, but it’s not necessarily getting onto the floor in time. And it’s not necessarily getting through all that supply chain issues that our customers have had. It affected them significantly in Q3.
And on top of that, we it is a bit of — POS is not strong. We’re seeing declines in POS, partially because it’s hard to get the goods, not on the floor, and partially because people just aren’t spending on furniture like they were in 2021.
The gross profit increased by $14 million, I mean, here’s where the issues are. So, the gross margin at $4.8 million for the quarter, is not something that we can continue to run at. So, again, it’s pretty simple. What’s happening is costs were going up and up and up all year.
Q3, even if we were getting new quotes that were for less, or there was talk about less cost of container freight, they knew they were still very high in the quarter. And in order to move these goods, we’ve had to lower our pricing, and promote some of these goods, so we can get them out of our warehouse so we can get them out of our system.
And I think the retailers are doing the same thing, they’re looking to get the high cost goods out of their system. So, everybody’s working to move these out, so that we can bring in next year, much lower priced goods, so that we can go back to making normal margin like we used to make.
So, that’s really what’s going on in our business. So, overall, the operating profit declined $14.8 million in the quarter for an operating loss of about $8 million.
In Juvenile third quarter revenues were down $32.4 million or 40.8%. Organic revenues declined by about 9% The declines in revenue were mainly in the US and Europe and Chile.
In the US, the decline, which was in most of the product categories, was primarily due to the retailer’s reducing inventories that, as Martin mentioned, they were high. They’re high across the board, and not necessarily in the Juvenile category.
But nevertheless, our customers are dealing with their own supply chain issues and are looking to reduce the amount of inventory in general in their system. And that affected us. Interesting enough, our POS was not that negatively affected. So they continue to sell goods. In fact, in Q3, we had a slight increase over last year in POS. And, which means that, people are still buying our product, there’s just less in the system, or was in Q3, less in the system, hopefully, in Q4, and then certainly into next year, we expect to see, a more balanced approach between the POS and what our customers are ordering.
Europe, on the other hand, is being — it’s really is being impacted both the POS and the amount of inventory that our customers are carrying. The inflation was people’s minds are on other things, and spending money right now. So little bit more concerned about what’s going on over there. Then in the US, which we think will balance itself off shortly.
In Chile, the high inflation and their currency was one of the worst hit in the world. And that’s affected their demand. And we’re hoping to see, that leveling off as well. While we did see some bright spots, some parts of the world we’ve got in Brazil continues to be strong, both on the top and bottom line.
Mexico, very small customer, a very small country for us, but we are actually having record sales and profits right now. So and even Canada, where we had massive product shortages earlier in the year, Canada started to come back in Q3, so that’s great.
On gross profit and the quarter off by 21 million, again, same thing, gross margins was 16% drop at 720 basis points. Again, foreign exchange, probably the biggest chunk of that represented about $14 million, just the change in the strength of the US dollar. And again, like I said in the other — the other segment, supply chain costs were very, very high in Q3, both containers and input costs. So we have a lot of that to deal with. The operating loss in the segment was $18.4 million for the quarter versus a gain of $2.4 million last year.
The only other thing, I would consider major news for us that we did in order to enhance our liquidity we did sell one of our factory building in Cornwall, Ontario and did a leaseback so nothing really changes from an operating profit. But we do have more liquidity in the system, which makes us feel better and allows us to, to operate a little more comfortably. So that was done very recently done this week. But we’ve mentioned it in the financial statements.
So with that, I’ll pass it back to you, Martin.
Martin Schwartz
All right. Thank you, Jeffrey. Okay, I’ll now ask the operator to open the line for questions. As always requested to limit the first round two questions. Operator?
Question-and-Answer Session
Operator
Certainly. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] And that will be from Stephen MacLeod at BMO Capital Markets. Please go ahead.
Stephen MacLeod
Thank you. Good morning, guys. Just a couple of questions. In terms of the top line, one of the things you talked about last quarter for the Juvenile business specifically was new listings. And that was meant to positively impact Q4. I think in the Outlook section, you talked about new listings, positively impacting next year. I was just curious, should we still expect some of those new listings to be positive for Q4? And is that when you talk about for the full year next year? Is that for both segments? Or is that specifically around new listings for Juvenile?
Martin Schwartz
So let’s talk about Juvenile first, so yes, we continue to have a lot of new product coming through the channels. It is slipping a bit, primarily because, like I said that the inventory issues that Dorel is encountering is not Dorel, it’s our retail partners as well. So everybody wants to move through the goods that they have before buying a lot of new goods. So in some cases, some of that stuff has slipped. That’s not to say that, nothing has been launched in Q4, we certainly have some products being launched, but I don’t think we’ll be affecting the, the financial statements until Q1.
On the other side, again, similarly, we’re moving, we’ve go to move through the old inventory to both physically make room on in, in our warehouses in the shelves of our store, before we start bringing in a lot of the newer inventory. There is some new product coming in for sure. And that new stuff that comes in will probably be priced properly, or cost wise will be properly, but we are we are optimistic in the fact that we’ve seen the opportunity right now between freight and costs, to get our margins back to where they should be.
So what we’ve done is we’ve lowered our prices, the retail prices are now kind of matching where the costs will be. But unfortunately, the inventory that we have today is higher price than that. So that’s the dilemma that’s Dorel’s in now and we feel good looking forward that, this will balance itself out. But we have to get there.
Stephen MacLeod
Okay. Okay. I see. Thank you. And then just with, with EBITDA sort of going adjusted negative in the quarter. I’m just curious if there were any covenant issues or covenant restrictions that we should be aware of?
Martin Schwartz
There’s currently under the ABL agreement, we don’t have like monthly or quarterly measurements for covenants like we used to. So based on that, the answer is no.
Stephen MacLeod
Okay, okay. That’s great. I’ll go back in line. Thank you.
Operator
Thank you. Next question will be from Derek Lessard at TD Securities. Please go ahead.
Derek Lessard
Hey, good afternoon. Jeffrey, maybe I get it that said there’s a lot of moving parts right now. So I’m just going to ask more of a qualitative question. Do you think you’re past the worst?
Jeffrey Schwartz
Well, we don’t see. We don’t see Q4 getting better because we still have to deal with the high cost inventory. The good news and it’s the really good news is we’ve already got reduced costs for either be raw materials, finished goods, freight, all of that is, is not something we’re hoping to see. But we are seeing today but we’re not buying heavily yet because we need to get through what we have. So exactly. When does that point change, when does it like sort of say, okay, we no longer have any of the old headaches, but we only have the good stuff going forward. I don’t know exactly what month that is. I mean, it’s not that far away, it’s certainly not Q4, it’s going to be into the early part of next year.
We’re also a little bit cautious with what we believe as a recession coming. Historically Juvenile does, okay, during the recession, I mean, the birth rate seems to be steady, a little more concerned in Europe, where it’s not a normal recession. But less concerned in other parts of the world on the Juvenile.
And Dorel Home is something we’ve got to get through all of this stuff. And there’s a lot of product in the system. Because a lot of people were jumping into the furniture business, we are seeing bankruptcies, we are seeing people getting out. We are seeing importers not importing furniture anymore. And all of that has to wash through.
So, I’m a little less certain on demand next year for furniture. But we have great opportunities we have — retailers are looking to do new stuff, they’re coming to us, we have a lot of new ideas, new products.
We’ve got new channels, I mean, Martin touched on some of it, or we are addressing, I’m going to call it, the OPP level of furniture stores. I mean, they need — with the recession coming, they need to have a lot of options for their customers.
And some of these stores are turning to us, because we have some great value products. So there is there’s a bunch of things that I’m excited about for next year. But we got to get that. We got to get through the sort of the anchors that we have, and then things will be good.
Derek Lessard
Okay. That’s helpful. And then maybe just to follow-up on that in terms of the inventory, I think, in Q2, you alluded to reducing them by about $50 million. You did about 27 in the quarter. Is that still relevant? Are you are you now thinking that that number should be higher?
Jeffrey Schwartz
Yes, I mean, I think 50 is still the appropriate number. We just want to replace the extensive inventory with normal price.
Martin Schwartz
Yes, is the key.
Jeffrey Schwartz
So that’s the number. Yes, that number will come down. We’re still too high in many areas. But the important thing is, we know that — like we’ve already dropped selling prices on many items. And now ahead of when we’re actually going to be able to sort of make our normal margins on it. So we just got to get through the old stuff, and then start bringing in the new stuff. And I mean, that’s the real strategy here. If we have to put it in a small little compact statement, and it gets really old inventory, so we can buy the new inventory, which will then give us the margins that we need to start going forward again.
Derek Lessard
Okay. That makes sense. And maybe if I could just follow-up on that. So where do you — where are you, I guess, in that — in getting rid of the old inventory?
Jeffrey Schwartz
Yes. In subcategory, I mean, certainly Q4 is going to be like a transitional period where we’re — whatever comes in November, December, we’ll probably be at new constant levels. We’re still — what we’re selling today is still stuff that’s in inventory at a higher costing levels. So, I’m hoping to see a noticeable change in Q1. But again, depends on how much we get out. And it’s also which category, certain categories we’re already. We don’t have a ton of inventory. And we are bringing in other categories we might be sitting on for six months. So it’s really is depending on the product performance.
Derek Lessard
And if you look back, or as you’re looking through your portfolio and the sale leaseback of the Cornwell property. Do you have any more of those type assets lying around that you can — that you’ll be able to do similar transactions and generate more cash or any potential non-core assets that you may have?
Jeffrey Schwartz
Right. Yes, we actually do have some more real estate. Some of its very small, some of its larger. So, certainly, yes, we are looking into the values and if we needed to monetize them, can we — all of that — I’m not going to give you any numbers. And I’m not going to talk about value, but yes, there is there is some inventory of those type of assets.
Derek Lessard
Okay. And maybe one just final one for me. Thanks for the giving us the impact of foreign exchange impact on EBITDA. I was curious if you had the impact on revenues?
Jeffrey Schwartz
Well, maybe one of our sites is working right now, but
Martin Schwartz
We do but I don’t have it handy, Jeffrey.
Jeffrey Schwartz
Yes. Okay. Look — it’s interesting. So we took obviously a really large in Q3, the US hasn’t really gotten stronger very much since Q3. So, there would still be an impact versus last year. But that’s sort of no ball effect of just like every month and every week, taking another write-down on balance sheet items, or it seems to have slowed.
And I’m hoping this is maybe the bottom of or the top of the US dollar strength, because we if we see it coming back the other direction, we will see some nice tailwinds for a change behind us, because it’s been brutal. I mean, some of the currencies that, like I said, I think the Chilean currency is one of the worst currencies in the world as far as the fall that it had. So I’m hoping this is the worst it gets, and that we only picked up from here. But I’m not putting any money on that.
Derek Lessard
Okay. One final one for me, notice CapEx did pick up a little bit, I think $2 million versus last quarter. So I think it was $6 million in total and in Q3. Just curious about what was driving that? And if you have any sort of early outlook for 2023 in terms of….?
Jeffrey Schwartz
Yes. I mean we want to get through this period before we get back to spending a lot, hopefully, I mean, I don’t know the answer to Q3 can be a project that was being finished. I know, we got some important car seats coming through the system. But no, I don’t have, it’s still a little early to give you any outlook on CapEx because we haven’t finalized anything.
Derek Lessard
Okay. Thank you. That’s it for me gentlemen. Thank you.
Operator
Thank you. And at this time, I would like to introduce with a follow-up, Stephen MacLeod. Please go ahead.
Stephen MacLeod
I just had a one follow-up question. Just as you’re thinking — you talked about the inventory. You got to work through the bad stuff here or the aged stuff to before we can introduce the higher full margin product. I’m just curious if you think about 2023, and if you do get through that into the Q1 period, let’s say, do you think you could be in a position where you’re getting back to historical margin levels in both the home and Juvenile business?
Jeffrey Schwartz
Yes. Volume is going to be a big part of that. And I don’t know the impact of the coming slowdown. I think we will be hurt less than other businesses. That’s traditionally been the case. And I said that two years ago, the relative veteran or recession and an inflationary time like 2022. It’s not good for Dorel to have prices going up constantly and having a go get price increases and then having, our customer having to pay more for the same goods as they, it just doesn’t work well for us.
It works a lot better when even if demand is slower at our costs come down, and we’re able to get normal margins again, and people tend to have to move downwards and we do have a lot of opening price point, mid-price point products.
So I do feel like, a slowdown isn’t that scary if we can get our cost under control. And we can get back, I don’t know what historical is anymore. I mean, it’s been a while, particularly the furniture aside since we knew what historical was, but we can get back to a good place next year, a run rate certainly next year. I don’t see that being an issue unless demand just is really, really terrible, but if it’s less than ideal, I think we’ll still be fine.
Stephen MacLeod
Okay. That’s great. Thanks Jeffrey
Operator
At this time, I would like to turn the meeting back over to Mr. Schwartz. Please proceed with closing remarks.
Martin Schwartz
Okay. So I want to thank all of you for joining us this afternoon. And wish you all a pleasant weekend.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you to please disconnect your lines.
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