final transcript - dorel industries... · final transcript may 8, 2014 – 11:00 a.m. e.t. dorel...

FINAL TRANSCRIPT

Dorel Industries

First Quarter Results

Event Date/Time: May 8, 2014 - 1:00 p.m. E.T.

Length: 46 minutes

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.

Dorel Industries First Quarter Results

"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript is error-free. CNW Group will not be

responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or liabilities which may arise out of or result from any use made of this transcript or

any error contained therein."

« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut

être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce

texte ou toute erreur qu’il contiendrait. »

2

CORPORATE PARTICIPANTS

Martin Schwartz

Dorel Industries – President and Chief Executive Officer

Jeffrey Schwartz

Dorel Industries – Chief Financial Officer

CONFERENCE CALL PARTICIPANTS

Derek Lessard

TD Securities – Analyst

Anthony Zicha

Scotiabank – Analyst

Stephen MacLeod

BMO Capital Markets – Analyst

Sabahat Khan

RBC Capital Markets – Analyst

Dave King

Roth Capital – Analyst

Frederic Tremblay

National Bank – Analyst

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








3

PRESENTATION

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries’

First 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 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 call is being recorded on Thursday, May 8th, 2014.

I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead, sir.

Martin Schwartz – President and Chief Executive Officer, Dorel Industries

Thank you. Good afternoon. On behalf of Jeffrey Schwartz and Frank Rana, welcome to Dorel’s

First Quarter 2014 conference call. We will be pleased to take your questions following our initial

comments and as usual, all numbers mentioned are in US dollars.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








4

After a tough 2013, we are very pleased that the efforts at all of our businesses have brought

improvement. There was a dramatic improvement in our bicycle business, as sales rebounded at both

Cannondale Sports Group, or CSG, and Pacific Cycle. Operating profit in the segment was up 71 percent

over last year’s first quarter, higher than we had anticipated. We are also encouraged that, driven by

Dorel Juvenile USA, the Juvenile segment is now moving in the right direction. We did well despite

currency issues in a number of countries, which Jeffrey will discuss. Home Furnishings was up modestly

but sales through the internet and drop ship vendor channel is growing significantly year-over-year,

compensating for a drop in sales of brick-and-mortar stores.

Dorel Juvenile did better than anticipated in Q1. We had expected, as we stated in March, that

the quarter would be slightly below last year because of currency challenges in Canada, Australia and

Latin America. These markets did, indeed, suffer from FX issues but a solid performance from the US

division, where better margins and better cost containment more than offset some of the FX’s damage.

Juvenile continues to focus on accelerating its innovation process with our realignment of R&D to gain

efficiencies across all markets. Dorel’s China operations are also being addressed and we will continue to

bring the segment’s divisions closer together in all areas of operations, including new product

development and product sourcing.

Another priority has been to shift focus from a product-oriented organization to one that is

more customer-oriented. To that end, Dorel Juvenile USA has added the position of digital leader to

assist the marketing group and to better understand and get closer to the consumer. Tiny Love includes

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








5

a full quarter of results and this newest Juvenile business was profitable. The integration with the rest of

our segment is doing well.

Last month, we acquired the Infanti brand name for use in Brazil. We already owned the Infanti

name in Chile, Peru, Bolivia, Argentina, Columbia and most of Central America and the Caribbean

countries. Infanti is the best known juvenile brand in Latin America and this will allow for further

expansion in Brazil, a market we have been present in since 2009, and based on the reaction at a recent

trade show in San Paulo, where we featured the brand, we are excited about the prospects.

Senior management has promoted Peter Woods, the Recreation/Leisure Interim President, to

Group President and CEO. Previously, Peter was the segment’s CFO. Over the past four months, he has

distinguished himself by leading the Rec team through significant change which has resulted in a

profound turnaround in our bicycle business.

As I said on our March call, the Management team is fully committed, invigorated and is

confident about the year ahead. Now with the quarter complete, things continue to look positive. The

global bike market is improving, with some changes we have made and with strong sales growth at both

CSG and Pacific Cycle.

While April was again, not the best weather month in North America, spring did come early in

Europe and this has resulted in strong results abroad. As well, the UK division benefited from a new

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








6

partnership between Mongoose and Halpern’s, a national cycle retailer with 300 superstores. Prospects

for this relationship appear most encouraging.

CSG Japan also had a strong quarter as consumers flocked to purchase bikes, among other high

value categories, ahead of a Q2 VAT hike. The first quarter is traditionally the weakest at Caloi but as of

April 1st, Caloi’s Manaus factory started to produce Schwinn, GT, Mongoose and Cannondale products.

Optimism is high regarding the integration of these brands in the Brazil market.

In terms of new products, the latest from Cannondale includes a 2015 OverMountain lineup,

which highlights some of the world’s best riding technology. The new Trigger and Jekyll have been

developed for uncompromising mountain bikers, ranging from the weekend warriors to the hyper-

competitive enduro racers.

In Home Furnishings, internet and drop ship vendor sales did extremely well, making up for a

sales decrease at brick-and-mortar. While a larger part of the online sales originates in support of

traditional retailers, sales to internet-only accounts increased significantly in Q1. Dorel Home Products

and Costco Home and Office both performed well, with higher revenue and sales of higher value items.

Jeffrey will now provide a more detailed financial perspective.

Jeffrey Schwartz – Chief Financial Officer, Dorel Industries

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








7

Thank you, Martin. Overall for the first quarter, revenue increased by 9 percent to $647.7

million compared to $594.2 million a year ago. Organically, revenue increased about 5 percent after

removing the impact of foreign exchange rates and new business acquisitions. Pre-tax earnings

increased by 20.7 percent to $29.8 million from $24.7 million last year. Net income was $24.8 million, an

increase of 11 percent from $22.3 million recorded in 2013. On a diluted basis, the fully diluted basis,

that’s $0.77 for the first quarter compared to $0.70 last year.

The Juvenile segment reported revenue increase by 5.5 percent. After removing the effects of

the Tiny Love acquisition and exchange rates, organic revenue increased by about 3 percent. Operating

profits for the period was $19.6 million, an increase of $9.2 million from last year and includes the full

quarter results of Tiny Love, which was acquired in January of 2014. Dorel Juvenile USA was the main

driver of improvement in operating profit due to the slightly improved gross margins and costs that

were well contained. This improvement was partly offset by a general weakness in foreign currency

exchange rates versus the US dollar, which had a negative impact on our operating profit, particularly in

Canada, Australia and Latin America.

At Dorel Juvenile Europe, the euro in France to pound, held steady against US dollars and the

currency was not a major driver of the year-over-year variations in operating profit.

The segment’s gross profit decreased by 80 basis points to 28.4 percent compared to 29.2

percent, primarily as a result of foreign currency exchange rate pressures in Canada, Australia and Latin

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








8

America. Generally (phon) expenses increased by $1.5 million and general and administrative expenses

decreased by $2.8 million compared with the previous year. The increase in selling expenses is due

mainly to the addition of Tiny Love, which represents more than two thirds of the increase, and the

remaining increase is due to marketing expense in Europe ahead of the second quarter product launches

and increased costs associated with a number of retail locations in both Chile and Peru in the first part

of 2013.

Overall, we’re pleased with the progress despite the exchange rate pressures. We have started to

adjust some pricing to the new exchange rates in selected markets, so we anticipate seeing an increase

in profitability in those markets as the year progresses.

In Recreational and Leisure, first quarter 2014 revenue increased 18.1 percent to $240.3 million

compared to last year’s $203.5 million. Organic revenue increased by 8 percent after removing the

effects of Caloi and the excluding of any foreign exchange impact. Overseas markets, particularly

Europe, had started out very strongly. That’s moderated by the US, where we’ve gotten off to a softer

start. However, compared to last year, even the North American market is up slightly but we’re still not

at the level that we were at in 2012 in North America.

Adjusted operating profit, excluding restructuring costs, increased 75.7 percent over the prior

year to $16.8 million compared to $9.5 million. Adjusted gross profit, again excluding restructuring

costs, was 25.2 percent in both this year and last year. This was driven by a favourable product mix in

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








9

the IBD channel as the majority of the quarter’s shipments for the model—for model year 2014 at full

margin and was tempered slightly by the mass market channel, where the gross profit was marginally

below last year. Excluding the acquisition of Caloi, selling expenses decreased 11.7 percent and general

and administrative expenses decreased 2.7 percent, all part of our program to get a little bit leaner and

moving forward into the future.

In the first quarter, we recorded $0.5 million in pre-tax restructuring costs in the segment, of

which $200,000 is in the cost of goods sold and the balance in expenses. So again, we’re very pleased

with the progress we made here. There’s still a lot of work to do in this segment. We’re not where we

want to be yet, but we’re happy with the numbers given the continued poor weather in North America

and the fact that Caloi actually loses money in the first quarter and probably the first half this year

before, you know, summer and the holiday seasons start in the second half of the year in Brazil. So

overall we’re, like I said, we’re quite pleased.

Home Furnishing, revenues increased 2 percent from $135.4 million last year to $138.1 million

this year. The internet—the segment’s internet and drop ship program drove online sales compared to

the previous year, and that’s starting to represent a significant portion of the segment’s sales. Those

increases were partly offset by decreases in the regular brick-and-mortar stores. Operating profit was

$8.1 million compared to $7.9 million last year, an increase of just 1.5 percent, and gross profit declined

from 13.4 percent last year to 13.1 percent this year; slightly higher distribution and operation costs in

our RTA factories.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








10

A few other items before I pass it back to Martin. Finance expenses increased significantly from

4.8—from $4.5 million to $9.3 million. This is primarily the result of the Caloi acquisition. Included in the

finance expenses was $2.3 million related to the interest recorded on the Company’s put option liability

related to certain of its business acquisitions. Last year in this first quarter, it was only $600,000, so

that’s a big portion of that. The tax rate was 16.8 percent this year compared to 9.6 percent. The main

reason, as it always is with Dorel, is the changes in the jurisdictions in which the income was recorded,

as well as an increase in the fair value adjustments related to the put option liability, which are non-

deductible for tax purposes. We are still expecting our tax assessment (phon) for this year to be

between 15 percent and 20 percent.

On our balance sheets compared to last year, aside from the increases in assets and liability as

part of the Tiny Love acquisition, our receivables inventory and payables did increase but are consistent

with prior year and are in line with our internal expectations.

With that, I’ll pass it back to Martin.


Thank you. Well as I said, we’re pleased with the progress to date as all of our segments

exceeded prior year earnings. Recreation/Leisure has been a good start to the year, particularly in

Europe. As we look to the full year, we believe the rebound will continue, not just in Europe but also

North America in both the IBD and mass channels. In the second half, we are also going to see the full

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








11

benefit of our Caloi acquisition and we remain confident about our return to much higher levels of

profitability.

As for Juvenile, we had announced an expected earnings growth of at least 10 percent for 2014.

After the first quarter, we remain confident of this extra (inaudible). Currency pressures in most markets

have eased somewhat and we are rolling out new products over the course of the year to drive earnings

improvement.

In Home Furnishings, we still expect moderate growth in sales and earnings for the year but due

to timing, the second quarter will likely be below prior year as the second—of the second quarter of

2013 was particularly strong.

I’ll now ask the Operator to open the lines for your questions. Again, please limit your first round

questions to two. Operator?

Q & A

Operator

Thank you. Ladies and gentlemen, we will conduct a question and answer session. If you have a

question, please press the star, followed by the number one, on your touchtone phone. You will hear a

tone acknowledging your request. Your questions will be polled in the order they are received. Please

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








12

ensure that you lift 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, TD Securities. Please go ahead.

Derek Lessard – Analyst, TD Securities

Yes, thanks, guys, and congratulations on a good quarter. Last time we spoke, you did give some

guidance for Recreational profits which, in hindsight, turned out to be somewhat conservative. Guess

my question is, is what changed in the last months and how much of that upside in your guidance came

from better conditions in Europe? Just a follow-up to that is, are you able to quantify the boost from

CSG Japan?


Yes, okay. Good question. When you look—when you mean—it’s kind of obvious when you

think about the bike business. The bulk of the first quarter shipping is done in March. You know, at the

time, I felt—you know, we don’t normally give guidance but we felt given the poor fourth quarter and

our strong conviction that we’re going to turn it around in the first quarter, we gave sort of the

minimum number that we thought we would hit, so you know, 20, 25 percent. That was the absolute

minimum at the time. That even considered if March turned out to be a bad month, we were going to

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








13

hit that number. So obviously, March didn’t turn out to be a bad month. It turned out to be a good

month and that’s why we were significantly above the plan.

So, you know, we do have some visibility, but again, weather—you know, going forward,

weather’s still, I guess, an issue, maybe not so much in Europe. Europe seems to be normal. But anyone

sitting around, particularly up in Canada, we know that spring really hasn’t started from a biker’s

standpoint yet. But nevertheless, we still remain optimistic. I believe the market is—hasn’t bought into

the levels of inventory it bought into last year, so we haven’t seen very much discounting yet, and

hopefully we won’t see it for a while. You know, that’s sort of—by this time last year, we—there was

heavy discounting going on as people had bought significant inventory. So, you know, we remain

optimistic for the rest of this year.


Okay and just one question before I re-queue. You exhibited some good cost control in Rec, as

well. You held expenses flat year-over-year. Maybe we can just talk about how you managed that and

what we should expect going forward.


Well, I think we just—we’re more focused. I mean, we did start that last year. If you remember,

we didn’t quite start it in the first quarter. We announced the restructuring, I believe it was Q2, and

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








14

we’ve just been focused. We’re spending where we need to spend, and we’re watching what we’re

doing and, you know, up until the first quarter of last year, we were flying down in—on the bike side and

I guess spending got a little bit out of control. So, watching what we’re doing; I think we’re spending

much better now. We’re getting more bang for our buck, as they say and then that’s part of the plan to

go forward, is just to make sure we don’t overspend again.


Okay. Thanks.

Operator

Your next question comes from the line of Anthony Zicha, Scotiabank. Please go ahead.

Anthony Zicha – Analyst, Scotiabank

Yes, hello. Good afternoon, gentlemen. Martin, can you give us some colour on what were the

main drivers in the improvement Juvenile USA?


Yes, I’ll (cross talking).


We’ll look into that.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








15


Again, some cost control. We’ve gotten, you know, some of sales. Our margins are a little bit

better on the product. We’ve been walking away a little bit from lower margin products, and I think

we’ve got a little bit of a healthier margin. We did – I think it’s on everyone’s mind –we did, I think,

benefit a little bit from problems some of our competitors had in the car seat area with recalls, so

there’s no question about that.

The other question I think other people have on their mind is how sustainable is that? We hope

it’s sustainable. I mean, we’ve got product out in the marketplace, demand is strong but you know

what? I—we won’t predict anything. You know, I don’t believe that—I don’t believe any of our

competitors lost listings because of their problems, so it’s just a matter of sell through and inventory

availability of product. So, that’s a very difficult thing to predict.

So, a bunch of things helped us. I mean, we are looking to have a better year in the US this year

over last year. We got off to a good start. We have—our budget is being held on to by—you know that

we’re not—the budget in the US right now is being held. It’s not being raised or lowered and that’s

good, and it’s good to have a good quarter behind us.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








16

Were there any drivers of new product innovation that was introduced that would have

stimulated sales, or is that yet to come?


I mean, there was some introduced in Q4 so, you know, we have some successful product. I

think, yes, to come is probably more Q4. You know, we have some introduction in Q4, and we have a lot

of stuff scheduled for 2015.


Shipping.


You believe that you could significantly outperform your 10 percent target this year (cross

talking)?


We said we’re looking at 10 percent.


Mm-hmm. Yes. Yes, that’s right, Martin.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








17


We didn’t say we’d outperform that.


No, no, but could you?


You know what? I mean, we’re pleased with the Juvenile results. They’re not outstanding. We’ve

got a lot of pressure on exchange rates. I mean, our biggest growth area is absolutely South America and

it continued to grow the top line in local currency pretty strongly in the first quarter. But you know, with

the weakness in South American currencies, it really took a bit of the profitability. So if I knew exactly

where the currencies would end up, it’d be easier to predict. So you know, hopefully—like I said, we are

raising some prices down there. Hopefully, the currency comes back a little bit and it’ll be a lot easier to

achieve some of our numbers. So, you know, it was a negative quarter earnings-wise in South America.


Mm-hmm. My last question was reference to the Recreational side and the bikes. Could you give

us a geographic split, like where—if there was stronger performance in Europe vis-à-vis North America?


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








18

Yes. I mean, we said Europe was definitely—they had an early spring. We had a great quarter in

Europe and the UK. I guess a lot of places around the world, I mean, are good. The US is good. I don’t

want to make it sound like it’s not; it’s getting better, had a good start but it could have been a lot

better if the weather was a lot better. On the mass side, however, the weather doesn’t seem to have

hurt as much; we’ve had a nice, call it a bounce-back in POS (phon) in the mass side compared to last

year.


Okay. What would be the weight factor for, let’s say, Europe versus North America?


I don’t have that. I don’t—that’s not something we give out.


Yes. Okay. Well, thank you, gentlemen.


Yes.

Operator

Your next question comes from Stephen MacLeod, BMO Capital Markets. Please go ahead.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








19

Stephen MacLeod – Analyst, BMO Capital Markets

Thank you, good afternoon. I just wanted to ask a couple of questions about the

Recreational/Leisure outlook. With respect to your 2014 expectations, do you expect, you know, aside

from a favourable top line environment, do you expect most of the improvement largely to come from

lower cost as opposed to improved gross margin?


Well, we’re focused on all three. I mean, last year’s gross margin hurt us because of discounting,

right? That was the biggest reason that we dropped our gross margin, so with what we anticipate to be

less discounting, I’m expecting to see better gross margins. So, yes, I think we can—I mean, you know,

it’s—there’s three elements. There’s—can we get a rise in sales, can we get an improved gross margin

and can we keep our costs down—our expenses down? If we can do all three, we’re going to see a big

improvement.


Right. That’s (cross talking).


That’s what we’re focused on.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








20


That sort of underlies your guidance for the year, or your expectations for the year I suppose

(phon)?


Yes, I do. I mean, you know, again, it’s—I don’t know when North American weather will get

better and at some point, discounting kicks in; it does every year. Last year, it started, I think, at the end

of April and I would say, as of now, we certainly haven’t started discounting yet. We don’t see a lot of it

in the marketplace, so hopefully, we can put it off until sort of the mid-part of the year, which is the

normal part.

So, that’s going to affect the gross margins and then I think we’ve got our expenses well under

control and I think we’re—we’ve got some great new products, and I think from the top line, we’ll

continue to increase the top line. So, you know, I—we’re not fixed – fixed is a big word – but we’re

definitely on our way. I feel good. I feel good about our Management changes that we’ve made there

and the response time with the new Management in getting things done is great, so we’re feeling good

about the whole segment.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








21

Okay, great. Are you able to quantify the impact of FX on your three—or, I guess, you know,

mostly your two segments, Rec and Juvenile?


Not really. I don’t have the number here because it’s—it certainly—there’s so many currencies

involved.


Mm-hmm.


It’s not—I mean, again, it’s somewhat regional. You know, South America obviously, on all

segments, was hurt. Europe was probably helped a little bit with the euro stronger, so—but I don’t have

a net number.


Mm-hmm, okay. Are you able to say what the contribution would have been on the top line for

Caloi and Tiny Love in the quarter?


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








22

On the top line, again, we don’t really give it out yet. I mean, the top line—yes, it’s—yes, I don’t

think we would. You know, at this point, we’re not giving it out. It’s not a material number. I mean, it’s

certainly the weakest quarter for Caloi on the top line and represents the smallest portion of their

number. But no, I don’t—at this point, we’re not going to give (inaudible).


Okay. But they’re both performing as expected on the top line?


Yes. I mean, that’s the key thing. You know what? Caloi cost us—there’s no question, when you

look at their operational loss, plus all the interest and all of the other costs related to Caloi, Caloi cost us

a lot of money in the first quarter. That’s the bad news. The good news is we – other than an FX charge

on—that we obviously don’t expect – the rest of it was all expected and all part of our plan and we’re

still feeling good because their business is really second half because both summer and Christmas arrive

at the same time in Brazil.


Mm-hmm.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








23

That’s the—that’s when bikes are sold. So, you know, most of the year, we wait up for that

fourth quarter, which is huge.


Mm-hmm.


So, kind of like a lot of maybe retail businesses, but you know. So yes, without Caloi, our EPS

would have been much higher this year.


Okay.


But again, expected.


Right.


Q1, correct. Q1 would have been much higher.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








24


Okay, great. Okay, yes, thank you.


Right.

Operator

Your next question comes from the Sabahat Khan, RBC Capital Markets. Please go ahead.

Sabahat Khan – Analyst, RBC Capital Markets

Thank you. Just wanted to go back to the inventory comment from a little bit earlier. Are you

still—you noted it at Q4 that you expected a little bit of restocking in the Recreational segment. Do you

think the inventories are back in line, or do you still expect some of that?


No, I think they’re back in line. I think our shipping is good. They were—you’re correct. They

were lighter than they had been in the past and I think that’s something that helps us as they restocked

through the first quarter. But now, this is selling season so nobody’s building inventories anymore.

They’re just selling what’s in and, you know, whenever we—gets shipped in, they get sold, so—

particularly on the mass side, which is where the big swings are in inventory. So, I think inventories are

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








25

good. You know, we can have – at this time of year in the first quarter – we can have significant amount

of bikes on the water just waiting to go directly into our customers’ warehouses, and yet, they’ll sit on

our inventory books. So, they’re—you know, it’s a very dynamic time of year for inventory.


Okay, thank you. On the Juvenile side, can you maybe update us on how the retail stores are

doing and what kind of outlook for those stores is? Do you expect to grow them, or…?


Yes, I mean they’re—I think same-store sales were up, if I remember now. Yes, they were up.

Again, it’s the season after Christmas so this is not the top part of the year, but I think we’re adding a

smaller amount of stores this year given kind of the economic situation in the Chile and Peru is a little

slower. So, we’re slowing down as well opening new stores but, overall, the same-store sales are up and,

you know, we’re very happy with that business.


All right, thank you. That’s it for me.

Operator

Your next question comes from the line of Dave King, Roth Capital. Please go ahead.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








26

Dave King – Analyst, Roth Capital

Thanks. Good afternoon, guys. I guess first off on the Juvenile business for Dorel USA, it looks

like you guys had pretty good progress on the gross margin and expense front this quarter. Now, I guess

big picture, what inning do you guys think you’re in there in terms of, you know, margin and expense

improvement? What’s the ability to get the margins—or, I guess, that margin differential that I think’s

pretty significant between the US and Europe, what’s the opportunity there in terms of ability to

capture some of that differential, and then the timing on that?

Then as we think kind of about the year overall for the Juvenile business, you know, that 10

percent earnings growth outlook – 10 percent plus earnings growth outlook – how much of that do you

think is going to be top line driven versus expense, gross margin, et cetera? Thanks.


Yes, it’s a good question. A few parts to it. I think I’ll—let’s address the margin difference first

between the US and Europe. I believe there’s upside in the US, but I don’t think it’s possible to get to the

European margin. That’s just the nature of the marketplace, which is that the US is dominated by mass

merchants in the marketplace and you’re dealing with a whole different sort of pricing structure there,

where it’s far more independent-focused in Europe.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








27

Marketing costs (phon).


You know, and, therefore—yes, but then, you know, obviously the marketing costs a lot more,

the brand is better in Europe. I mean, there’s a whole—it’s just a different business. But having said that,

we’re still underperforming in the US, there’s no question. Where we – what inning – I mean, that’s

subjective. I’ll tell you, we’ve—we have quite a new team, I would think, in the United States now. A lot

of new positions have been filled in the last 12 months, particularly in the sales, marketing, you know,

president role. Those are all fairly newly-filled positions. We’re doing things differently. We’re

approaching a lot of things differently. So, from a US standpoint, I still think it’s early. I think we’re—but

that’s maybe not a good answer but, you know, to me it’s, I don’t know, Martin, I see it third/fourth

innings, I would think.


(Inaudible).


There’s still a lot of work to do. We got the people in place now and we’re starting to see some

progress, but there’s a lot of work to do. So, I don’t think it’s—I think it’s more of a 2015 where we’ll see

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








28

a big—hopefully, see the change and this year, we’ll just continue to work towards getting next year

significantly better.


Yes, and then in terms of the overall then, how that ties into the outlook for that 10 percent

earnings growth, is it, you know, more top line-driven expense (cross talking)…


I think it’s more top line-driven, yes. You know, with current—I mean, again, if we had—if I knew

the currencies would be, let’s say stable in South America, then we’re going to get a lot from there. You

know, top line, that’s still double digit growth there, I mean, in virtually all the countries in Europe – in

South America, sorry – and yes, a lot of it’s still going to be top line. I mean, there’s some margin

opportunity here and there but mostly top line.


That helps and then turning to the Rec business, sounds like you had a pretty good March then.

You know, did that continue – or at least internationally – so did that then continue in Europe through

April and into May so far? Then as we think about the US business, or North America business, is that

primarily – I guess the expectation you guys have for that – is that primarily due to just the fact that

there’s less discounting, or are you seeing any incremental signs of improvement there yet?

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








29


Well, it’s better than last year, right? I mean, (cross talking), so…


Right.


But the discounting is what really killed us, right, and hurt our margins. So, we’re optimistic, I

mean, we’re feeling—I’d love to see a couple of wonderful sunny weekends in the northeast or midwest

and that might change our thoughts, but we’re still optimistic. I mean, we also had some very easy

comps versus last year, so it’s not going to be hard to beat last year, that’s for sure, and we’re going do

that for sure. But we just got more confidence.

The mass business seems to be much more solid than last year. The international business in

most markets are much more solid, you know, and I would think only international market that’s down

is probably our Russian business, which has actually grown – our business in Russia has actually grown in

the last few years – and that’s the only country I’m aware of that’s sort of down. Other than that,

everything’s good and the US isn’t bad. It’s up but it should be up more and same thing with Canada; it

should be up more. Hopefully, you know, we’ll get it.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








30

Great. Nice quarter. Thanks.


Thank you.

Operator

Ladies and gentlemen, if there are any additional questions at this time, please press the star,

followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before

pressing the keys.

Your next question comes from the line of Derek Lessard, TD Securities. Please go ahead.


You guys mentioned that you started upgrading to your prices in Juvenile. Have you seen any

pushback or declines in volume on these increases?


Keep in mind, that’s selected markets, right? So, we’re talking about South America, Australia, a

little bit in Canada. I mean, again, those markets – and we’re just putting them through – so no, it’s a bit

early. Again, all the product that goes into those markets have been affected by currency, so it’ll—you

know, for the most part, it’ll stick.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








31


Okay. Maybe if you could just comment on your decision to promote within; to promote Peter

and what are some good things he brings to the division in terms of his background and expertise?


Peter’s been with us now for just over 18 months; close to two years. He was very involved in

the—of course, the finance and a lot of the operations of the CSG group and of all, you know, the rest of

the Rec group, and when we made a change in December, we asked him to be—to take over as Interim

President. We gave him the opportunity to prove himself. I think the first quarter definitely shows it. He

has got a very loyal following by his Management team and even the people below that, so everybody

has worked together as a unit to make the improvement.

He’s—you know, and even though we’ve had a good quarter and we’re looking for a very good

year, there’s still a lot of areas that need improvement. Peter has identified them to us. He’s sat down

with us. We’ve decided how, you know, and when we’re going to make the changes and we felt very

confident he’s the guy who could do it. He knows the business and I mean that’s basic—the reason. You

know, I think we’re very happy with the decision we made.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








32

Okay. Just maybe, just a couple of housekeeping questions. There was a jump in R&D expense in

Juvenile. I think it was up $1.5 million. Maybe just add some colour to that and, again, on your interest

expense going forward, maybe what we can expect.


The R&D, I don’t have anything that I can think of. I mean, you got to remember, R&D expense

sometimes is related, given that we amortize some of our successful—or the projects that get into the

marketplace, occasionally, costs that are related to products that we don’t put into the marketplace to

get expensed. So, it could just be a timing issue. It doesn’t mean—there’s not a lot to read from it, let

me put it that way, okay?


Okay, and interest expense?


Interest is probably correct, approximately, for the year. I mean, you know, it’ll go—I think it’s…


It’s probably proportional.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








33

Yes. Yes, it’s probably a correct number, give or take a little bit.


Thanks, guys.

Operator

Your next question comes from Frederic Tremblay, National Bank. Please go ahead.

Frederic Tremblay – Analyst, National Bank

Yes, thank you. I was just wondering if you could comment on Brazil. You just announced, like a

new acquisition there. If you could maybe comment on the general trends that you’re seeing there that

have attracted you to that market and, I guess, sort of your outlook for bikes and Juvenile in that

country?


Yes, that’s actually a good question because Brazil is very, very dynamic. We’re very interested

in Brazil at this point, and we’re a very big player in Brazil. We’re the largest bicycle player and we are

probably the second/third largest juvenile player in the country. Yes, it’s the fourth largest population in

the world. It’s, you know, like I said, very dynamic. It’s growing. It’s going through a little bit of a crisis

right now, but as the Brazilians tell us, that’s what being a Brazilian is; living in a crisis. So, what we did is

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








34

we bought – for less than $10 million – we bought the brand name Infanti. It’s going to focus us on the

middle price point area that we didn’t have a lot of product in. We had high price point product, we had

a lot of low price point product, so this was an area that we weren’t addressing. So, we’re very excited

about that. We think it’s going to give us a lot of growth potential.

As far as, you know again, we like the long-term vision of the country. From a short-term vision,

you know, there’s certainly challenges and especially real short-term, in the next few months prior to

the World Cup, nobody’s quite sure what’s going to happen there. There’s a lot of tension. Some cities

are actually declaring holidays on days where the World Cup is being played in their city, which means

it’s (inaudible) in a factory that we have and the factory closes down, for a few times that month that we

weren’t expecting. So, I don’t believe it’s going to—it’s not going to help us. It’s probably going to hurt

us a little bit in Q2. Q2’s not our most important quarter, but it’s still going to be a bit of—going to put a

little bit of pressure on us, specifically on the bike side, I think.

The other negative that we’re seeing now because of the World Cup is if you go into any

sporting goods store, they’ve got a lot of, you know, soccer – or football for the non-North Americans –

gear. I mean, everywhere you go, you just see everything about the World Cup, so they’re buying less

bikes right now, but again, it’s not bike season so that’s part of—an issue. I don’t see any mid- to long-

term—after the World Cup, I think we’re going to be fine again in bikes and we’ll get back in it. We’ve

got a strong company with great people. So, we really do believe very heavily in the long-term prospects

for the country.

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








35


Okay, great. Then if you could comment maybe on your appetite for future acquisitions. Are you

seeing a lot of opportunities, and are you prepared to act on those?


For the right strategic one, I guess, Martin. I mean, we’re obviously—we’ve a lot of opportunity

on bikes today without doing an acquisition. There’s a lot of things we got to get right, a lot of things to

be fixed and if we do a better job, we can bring a lot of money to the bottom line. So, that’s kind of the

focus there.

On the Juvenile side, there’s a couple of things we’re working on. We can’t disclose them but,

you know, we’re more than likely to do something on the Juvenile side than anywhere else. But it’s not a

super high priority.


Okay. Thank you.

Operator

Your next question comes from the line of Anthony Zicha with Scotiabank. Your line is open.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








36

Yes, Jeffrey, can you confirm the purchase of Infanti brand? Bought it for about $10 million?


I said less than.


Oh less—okay, less than…


(Cross talking). Yes, we’re not disclosing the amount right now but it’s less than $10 million.


Okay. Could you give us some colour on the historical profitability and what kind of sales do they

generate?


I mean, (inaudible) again, that was their business, right? I don’t—we didn’t buy the business. It’s

a mid-price point brand. You know, we think it should give us probably average to above average gross

margins for that marketplace. Size-wise, I guess, you know, what do we think we can get to? Twenty-

five?

FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








37


Or more.


Yes, I would say—let’s say if we go three years down the road, you know, could we make it a

$30/$35 million brand? I think so. Maybe I’m a bit conservative there, I don’t know, but it’s a nice brand

and it’s already in the marketplace. It was—the guy was having financial troubles and he couldn’t ship

for about a year properly, so you know, it was sort of a little bit out of the marketplace, but the

reception we got at the last trade show was wonderful and people are excited to get the brand back in

the marketplace. It also opens us up to retailers, particularly smaller retailers that we weren’t in before

because we didn’t have the right product for that.


So, you have great optionality on that brand.


Yes, and it’s going to be nice. We’re just taking it in-house. You know, we’re not adding

overhead. It’s—so I think it’s going to be a nice piece for the business.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








38

We’re also going to be able to combine the design and the purchasing effort with our other

areas that are doing it fancy (phon) right now, such as Chile. So, they’ll be designing together, they’ll be

buying together, it’ll be more effective for everybody.


Excellent. Okay, well thank you.

Operator

Your next question comes from the line of Stephen MacLeod, BMO Capital Markets. Please go

ahead.


Thank you. I just wanted to follow up on your commentary around the interest expense. Jeffrey,

did I understand that the—did I understand you correctly, you mentioned that the proportion and

amount for the year is equivalent (phon) to the quarter, so is that kind of $9 million finance expense in

each quarters of the year?


Yes, in that ballpark, yes.


FINAL TRANSCRIPT

May 8, 2014 – 11:00 a.m. E.T.








39

Okay. Thank you.

Operator

Mr. Schwartz, there are no further questions at this time. Please continue.


Okay, thank you. Well, this concludes our call. I just want to remind all of you that our AGM is on

May 28th, 10:00 a.m. at the Windsor Ballroom on Peel Street here in Montreal and we hope to see you

there.

Thank you very much for joining us this afternoon.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating.

Please disconnect your lines.

final transcript - dorel industries... · final transcript may 8, 2014 – 11:00 a.m. e.t. dorel...

Documents