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01:13 Thank you. Good afternoon and thank you all for joining us for Dorel's third quarter earnings call for the period ended September 30.

On the line with me are Jeffrey Schwartz, CFO; and Frank Rana, VP of Finance. We will take your questions following our comments.

Again, all figures discussed are in U.S. dollars.

01:33 Major accomplishments during the quarter was the agreement reached to sell Dorel Sports. Acting on the feedback from our shareholders earlier this year, we embarked on a thorough review of strategic alternatives.

We are pleased that this transaction has accomplished our objective of unlocking shareholder value. We have been able to monetize Dorel Sports at a time when the demand for bicycles remains very strong.

01:58 Investor interest in Dorel has certainly picked up since the announcement. The main question being how the net proceeds of over seven hundred million will be used.

We are looking at various scenarios and as we have said, we will provide details once the deal closes, which is expected before the end of Q1 next year. 02:19 Our focus now is on Dorel Home and Dorel Juvenile.

The aim is to replicate the success achieved in our sports business, but there is work to do. To this end, last month, we announced initiatives to strengthen Dorel Home, which I will elaborate on shortly.

An unpleasant surprise last week was the judgment from the Luxembourg Administrative Court. Jeffrey will get into the details when he summarizes the financials.

02:47 Turning now to our segments, the main concern as with most industries is the continuing supply chain disruptions, which do not appear to be going away anytime soon. While demand for our products remain strong, and we have not lost market share, the situation has become overwhelming and it is difficult to predict when it will end.

03:09 At the outset, the concern was the high cost of containers. This is still the case, but the ramifications are now far more wide ranging with the snowball effect.

Now, it is difficult to even get containers. The loading process is slow.

Ships sitting offshore waiting to enter ports because of delays on unloading trucks are hard to find, and trucks are hard to find. And what's finally at the destination warehousing and handling for both us and our customers is more complicated and more expensive.

03:42 This is presenting challenges to meet the continuing consumer demand for Dorel products, but we are actively working on the solutions. Dorel Home has had a tough quarter due to the supply chain chaos, the continuing pandemic, and a series of related operational challenges.

COVID forced a shutdown of several of the segments large suppliers in Southeast Asia for several months, some of which have reopened or are in the process of opening. And COVID also closed important Chinese ports.

04:17 COVID related labor shortages at Dorel Homes U.S. Distribution centers compounded the problems resulting in additional detention and demurrage charges as we couldn't empty containers on time.

This all combined to cancel our delay shipments materially limiting product availability thus reducing Q3 sales, both online and in store. 04:42 Domestic reduction at our factory was also affected due to a lack of availability of board and hardware, which impacted manufacturing and factory throughput.

The situation is now improving. The segment increased the price of its products with continuing cost hikes, plus the lag time of implementation did not fully compensate for the situation.

05:07 The good news is that many of Dorel’s internal issues that is stopping turnaround times and congestion began to ease in September and continues to improve through October. Our Dorel Home has good inventory going into Q4 to meet the increasing demand.

05:25 To bolstered Dorel Homes growth prospects, we announced twenty nine million dollars in investments. Ten million is for new factory equipment at the segment's three factories that will bring back some production from Asia, allow for manufacturer of value-added innovative new products, and better serve our e-commerce partners with on-trend products made in North America.

05:50 New machinery at Dorel Home products in Montreal will permit the manufacturing of coil spring mattresses, previously imported from Asia. All equipment should be up and running in the first quarter of twenty twenty two.

06:05 Nineteen million dollar acquisition of Danish-based Notio Living, an e-commerce home furnishings firm provides an important advantage for further European expansion. The combination of Dorel Home’s strong portfolio of products and brands with Notio’s strong mainline Europe distribution capabilities, are expected to significantly augment Dorel Home’s European business.

06:32 Dorel remains fully committed to taking a disciplined approach to value creation as it sees significant upside in its Dorel Home business. At Dorel Juvenile, markets in North and South America all reported higher revenue.

Europe was the issue, as it was most negatively impacted by the supply chain problems, partially offsetting revenue increases gained elsewhere. 07:00 The destruction has caused a backlog of hundreds of containers in Asia, resulting in product shortages and out of stock conditions of certain key items.

While some of these conditions have started to ease in Europe, product shortages are expected through Q4. 07:17 While Dorel Sports had a solid quarter as consumer demand remains high, supply chain disruptions and a shortage of components impacted sales.

07:28 Turning to our outlook, the risks and rising costs associated with the supply chain disruptions that we referenced at the end of Q2 impacted our third quarter more than anticipated. Situation is not yet easing, and therefore our expectations for Q4 are now lower than previously projected.

07:47 Despite Dorel Home’s disappointing third quarter for the reasons outlined, we are currently in a favorable inventory position and experienced uptick in demand in both September and October. Q4 earnings from operations are expected to improve from the third quarter, but given the higher costs we are experiencing earnings from operations will not reach last levels.

08:13 Our gross margins will remain under pressure in the short term as we continue to implement strategic price increases to offset the higher costs. The challenges in Juvenile and Europe persist and well previously, we expected this to be a short-term issue is now a continuing reality.

Container backlog is being reduced, but it's taking time and is costing more. 08:37 In addition, passing on higher costs to our customers will only begin to materially impact our earnings early in twenty twenty two.

As such, Q4 gains in other markets are going to be offset by losses in Europe, and we now expect the quarter to be approximately breakeven. 08:56 The Dorel Sports now classified as a discontinued operation given its impending sale it continues to see strong demand, while navigating the same issues as our other segments.

The sale is on track for closure in the first quarter of twenty twenty two. I want to take this opportunity to thank the sports segment employees for their contributions to Dorel and for their ongoing support of the sale process.

09:25 I will now ask Jeffrey to review the numbers. Jeffrey?

09:34 Thank you, Martin. First of all, it's a little bit tricky this year with the numbers, we're going to be talking mostly about continuing operations for the third quarter, which includes the financial results of Dorel Home and Dorel Juvenile, as well as the existing corporate structure supporting these segments.

But keep in mind this continuing operation should not be interpreted as representing the future results of Dorel and Juvenile. 10:05 For example, the interest – most of the interest that we had in the quarter is put into continuing operations, but when we closed this deal, we would have significantly less debt outstanding and therefore, the interest rate will not be what you see today in continuing operation.

So, keep that in mind, it's not certainly the best use forecasting. 10:35 So, if we look at the numbers, Dorel’s – this will be for continuing operations, revenue was down ten point six million or two point four percent to four thirty seven million.

Organic revenue declined by approximately one point one percent after removing the variations of foreign exchange rate year over year and the impact on revenue of the sale of the Juvenile manufacturing facility in China. 11:02 The revenue and adjusted organic revenue declines were in Dorel Home, partially offset by revenue growth in Dorel Juvenile.

Dorel Home decrease in revenue is mainly explained by a small reduction in demand coming up of last year's record pandemic influence surge, but mostly supply chain issues in our direct import business, as well as congestion in the ports and our warehouses. 11:32 In Dorel Juvenile, all markets except for Europe had organic and adjusted organic revenue gains.

From a gross profit standpoint, we decreased three ninety basis points to seventeen percent from twenty point nine last year. The decline in the quarter was in both segments.

The decline in home was made up higher warehousing costs, increased ocean freight costs, higher input costs and some reduced sales volume, and Juvenile it's mostly a decrease due to higher input costs. And within that, it's principally freight and revenues in [indiscernible] production.

12:16 Selling expenses for the quarter increased three point one million dollars or about eleven percent. The increase in selling expenses is mainly explained by increased promotional and marketing activities and people costs.

Last year, we saw a large reduction in these areas due to cost containment measures implemented to mitigate the impact of the COVID-nineteen pandemic. 12:42 General and administrative expenses declined in the quarter by four point seven million or thirteen percent.

The overall decrease was mainly due to lower people costs in Europe because of the restructuring programs. 12:59 Finance expenses increased by seven point five million dollars to sixteen million dollars during the quarter, an increase of eight point five million dollars of that is mainly due to this judgment of the Luxembourg Administrative Court, and that's partially offset by a decrease of four hundred thousand in interest on long term debt, due to lower average interest for us.

13:25 Overall, because of the judgment of the court and the tax loss, our net loss was sixty eight million or two point zero nine dollars per diluted share compared with a net income of nine point three or zero point two eight dollars last year. 13:43 We look at the segments now, if we look at Home, Dorel’s third quarter revenue declined by twenty four million or about ten percent.

The decrease in the revenue is mainly explained by closures of Asian countries, such as Malaysia and Vietnam, which reduced our revenue from our direct import business. 14:05 These countries were closed – Malaysia for most of the quarter.

And I think Vietnam has only opened up in the last few weeks. And then the huge congestion of containers of both the ports, domestic ports and within our warehouses, which delayed us forgetting product that was demanded into the warehouse, so we would be able to ship it.

So, it affected our domestic shipping and it affected – the supply chain also affected our direct import business. 14:40 As well, we did see a slowing down of demand a little bit because of the huge demand that we had last year, but we are seeing a fairly decent demand now.

As Martin mentioned September, October were good months, and as we get through the supply chain congestion, that's also adding to our ability to increase our sales. 15:11 From a gross profit point of view, gross profit was only ten point six percent in the quarter, a decline of four seventy basis points.

Again, as I mentioned before, higher warehousing costs increased ocean freight costs, increased raw materials, increased overseas finished goods costs, and reduced volume. All negatively impacted us, and as well we did do a price increase to try and counter a lot of these increased costs, but they only took effect in the end of the quarter.

15:48 So, we expect to see some improvement in the fourth quarter and margin because of that. Operating profit declined fourteen million to down to six point eight million, which again was disappointing.

As we mentioned looking forward, things are getting better, but there's a lot of challenges out there. If price increases are in effect in Q4, our congestion has eased, but we still have the issues of raw material prices and difficulties in getting containers.

16:28 We move over to the Juvenile Section, revenue increased by thirteen point five million or six point six percent to two nineteen million. Organic revenue increased by about five point six percent.

So, things are going well virtually everywhere step for Europe. All the markets, like I said, are doing better except for Europe.

16:56 The markets in America continue to have strong sales. U.S., Brazil, Chile, Mexico, Canada, all having good quarters.

The Dorel Juvenile USA increases came, mainly from mobility categories, as those are starting to come back as people are traveling more, and Brazil, we've now taken a leading position in e-commerce. All of those things are going well.

17:28 The problems we're having in Europe are primarily related to not having enough goods. As we go into this week, we have about three fifty containers worth of goods sitting in China and that's about a six week delay on what we'd like to have here.

We have a lot of new products that are selling well, but we continue to run out of them. 17:57 So, the challenge in Europe becomes not just, not having the goods for the current orders, but when you don't have the goods for the current orders, it's unlikely you get the second round of orders, as well as it's difficult to plan any promotions or any sort of expansion of distribution of those products.

18:18 So, really is, until we catch up, it's really weighing us down as far as getting the revenue to get to the level we want. If we look at the gross profit in the Juvenile, it was twenty three point three percent.

It’s a decline of four hundred and ten basis points. 18:37 Again, reason for that, a higher input cost, as we talked about freight, resin, as well as lower production because of some parts shortages and just general overhead not being covered by the lower sales levels.

18:56 Price increases have [indiscernible] affected in most markets. The one market that we really need to put them in will be in Europe and that is effective January first.

So, as Martin mentioned, we are expecting January the first quarter to see a material improvement in our margins in Europe. 19:20 Our operating profit in the division was two point four million during the quarter, compared to an operating profit of seven point six last year.

I will talk briefly on Sports. It’s now classified as discontinued operations, but their revenue line was up two million dollars, sorry, down two million dollars or just under one percent versus last year.

19:45 Gross profit declined by one hundred and ten basis points. The decline was mainly due to just increased ocean freight and factory costs.

When we look at the operating profit, it's a little confusing here, it's – that the accounting is showing forty three point one million, but when you exclude the reversal of the prior year impairment losses on intangible assets and restructuring costs and the transaction costs related to the sales of the sports segment of fifty one million the adjusted profit declined six point six billion from last year. 20:28 And the adjusted profit decline was mainly due to reduced revenues relating to available inventory as you know we’re – the bike business is still short significant amounts of inventory, particularly on the Cannondale side.

And then some increase on costs related to having the business back normally. 20:53 With that, I will pass it back to Martin.

21:01 Thank you, Jeffrey. I'll now ask the operator to open the lines for questions and as always, please keep your first round of questions to a maximum of two.

Operator, go ahead.

21:50 Good afternoon, gentlemen. I was wondering, if you could maybe remind us how much of home segments manufacturing is actually done domestically or in-house versus outsourced?

And maybe as a follow-up to that, just maybe help us understand how your annual CapEx in that business is so low? I think it hovered around two million dollars before you announced the new CapEx spend?

22:20 Right. So, the number right now is around thirteen percent is domestic manufacturing.

One of the reasons CapEx has always traditionally been low is it doesn't really – we don't use it CapEx for product development, like we do in the other sectors. 22:45 It’s [indiscernible] would, whatever it is.

So, we don't capitalize any of that. It's generally machinery.

And as we've said in our last press release, we hadn't really spent much on the factories over the years, and hence the large expenditure all at one time here to do it, but I would expect if you're looking for future, I think it will probably be more than two or three, but it's not going to go up significantly from there.

23:16 And the thirteen percent in-house, do you expect any, I guess a boost to that after the ten million CapEx and I guess maybe even the addition of the new acquisition in the UK?

23:37 No, the acquisition in Europe is a distributor company. So, that's what we are going to have actually reducing the manufacturer numbers.

Yeah, the manufacturer number will go up. We aren't necessarily bringing product back.

We will be bring some product back that is imported, but we will be expanding on products, higher margin, higher sales price, higher ticket items in the factories that we’re not even importing today. So, I expect that thirteen percent number to go up, but it doesn't mean that it was not going to be importing items.

24:23 Okay. Thanks for that.

And the extra ten million dollars in capital spend, over what period should we be de-modeling it?

24:37 Most likely would be first quarter. Am I right, Frank?

The bulk of it.

24:43 Yeah. The bulk of it will be the first quarter of twenty two.

There could be very little in Q4, but mostly will be Q1 next year.

24:53 Okay. Thank you.

That's helpful. Just switching gears, a little bit, historically or last year, maybe, you paid about fifty one million dollars in rent expense.

Now, with the sports segment being sold just wonder what that number comes down to and maybe if, I don't know if you have the split between home and Juvenile?

25:26 Well, we'll give you – I don’t have the split right here. I think the number, correct me if I'm wrong again, was twenty seven percent.

Is that the right number that the sports segment represented of that?

25:43 Okay. And one last one for me before I requeue.

I know you said that you thought the pressure was more or the supply chain pressure was more transitory. Now that you think it's not, I was wondering how you guys are starting to think maybe about your free cash flow or your cash burn?

I guess against the backdrop of the current margin pressures that you're seeing?

26:13 Well, I mean, it's very difficult to look forward on the supply chain. What we're getting a handle on now, what we're saying things are easing is, sort of the internal issues.

We had a lot of warehouse issues. We had – one of our biggest warehouses got hit by COVID over the summer, which ended up giving us a huge backlog in unloading containers.

We had hundreds of containers in our yard that we couldn't catch up. And that's starting to be caught up, and that means we can actually sell those items.

26:49 So, we had orders for items that we had in our yard, but couldn't get them out of the containers. So, those are the internal issues that are easing.

The external issues are not really easing. So, it's very difficult to see down the road how it's going to impact us.

As I mentioned, we passed on price increases and it looks like we'll probably have to pass on some more pricing increase. 27:17 Inflation is not slowing down.

For our business, the main focus is container prices. That's probably the biggest input increase that we have and they haven't really – we're looking at next year and the rates look like they're going up.

So, we'll have to do another round of price increases at some point. 27:40 And again, I don't have the timing on that.

So, that's making all of it as difficult to really get our hands on things. I will tell you from a cash flow standpoint that the inventory levels in the home business had a good place despite all the problems and everything.

We're at a good place as far as owning inventory. I don't think we need to expand much on that.

The Juvenile on the other hand is short inventory. They could certainly use another twenty million I would say.

28:15 And then a bike business, we don't have to worry about going forward. So, that's sort of the cash that we're looking at.

Once everything settles down working capital, maybe another twenty million, but now much more than that.

28:29 Okay. Maybe one last one for me.

Are there any, I guess other legal proceedings that are going on that might result in a, sort of like a large cash outlay? I know you guys had pointed out earlier in the year, this one related to tax, just wondering if there's any other ones that are floating around?

28:54 That's the only outstanding large event that’s out there like that.

29:03 Okay. Thanks gentlemen.

29:15 Thank you. Good afternoon guys.

Couple of questions. I just wanted to follow-up, maybe one that's close to Derek, so you just asked.

In the press release, you talk about the fact some of these issues will continue in a short-term around supply chain, but you said you are actively working on solutions to work through them. I guess in addition to passing on price increases and Jeffrey, you just mentioned around catching up on unloading containers, are there any other levers that you can pull on to get through some of these supply chain issues that are continuing to linger?

29:55 I mean, there's some – I think Martin was trying to show everybody, if there's so many issues that, yes, we're solving some, but it's not a one-time thing, but, yeah, price increases are big. Getting our own warehouses up to speed is a big deal, but we still have a lot of challenges outside, getting our customers to pick up goods was a huge issue in Q3.

30:28 When we talk about direct import, what that often means is, we design and buy a product and then have our customers pick it up in Asia. And they were not able to pick it up, but there was tens of millions of dollars of goods at any given point that was ready to be picked up that wasn't.

And hopefully maybe with the Christmas season down and they're refocusing on other non-Christmas goods that will alleviate, but again, a lot of these things are outside of our control.

31:08 Okay, okay. Thank you.

In the Juvenile Segment, you quantified roughly fourteen million dollars in lost sales, I think was the number from European supply chain issues. Are you able to quantify what the lost sales could have been in the Dorel Home business because of some of the demand or supply disruptions?

31:31 Yes, it was a lot harder. We tried to do that.

It was a lot harder to do because in some cases we owned the goods, but didn't have them accessible. But like I said, there's probably twenty million, is a twenty five million of goods that were not picked up that could have been in normal times would have been picked up and delivered.

So, it’s harder to do the profit, but I can comfortably say twenty five million in the quarter was easily caused by supply chain issues.

32:07 Okay, okay. And then maybe just on both segments, you talked about price increases.

Obviously, there's lots of input cost inflation, is inflation, continuing at such a rate that it's hard to see when price increases will potentially offset the cost inflation or is there a point in time maybe whether it's like next year, second half of next year where you see, maybe price increases beginning to catch up with some of the cost increases you've seen?

32:45 Yes, it's a good question. Unfortunately, we don't have an answer because we do – there's a lag time, two to three months generally in North America is how it works.

So, we do the price increase to cover the inflation and then by the time it's in, we're seeing more inflation. So, I'm not sure when that's all going to stop.

But yeah, that definitely puts pressure on a lot of our business. 33:19 It is easier today to get those pricing increases.

That's pretty obvious that everyone has them. So, it's just the timing thing, right?

It's just that lag, hopefully, we won't have that lag all the time.

33:35 Right, okay. Okay.

And then maybe just finally, on the Juvenile business, I just wanted to maybe see if I – hoping to fully understand why in Europe, Europe was the market that was really uniquely impacted by supply chain, whereas, [indiscernible] performance in the Americas seem to do much better. So, I was wondering if you could just explain what's unique about European market with respect to that?

34:03 Yeah. I think, I'm going to pass the actual freight part on to Martin, but one of the things is, we have a lot of new products that we've developed.

In fact, forty eight percent of our sales now is products that we've introduced in the last two years in Europe. So, we're pretty proud of that, but a lot of that stuff is product that's made in Asia.

34:27 And therefore, the high demand stuff needs to be imported. And Martin I’ll let you talk about the freight.

34:34 The problem with Europe is that getting goods out of Asia into Europe is much slower this year. You see a lot of ships and containers available to bring the product forward.

As we said before, we've got something like three fifty containers of goods. or good to fill three hundred fifty containers waiting and to be picked up.

There just isn't enough supply to start with empty containers. And there isn't enough supply routes to get them into Europe or time.

So, it's been much more difficult getting goods at the Europe that has been into North America.

35:21 Okay. Okay, that's great.

Thank you. Thank you answering the questions.

Thank you.

35:36 Yeah. I was wondering Jeffrey if you're able to talk about, like how long is that like on the price increases?

And maybe I don't know if you mentioned it, but the magnitude of the increases that you've put through in both Home and Juvenile.

35:59 I’m not going to – I’m not at liberty to discuss the magnitude. I will tell you in some cases, we've done three price increases already and planning a fourth.

So, that in itself is, I've never seen that. And as far – what was the first one, sorry forgot your first question?

36:26 You weren't able to enter the magnitude, but I was curious about the actual lag or how long it takes?

36:35 Yeah, I’m going to say, ninety days…

36:40 But in some cases already, we’ve notified the customer that prices are coming. So…

36:45 Yeah, but by the time they actually kicked in and the negotiations and then – but it's about ninety days.

36:54 Okay. And I guess my final one is, as I guess we're sitting here in [November fifth] [ph].

What does the, I guess, what does the situation look ahead of the upcoming holidays in terms of being able to get product to customers, given the stronger seasonal demand?

37:22 I think, again, Martin, you might know this, but I believe that that seasonal demand is almost over now as far as delivery is concerned. Like if you don't have the stuff already in the warehouse, it's not getting on the shelves for Christmas.

And given that we're not that, we have some Christmas items for sure. 37:45 That, you know, it's maybe going to get easier for us, maybe we'll get a little more space.

I mean, I know I've heard even some of the large retailers, they can't even process all the goods that are coming in. And they’ve pushed back even for stuff they need, they said, we can't unload it.

So, don't bring it into our warehouses and these are the big guys. So…

38:07 And in some cases, we have goods in our warehouse where our customers like the big retailers just don’t have the facilities to pick them up. They don't have enough trucks, drivers, and they don't have space in their warehouses to put it.

The supply chain problems is not just between Asia and North America, it's within North America as well.

38:29 Our delivery of furniture directly to consumers is up now. And that's doing well because the retailers don't have to bring it into their place.

So, we deliver those items and that's doing well. That was, I mean, we were behind because of all of the issues we had within our warehouses, but that is improving every week now.

So, we're hoping that that picks up some of the business.

38:57 Okay. Thanks gentlemen and have a good weekend.

39:01 Thank you.

39:13 Hey, thank you. A word of sincere thanks to our teams everywhere for their continuing effort to get through this supply chain and COVID challenges, as well as the rising costs.

It's tough and stressful, but our employees are clearly doing what's necessary to get things done. In fact, many of our customers have told us that Dorel is doing better than many of our competition.

And that concludes today's call. Thank you for being with us, and have a pleasant weekend.