FINAL TRANSCRIPT. Dorel Industries Inc. Fourth Quarter Results. Event Date/Time: March 4, 2014, 1:00 p.m. E.T. Length: 42 minutes

Transcription

1 Dorel Industries Inc. Fourth Event Date/Time: March 4, 2014, 1:00 p.m. E.T. Length: 42 minutes 1

2 Dorel Industries Inc. Fourth CORPORATE PARTICIPANTS Martin Schwartz President and Chief Executive Officer, Dorel Industries Inc. Executive Vice President and Chief Financial Officer, Dorel Industries Inc. Frank Rana Vice President of Finance and Assistant Secretary, Dorel Industries Inc. CONFERENCE CALL PARTICIPANTS Derek Lessard Analyst, TD Securities Leon Aghazarian Analyst, National Bank Stephen MacLeod Analyst, BMO Capital Markets Joe Bess Analyst, Roth Capital Partners Mark Petrie Analyst, CIBC World Markets Sabahat Khan Analyst, RBC Capital Markets 2

3 Dorel Industries Inc. Fourth PRESENTATION Operator Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Dorel Industries fourth quarter 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. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press * followed by 0 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 call is being recorded on Tuesday, March 4th, I will now turn the conference over to Mr. Martin Schwartz, President and CEO. Please go ahead. Martin Schwartz President and Chief Executive Officer, Dorel Industries Good afternoon, everyone. On behalf of and Frank Rana, welcome to Dorel s fourth quarter and yearend conference call. We will be pleased to take your questions following our initial comments. And as usual, all numbers mentioned are in U.S. dollars. 3

4 Dorel Industries Inc. Fourth 2013 was a disappointing year. A number of issues we faced were industry and economy related, but others were the result of less than perfect execution on our part. Consolidated results were affected by our previously declared restructuring in Recreation/Leisure, which, while mostly non-cash, accounted for $0.25 per diluted share in the quarter, and $0.29 per diluted share for the full year. This charge, plus the segment s weaker 2013 performance due to top-line softness and our poorer product mix, accounted for much of the year-over-year shortfall. Juvenile faced headwinds last year, particularly in North America and Europe where the marketplace is challenging. Our Latin American divisions did well as Dorel Chile performed nicely and Dorel Brazil vastly improved over Several projects are underway to address improvement and focus teams across the U.S. and Europe on more efficient product development. I m certain you understand that for competitive reasons I cannot go into details on this call, but I assure you that we are realigning a number of areas to deliver better results. Work has begun to integrate the Tiny Love business into Dorel and determine how best to distribute our complementary product lines and benefit from the new category of developmental toys that Tiny Love brings to Dorel. Tiny Love has a tradition of strong R&D, which we will certainly maximize. There has been intense activity at our Recreation/Leisure segment, and I must say the mood is extremely positive. The management team there is fully committed, invigorated and is confident about the year ahead. No question, 2013 was tough, not just for us, but for the entire 4

5 Dorel Industries Inc. Fourth industry. We are tackling what we can control, ensuring that we have the best products out there to support our strong brands and cutting costs where it makes sense. We re moving on several fronts. The global restructuring plan we announced in January will reduce supply chain complexity and will deliver competitive advantages to our customers and in turn consumers. As indicated toward the end of this year, the Bedford assembly and testing facility will be closed, and operations there will be deployed elsewhere. In addition, the R&D facility in Bethel, Connecticut is being moved to the segment s new headquarters in Wilson, Connecticut. These initiatives will improve profit through 2014 and 2015, and we expect to realize annualized cost savings of at least $6 million once the restructuring is completed towards the end of this year. Also in line with this plan, the cycling sports group will transition operations of its Australian business to Monza Imports, the leading action sports distributor in Australia, effective May the 1st. We are confident this strategy will bring us the same or greater profits with less invested capital and less risk. This is the beginning of the next phase in Dorel s evolution as a global bicycle and bike apparel company, and will result in a higher quality of products and services. Things are progressing well at Caloi where we acquired a 70-per-cent stake last summer. Like our arrangement in Chile, we have an excellent committed partner with true entrepreneurial culture. Caloi has assumed full responsibility from the previous local distributor, for Cannondale and GT distribution, promotion, and technical support in Brazil. The Cannondale premium dealer 5

6 Dorel Industries Inc. Fourth relationship program was inaugurated, increasing brand distribution in Brazil from less than 30 dealers to over 250, piggybacking on Caloi s network. At the November Brazil Bike Fair the GT and Cannondale 2014s were launched at Caloi s large booth, alongside Caloi s new models. From a manufacturing standpoint, a portfolio of Schwinn and Mongoose bicycles has been developed and adapted to the local mass market with production expecting to commence at Caloi s Manaus plant this spring. Cannondale and GT assembly is also slated for the Manaus facility this spring. The factory is in a free-trade zone and is the largest facility outside Southeast Asia. Caloi s sponsored road team ended 2013 as the number one team in South America, and for 2014 it has been transformed into the Cannondale road team, which won the first and most important race in Brazil, the Tour de Brazil, and currently leads the continental ranking. This resulted in two cover stories featuring Cannondale and Peter Sagan on the two best bicycle magazines in Brazil. Further recognition for Cannondale, the Synapse has been named Bike of the Year by the U.K. s Cycling Plus, the biggest cycling magazine in the country. Cannondale won it over 50 different road bikes, including every competitor in the market, making it the most important bicycle test in the U.K. market. In Home Furnishings, Dorel Home Products and Cosco Home and Office performed nicely with strong sales of mattresses, futons, folding furniture, and imported furniture items. The 6

7 Dorel Industries Inc. Fourth segment s expansion into the Internet sales channel continued at a brisk rate. It was another record year in e-commerce, which now represents a significant portion of revenue, offsetting reductions in sales to brick-and-mortar stores. In line with this, their drop-shift vendor channel continued to gain traction as the number of transactions is growing rapidly. Jeffrey will now provide a more detailed financial perspective. Executive Vice President, Chief Financial Officer, Dorel Industries Thank you, Martin. I will be focusing more on the fourth quarter as opposed to the full year. I just want to remind everyone that our results include restructuring costs that occurred in However, we believe that the results are more meaningful if we provide you with the business performance of the period where we discuss results that do not include the restructuring costs. So in my discussion going forward these will be all adjusted for removing the restructuring costs. Our revenues for the fourth quarter were $633.5 million compared to $622.6, an increase of 1.8 per cent. After removing the effect of varying rates of exchange year over year and sales from business acquisitions, organic revenue declined about 1 per cent. The principal contributor to the organic sales decline was in the Juvenile segment, which recorded a decrease of about 4 per cent. Adjusted gross profit for the quarter decreased to 22.9 from 23.5 per cent. That reduction was affected by the increase discounting activity in Recreation and Leisure, as well as a shift in the 7

8 Dorel Industries Inc. Fourth product mix to lower margin items. Partially offsetting this decline was an improvement in gross profit in the Juvenile where in Home Furnishings gross profit remained stable. If we go down to the pre-tax income line, it was $24.4 million in 2003 (sic) versus $35 million in Excluding the impact on restructuring, income taxes were $5.2 million or 21.3 per cent of pre-tax income, which is in line with our expectations. As a result, fourth quarter adjusted net income was $19.2 million or $0.60 per share fully diluted compared to $29.1 million or $0.91 per share last year. One line item that is of note here is finance expenses, which was $8.3 million compared to $4.5 million in This increase is primarily due to the higher borrowing and acquired debt related to the acquisition of Caloi. If we move over to the segments, the Juvenile segment, revenue decreased in the fourth quarter about 4.5 per cent compared to the year before. Excluding impacts of foreign exchange, organic revenue was slightly less than 4 per cent. The difficulties that we experienced throughout the year were the same in the fourth quarter, being both Europe and North America where growing has been challenging. Partially offsetting this are the revenue gains that we have in the Latin American market where revenue continues to grow in all our markets down there. Gross profits were 28.8 per cent versus 28 per cent the year earlier. Most markets saw their currency weakening against the U.S. dollar during the quarter. This weakening was almost completely offset by the Euro, which is strengthening against the U.S. 8

9 Dorel Industries Inc. Fourth counterpart. So from a currency standpoint on the operations and was somewhat neutral. But we definitely had both pluses and minuses occurring because of different movement of currency. The operating profit for the quarter, $18.4 million or 7.2 per cent of revenue versus $18.6 million or 7 per cent of revenue last year. Moving over to the Recreation and Leisure, revenue increased by $18.8 million or 8.3 per cent in the quarter. Organic sales, excluding the foreign exchange and the acquisition of Caloi, was more like 1 per cent. Revenues were affected by the global bike market slowdown, a sluggish start to the holiday season of both IBD and mass, as well as an unfavourable product mix. In addition to that we had approximately $10 million of product that arrived late and was shipped in Q1. And that product was new product with good margins. Adjusted gross profit, excluding the impact of restructuring in the quarter, declined to 22.8 per cent from 24.9 the year before. Again, that was partially due to the unfavourable foreign exchange rates on purchases as well as an unfavourable product mix and increased discounting activities on the 2013 models. Selling expenses were 10.5 per cent of revenue in the quarter versus 9.7. Most of this increase came from the initiative to support the Guru Fit system program and an increase in GSG retail business. So we do have a number of stores open. We had two stores at the last year. And the SG&A from those stores affect our SG&A obviously on the global line. We do pick up higher margins from those stores, so that s where the counterbalance is. 9

10 Dorel Industries Inc. Fourth As mentioned, from a profit standpoint $13.5 million in total restructuring for the quarter, and as a result if we remove that we would have had an operating profit of $8.1 million or 3.3 per cent of revenues compared to 7.3 per cent of revenues in Over to Home Furnishings. In the fourth quarter Home Furnishing revenues increased by 3.3 per cent from $128.6 million to $132.8 million. Business was driven by higher imported items, mattresses and futons, as well as folding furniture. Gross profits were flat with the year before. Profit was down from last year, $5 million this year versus 3.8 per cent of revenue versus $7.3 million or 5.7 per cent of revenue. I mean, this is one of those strange events. This was our budget for the year. We did particularly well. We had some kind of non-recurring expense reductions last year that didn t reoccur, but like I said, even though it looks poor, this was our plan for the year. We actually came in on our plan for the year. This business is doing what it s supposed to do. So it s the one business that internally is hitting the matrixes that we expect, and we re happy with that. From a corporate expense side, we have a negative expense in the quarter. That s from a combination versus last year of lower compensation for head office management in terms of bonuses and stuff, as well as a gain on FX on our contingent liabilities. This is something that happens when you got a major change in the countries where we have contingent liabilities, such as South America, a big change in the currency will affect the operations negatively. Or if the currency shrinks, I should say, operations get affected negatively, but our contingent liability goes down and 10

11 Dorel Industries Inc. Fourth we get a gain from that. So they re not all put through in the same area. The gains from the contingent liability goes in through the corporate, and the losses go through the actual segment itself. So there s a bit of a disconnect on that. If we move over to we compare it to 2012 levels, one of the largest variations on the financial statement balance sheet is an increase in inventory from $501 million to $555 million. Caloi represents 55 per cent of that increase. And another big part of that increase is an increase in Home Furnishings, which has now increasing some inventory to support the drop-shift program in the Internet sales channel, which has become a very major part of that business. Cash flow provided by operating activities was $144 million compared to $107 the previous year, an increase of $37 million. This was despite lower year-over-year earnings and due to improved working capital management. And for the same reason our free cash flow improved to $43 million in 2013 versus $14.6 million in And with that I ll pass it back to Martin. Martin Schwartz Okay, thank you, Jeffrey. As for our outlook, we re now two months into 2014 and we are seeing an encouraging start to the year. Specifically in Recreation/Leisure the restructuring and cost cutting initiatives underway, coupled with an unexpected rebound in all markets and a full year of Caloi in Brazil make us confident for the year ahead. The weather is always a variable that we cannot control, but if last 11

12 Dorel Industries Inc. Fourth spring s record rain and cold in both North America and Europe are not repeated, we are definitely well positioned to return to much higher levels of profitability. Earnings for the first quarter should improve by at least 20 to 25 per cent over last year. In Juvenile we expect most markets to improve their earnings in This, along with the contribution of Tiny Love acquired in January, should translate into earnings growth of at least 10 per cent for the year. This forecast excludes the negative impact of the costs of the one-time U.S. legal case that we recorded in Currency challenges in Canada, Australia and Latin America should result in the first quarter being slightly below last year, but this does not dampen our enthusiasm for the full year. In Home Furnishings we expect moderate growth in sales and earnings as we continue to capitalize on our Omni-channel distribution through both traditional and online retailers. I will now ask the operator to open the lines for your questions. And as always, please limit your initial questions in the first round to two. Operator, please. Q&A Operator Thank you. And ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press the * followed by the 1 on your touchtone phone. You 12

13 Dorel Industries Inc. Fourth will hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please ensure you lift the handset if you are using a speakerphone before pressing any keys. And one moment, please, for your first question. Your first question comes from the line of Derek Lessard from TD Securities. Please go ahead. Derek Lessard Analyst, TD Securities Yeah, thanks, guys. Question on the Rec division. We ve been hearing some about some dealers not being able to access the Cannondale portal whereas others, up to two weeks ago, hadn t received the majority of orders from October. And in other cases there are some dealers who have brought in competing brands while others are pushing the competing brands more than Cannondale. I guess my question is, is where do you guys stand in fixing these issues? How deep do they run, and was it in Canada only? And a follow-up to that is how confident are you, and weather aside, in hitting that 20 to 25 per cent number, given these issues? And more importantly, beyond Q1, what are you doing to ensure that you guys don t get put into the penalty box? Well frankly, Derek, I m not aware of this being a major issue. Perhaps some dealers are not happy. Perhaps some dealers didn t get stock. I assure you I know we were late on a number 13

14 Dorel Industries Inc. Fourth of items that we shipped in January, and we probably have some hot selling items we re behind on, but it s not a systemic problem. Again, our Canadian portal system is just getting going. The U.S. system and the European systems are different. So that s not an issue. But we met with our President, our interim President today, and things are good. We re very confident that we re going to hit a minimum of 20 or 25 per cent. And like I said, perhaps you re aware of a few accounts, but it s certainly not a systemic problem that s affecting the global sales. Derek Lessard Okay. Fair enough. And can you maybe just any updates on the hiring of a new Rec head? We re still interviewing and still deciding where we want to go with that. But in the meantime we re making a lot of progress within our business. Derek Lessard Okay. Thanks, guys. Operator Your next question comes from the line of Leon Aghazarian with National Bank Financial. Your line is open. 14

15 Dorel Industries Inc. Fourth Leon Aghazarian Analyst, National Bank Financial Hi. Good afternoon. My first question s regarding the Rec business again. I mean, you were mentioning that you unexpectedly saw a rebound and that the rebound is in all markets. Can you give us some more colour as to what that s driven by? And if this is just natural growth following a weak year or is it a new product introduction that s been really pushing this demand? I think it s a little bit of everything. It s a combination of I think the retailers Now again, mass works a little bit different from the independents. The mass dealers finish the year with lower inventories than normal. Many years they buy a lot in Q4 and have high inventories going into the beginning of the year. I think this has been the opposite where the inventories actually weren t that high. So we re getting good flow through on our mass side. On the independent channel, there was a lot of deals going on and a lot of people looking to make buy the end of the 2013 models. I think now they re gearing up for We ve had a lot of success with some good products. And we re getting a fairly good demand. I mean, there s a couple of products like every year, some of the hot products we run out of already. We re getting some more in, so I m not going to say we re in stock on every model. But a combination of some like like Martin mentioned, we won an award for top bike in the U.K. last week, certainly spurring demand. So some new product. It s the stores getting more, I think, serious about stocking up and having the goods. And in many cases, they re getting demand. People are coming into the store, the 15

16 Dorel Industries Inc. Fourth IBDs, and they re actually buying already. So that s nice to see. So it s not just a pipeline fill, but it s an actual demand for the product, so that s what leads us to be confident. Leon Aghazarian Yeah. And then just to follow up a bit on that, so you expect the profitability also to be higher necessarily. I mean, because if we look at the quarter itself, I mean the sales in the Rec space weren t I mean they were pretty strong, yet the operating profit was still negative. So I mean that s fair to assume that there was a lot of discounting that occurred to kind of get rid of that inventory. There were a lot of discounting. The mix was not right. We were still selling a lot of older models last year, which, you know, obviously you sell them, they re gone. We re not 100 per cent gone but if you know what I mean, it s now we re selling the 2014 models, which carry full margins. So exactly, we re expecting the gross margin to go up quite a bit. Leon Aghazarian Okay. And one last one for me would be regarding the inventory again, I mean, you mentioned it a couple of times now. Just to clarify: Caloi represented how much of the increase, 55 or 65 per cent? Fifty-five. 16

17 Dorel Industries Inc. Fourth Leon Aghazarian Okay. So what is your optimal comfort level now, assuming no further acquisitions right now for inventory? I m going to assume that we re at a level now. I mean, there is an opportunity to take out probably you know, ideally $25 to $40 million perhaps. I mean, I know in some areas, in Home Furnishing they re working on bringing it down a little bit, but as the online business increases we do a lot of drop-shipping, and we need to carry a little bit more to do that. So it s in this range. It s not a lot different, but I think there might be some room to bring it down. Leon Aghazarian Thank you. Operator Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Please go ahead. Stephen MacLeod Analyst, BMO Capital Markets Thank you. Good afternoon. Just wondering if you could just give some more clarity on the top line for the Recreational and Leisure segment? How much of that contribution was from Caloi? 17

18 Dorel Industries Inc. Fourth Yeah, again, we re not at this point breaking it down. I mean, you know, we don t generally breakdown the pieces. Stephen MacLeod Okay. Got it. Caloi was definitely profitable during the quarter. I mean, I think it had a very good year. We didn t record all the profit. I think I mentioned the last quarter that we had a number of how much was it, about $2 million that was held for the purchase price? Unidentified Female Speaker (off microphone) Yeah. About $2 million of profit was recorded as a reduction of goodwill in the quarter because of the purchase price accounting. That would... next year if we we would get credit for that, so... But overall it was still quite profitable. Stephen MacLeod Okay. And on the top line was it materially different than sort of what your expectations were when you bought the business? 18

19 Dorel Industries Inc. Fourth Not at all. No, we re very pleased. We re pleased with, so far, even in the first quarter. Now the first quarter is not is their weakest quarter by far because it s the end of summer in Brazil, as well as Christmas just passes. So it s kind of two negatives. So it is definitely the weakest. But we saw some strong demand in the end of January. The weather s not nice in Brazil. Kind of got a little bit warmer and demand picked up again. So overall we re I d say we re very pleased so far with what we have. Stephen MacLeod Okay. And then in the just turning to the Home Furnishings segment, you mentioned that there was some I understood them to be kind of one-time items that drove the year-over-year variation in EBIT. But was there anything else that was going on in the operating profit line considering gross profit was up 3 per cent and operating profit was down 30? That s pretty much it. I mean, you know, we there is a bit of, I guess, sales mix. But really it is some of these charges that we were able that we didn t have last year for various reasons. Stephen MacLeod Okay. That s great. I ll get back in queue. Thank you. 19

20 Dorel Industries Inc. Fourth Operator Your next question comes from the line of Dave King with Roth Capital Partners. Please go ahead. Joe Bess Analyst, Roth Capital Partners Good morning. This is Joe Bess for Dave. In terms of the Juvenile business in the U.S. and Europe, it appears that birth rates have been stabilizing. Are you seeing any signs of improvement at this point in time? In birth rates or in our business? Joe Bess In your business. In our business, we re seeing it s pretty stable so far. We ve got some work to do, particularly in the U.S., to improve our business, which we re in the middle of now. We kind of launched it last year. The good from our point of view, our sales are down, our profitability in the U.S. is actually fairly stable. And again, we ve done that through cost reductions and in increased margins where we can. But we need to focus on products that will pick up the top line again. Europe is a little less internal. I think it s still there s still a lot of countries there that are struggling. We are seeing Europe pick up a little bit, and certainly the Euro currency is going to help 20

21 Dorel Industries Inc. Fourth us. I mean, it s at a nice level. So that s a positive news. But again, Europe as a whole is still it s challenged in certain areas, in certain markets where we re finding it difficult, not from a competitive standpoint, just people not spending money. Joe Bess Okay. And then I believe there s a large... you have a large supplier in China in the Juvenile business. The name s slipping my mind right now, but I believe they recently bought a brand and are vertically integrating their model. Can you talk about how this impacts Dorel moving forward? Well, I mean in Europe they ve that company has been a competitor of ours. The company, Goodbaby, that you re referring to, they sell we buy strollers from them they sell strollers to a lot of our competitors. They are now going to be vertically integrated. They re going to have the costs of actually managing a distribution business, as well as a marketing business. So it s something we re watching, but initially, for this year, we re not overly concerned, but it is something that we re watching. Joe Bess Okay, great. Thank you. Operator Your next question comes from the line of Mark Petrie with CIBC. Please go ahead. 21

22 Dorel Industries Inc. Fourth Mark Petrie Analyst, CIBC Yeah, good afternoon. I just wanted to follow up on the European Juvenile business, and wondering if you can just comment a little bit about the structure of the market there as it relates to independent specialty shops versus hyper markets, how you see that market continuing to evolve, and how Dorel might reposition its business or tweak its business, given the shift in dynamics? That s a good question. Here s just again an interesting story. When we started in Europe in 1994 we came over from America, Canada and looked at the marketplace, and Walmart had just bought a German company, and we were sure that the future of Europe was going to be mass market, you know, the Walmarts, the Carrefours, and we kind of pushed the business towards that a little bit, but we got a lot of pushback from our people in Europe saying it s not going to happen. And at the end of the day they were right, and the mass market, although picked up a little bit, didn t really do very much. If we fast forward to about 08 or 09, again, the European crisis and North American crisis started. We again anticipated more shoppers would go to places like Carrefour and the mass market. And again we were wrong. What happened was the independents and the chains, what they did was they brought down the price point. They started carrying lower price points in their shops. And that s how they handled sort of the pricing pressure. 22

23 Dorel Industries Inc. Fourth So we still don t see a large increase at the mass level. What we do see, however, if the marketplace is changing it s going to be changing along the lines of online retailers. So really the dynamics that we re seeing, if anything... any major change is happening in Europe it s definitely on the online retailers, and we re definitely getting our act up to speed on dealing with people like that. So we re ready for those customers. Mark Petrie Okay, that s helpful. And in North America can you just comment about on the business and strategy of bringing some of the higher-end premium European brands into that market, how that s going? Yeah, that s actually I mean, that is a highlight, I guess, of the U.S. We re actually growing in that market. Our Quinny brand, our Maxi Cosi brand is becoming more and more popular in the higher end independent channel, some online channels. We re making actually quite a bit of progress there and are hopeful. So that would be kind of the shining star I guess of our U.S. operation right now. Mark Petrie And in the mass business for Juvenile, are you through the process of cutting less profitable SKUs or do you think there s more to go there? 23

24 Dorel Industries Inc. Fourth Yeah. But I think it always happens. I mean, I think we re always looking at that. We re looking at I think the focus is more to kind of upgrade the value proposition on the product, and hopefully be able to improve margins by improving the product itself without making a radical price change. I mean, you can t take an item that s $59 at retail and say move it to $79 or $89 and expect the same results in sales. But you might be able to get that $5 or $10 jump by giving a product that has more value to it than the old one did. And then making everyone, both the consumer and the retailer and us happier. That s kind of the strategy we have going forward. Mark Petrie Okay. But in terms of the sort of structural shift in gross margins in that business because of a focus on higher margin product, that s played out effectively, and this is sort of your ongoing strategy. Yeah. I don t think you re going to see a material change because of in gross margin. I think I don t think gross margin in the U.S. is the problem right now. We ve actually improved that over the last little while. We need to now increase the top line to get it. Mark Petrie Understood. Thanks a lot. 24