Martin Schwartz - President, Chief Executive Officer Jeffrey Schwartz - Chief Financial Officer Frank Rana - VP of Finance

Thank you. Good morning and thank you all for joining us for Dorel's earnings call for the second quarter ended June 30th.

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

As always, all numbers mentioned will be in U.S. dollars.

2020 has been a year like none others for all of us. While it began quite normally, it quickly and dramatically deteriorated with the onslaught of COVID-19.

I am pleased to report that Dorel’s revenues have recovered sharply from the initial negative effect of the pandemic, with strong performances in two of our three segments. Both Dorel Sports and Dorel Home benefited from increased demand as consumers have chosen Dorel for its bicycle and home furnishing purchases, selecting our leading brands and outstanding value products.

Our advanced capabilities in e-commerce have also allowed us to deliver reliably and efficiently. Increased sales of in-stock items allowed both businesses to reduce inventories to record low levels.

It's been somewhat different at Dorel Juvenile, which remained challenged through the first half of the quarter, affected by continuing store closures in many markets, a situation which began reversing as more stores reopened. I applaud our divisions which have done an excellent job of cutting costs and holding discretionary spending, resulting in a considerable decrease in selling expenses.

I'm also pleased to say that our balance sheet has improved significantly with much lower inventories and overall debt. Looking now to our individual segments, Dorel Sports had its fifth consecutive quarter of revenue growth and posted record profits, a sharp reversal from Q1’s COVID related operating loss.

Bike factories in Asia closed for four to six weeks during the first quarter, initially severely reduced supply. Then as the factories were ramping back up, demand for bikes took off to an extent never seen before.

According to the NPD Group, which offers point-of-sale data, retail sales tracking and analytic research, U.S. bicycle sales through all retail channels grew 75% at April to about $1 billion in retail sales, marking the first time sales reached that level in a single month.

Typically April sales are between $550 million and $575 million. NPD noted that bikes for family use, neighborhood riding and lower price points showed the strongest year-over-year sales gains.

There are many reasons for this search. First and foremost, people want and need to get out after weeks of forced lockdowns, to be able to exercise, but with the good weather, huge numbers are out and it's easy safe, ensuring the social distancing.

Many are still opting to get on a bus or subway and are also staying away from gyms, even though most have reopened. Cities almost everywhere are encouraging cycling with significant additions to their bicycle infrastructures, plus people are staying put and spending on bikes for family recreation.

As a result CSG and Pacific Cycles did very well with sales particularly online, only limited by a lack of supply. At CSG, our U.S.

IBD channels saw revenue growth, strong double digits over the last year, and in the UK revenue was up just over 100%. Clearly we could have sold more bikes had we had them.

Our third bike division, Caloi was hurt by sustained closures in Brazil and the April, May shutdown of their factory. But looking ahead based on current trends, the demand for bicycles is expected to remain strong throughout this summer.

Ongoing supply constraints will limit sales, but expectations are that Q3 revenues and operating profits will continue to be strong. Due to the current volatility in the bicycle industry because of the pandemic, longer term visibility is difficult.

Changes in current demand levels and possibly in the seasonality of bicycle sales, currently make expectations for the fourth quarter and beyond unclear. Dorel Home did equally as well, as we posted record revenues.

As lockdowns took hold in mid-March and were maintained for several weeks, attention initially for needed home office furniture turned to home renovations and DIY projects in general. Purchases of desks and entertainment units were strong.

As the weeks wore on, consumers turned to the segments other categories, including beds, futons and with all staying put, outdoor recreational furniture. Folding furniture such as tables and chairs as well as step-stools were soft earlier in Q2, but also sold well.

Online sales have been driving much of the segment's revenue growth. Last Wednesday one of the world's largest online furniture retailers, significant Dorel Home customer reported second quarter sales growth of 84% due to what they termed unprecedented demand.

As with Sports, inventory was way down and created supply issues which limited some sales. This is now coming back somewhat, but remains constrained as demand remains strong.

Recent surveys indicate the work-from-home trend will be maintained for a while. Last week a KPMG poll found that 54% of Canadians are afraid to return to their workplace given how contagious the virus is.

In the U.S. Global Workplace Analytics, a research firm that helps employers prepare for the future of work says some 56% of the workforce holds a job that is compatible with remote work and estimates that as much as 30% will be working from home multiple days a week by the end of 2021.

As we look ahead, obviously this bodes well for the continuing sale of home-office furniture. We anticipate this trend to continue with Q3 revenues and operating profit is expected to be strong.

At current demand levels inventory shortages could constrain sales in the short term, but the outlook for the real-home remains positive. Dorel Juvenile had a rough first quarter, but saw recovery starting midway through Q2.

Apart from the U.S., most of its markets were hurt by retail store closures, which was especially the case in Europe. Even some online purchases there could not be delivered as baby stores were deemed non-essential.

As stores began to reopen in May after a very challenging April, things began to improve and this continued through the end of the quarter. But Dorel Juvenile Europe back to business promotions initiated in June is supporting our retail customers to drive sales and earnings.

The core Juvenile category of car seats and strollers which suffered earlier have started to come back and the U.S. government stimulus checks have allowed consumers to buy.

Items such as thermometers and other safety first items were sold out everywhere and factories were working at maximum capacity to meet demand. Chile and Peru have been slow to bounce back as Dorel-owned stores were closed for most of Q2.

Many are still closed today and there are limited e-commerce options. Looking ahead to Peru’s second half, despite ongoing weakness in South America, Dorel Juvenile is expected to continue to improve its operating profit.

In terms of our overall outlook, in the short term, robust sales particularly at Dorel Sports and Dorel Home should continue, but there are many unknowns and risks going forward. The impact of the slowing economy and a higher unemployment is difficult to measure at this time.

The possibility of worsening economic conditions, brought on by a second coronavirus wave means current shopping habits could change again, but we are currently enjoying strong demand in many of our markets. We must be prudent going forward in our inventory purchases, keeping a proper balance and in our expenses in general.

I’m extremely grateful to our employees worldwide who have demonstrated their clear commitment to Dorel by directly contributing to our lower costs in the second quarter and who continued working at our facilities under enhanced safety protocols. Their safety and welfare remains our top priority.

I will now ask Jeffrey to provide the financial prospectus. Jeffrey.

Thank you, Martin. For the second quarter of 2020, Dorel’s revenue increased by $54 million or 8.1%.

Organic revenue improved by approximately 10.1% after removing the variations of foreign exchange year-over-year. Revenue and organic – regular revenue and organic revenue improvements were in the Home and Sports section, partially offset by a decline of about 20% in Juvenile.

Gross profit for the quarter decreased 50 basis points to 20 from 20.5 in ‘19. SG&A selling expenses for the quarter declined by $14 million or 25%, a big number.

Selling expenses were lower in all three segments due to spending cuts that were initiated in mid-March to mitigate the impact before we knew what demand would be. We did that through reducing the workforce temporarily in certain locations and reducing marketing spend in promotional activity, as it wasn't needed in a number of categories.

On the general and administrative expenses, they actually increased by 6% in the quarter. These were areas that were a little bit more difficult to pull back on during that time.

Some other items from the income statement, we did have an impairment loss on accounts receivable of $3.5 million for. That was due to a filing for bankruptcy in Brazil of a bike share program where we contribute to the bikes for – that was the primary reason for that.

Finance expenses decreased slightly by $0.5 million from the last – from the second quarter last year and finally the net income during the quarter, net income was $11.1 million or $0.34 per share compared to $2.8 or $0.09 last year. Then when we exclude restructuring costs, the adjusted net income for the quarter increased by $9 million to $15.6 million or $0.48 per share compared to $6.3 million or $0.19 last year.

So now if we go to the individual segments, the Sports business had a obviously tremendous quarter with revenue up $44.6 million or 18.5% to $285.6 million. When we exclude the impact of varying foreign exchanges year-over-year, the actual organic revenue increased by 21.1%.

The revenue growth was in all markets where stores were allowed to remain open. So, what we saw was the U.S.

was primarily open the entire time and Europe gradually open as the quarter went through and as soon as it did open, sale grew substantially. Revenue down in Brazil at Caloi was impacted negatively due to the outbreak of the pandemic.

They – you know Brazil is one of the worst hit countries in the world and they did close a lot of doors, particularly early in the quarter. Our gross profit for the quarter improved by 300 basis points to 23.6.

The increase was mainly due to risk [ph] discounting, as we didn’t need to do that during the quarter, lower promotional incentive offerings and some favorable tariff exclusions granted in the U.S. On the other side partially offsetting that, those gains was the impact of foreign currency in Brazil, as well as some promotional activity in Brazil that we did to improve sales in the country.

Untimely the operating profit in the quarter was $26.8 million compared with $10.1 million. The operating profit improved as we said mainly due to the increase in revenues and gross margin improvement, as well as an overall reduced expenses as we discussed before.

Moving over to the Home division, second quarter revenues increased by $53 million or 25%. Strong online sales in response to consumer needs during the pandemic stay-at-home period resulted in some record setting revenues for the second quarter in all parts of that division.

The gross profits were 13.3% and that declined by 90 basis points. However, we did do a small restructuring plan.

So excluding the restructuring plan, the gross profit was 14.2%, which was flat with last year. The operating profit in the division improved by $4.5 million, however when you exclude restructuring costs, operating profits improved by $7.3 million for the second quarter and again the reasons for the that is improved revenues, as well as some overall reduced expenses.

We move to Juvenile, much more things going on in the Juvenile. A bit of a tale of two stories during the quarter.

I mean it started off quite, quite difficult with virtually all stores in Europe closed and ended up you know in a strong June. So the net result of all that was we were down about almost 20%.

We dropped sales from $221 million in ’09 to about $177 million in 2020. Organic revenue declined by about 16.8%.

Almost all the markets reported organic revenue declines because of the virus. With the most specific, most significant being in areas where stores were closed such as South America and Europe.

As countries and the regions began reopening in the latter part of May and June, we definitely saw a rebound in those markets, but not enough to reverse the impact of the problems at the beginning of the quarter. Second quarter gross profit was 23.9%.

This represented a decline of 230 basis points. If we exclude restructuring costs, the adjusted gross profit for the quarter was 24%, which represented a decline of 270 basis points.

The decline in gross profits and adjusted gross profits were mainly due to lower volume absorption of the fixed overhead costs, as well as higher promotional incentive offerings in certain markets in an effort to increase sales upon reopening. That did work.

It did cost us some money, but we did see a boost in sales because of those efforts. The operating loss in the division was $1.2 million during the second quarter compared to a profit of $2.4 million, but if we exclude restructuring costs, operating profit declined by $5.6 million to $1 million from the $6.6 million last year.

And I’m just going to talk a little bit about the long term debt, because there was a significant change there, so just a little bit of history here. So at the beginning of – at the end of the first quarter, we increased our debt level to maintain additional cash-on-hand and liquidity to meet our obligations during the downturn caused by the pandemic.

While at the same time ensuring we remain compliant with our amended borrowing covenants, which we got at the end of the first quarter. During the second quarter, consumer demand for bikes and home product led to increased sales generating higher cash-on-hand and therefore improving our liquidity position.

Accordingly, during the second quarter we're able to reduce our debt levels significantly. Our current, our revolving credit facilities and term loans are due and right now at July 2021 and we're currently in discussions with our lenders to extend those dates.

We're also looking at some other financing alternatives. But the net result of all this was the increase in demand reduced our inventory significantly.

We were able to clear through a lot of the slower moving inventory and we ultimately turned back to cash, which ultimately paid down debt. So today we are comfortably under all the covenants that we are supposed to be, and are looking forward to the future.

It made much less tight environment on our balance sheet that we've had over the last year and a half or so. So with that, I’m going to pass it back to Martin.

Okay, thank you Jeffrey. I’ll now ask the operator to open the lines for questions and request that you limit your questions to two in the first round.

Operator.

Thank you. Good morning everyone.

Just maybe starting with the Sports business, could you just talk a little bit about where you see demand today versus the peaks in sort of March and April?

The demand, I mean there is – because of the worldwide shortage of bikes, demand is still pretty strong. There's very little inventory in stores today.

So it's difficult to measure how deep it is, but you know today again everything we ship to the store seems to be moving through the system. So again, this is in a sense unprecedented, so it's very difficult for anyone to truly be able to forecast on the bike side, you know where all of this is going.

But right now as we speak, demand is still very high and in store inventory remains very low.

Okay, thank you. And is it possible – it sounds as though you saw revenue sort of – you know like in the quarter you didn't have Europe open the full quarter.

So is it possible that you could actually see revenue in Q3 growth accelerating from where it was in Q2, on a year-over-year basis?

The problem that we have, let’s address this now, because I’ve had a lot of questions, is on the supply constraints. So what that means is, you know the timeline to order bikes is anywhere from 90 to 150 days.

So when we started to place new orders for increased supply, we were getting all of our supply. There’s been no problem getting the original supply, so I want to make that very clear.

Whatever we were planning on getting, we're getting all of that plus more, but in order to increase supply for the increased demand, that there is lag and it takes a while to get there. So the limits we look at in Q3, if we were able to fulfill all the demand, yes absolutely you'd be right Steve, we would be able to like smash that number.

But the stuff that’s coming in, in let's say August needed to have been ordered maybe in April and you know April was just when we started seeing all of this demand. So the question is, when is this stuff going to come in, which time period and you know what’s demand going to be like in that period, which causes a lot of sort of uncertainty from our point of view.

But where we have supply, where we’re getting bike sale, I mean they are going right out the door.

Okay, that’s good color. Thanks Jeffery.

Maybe just one more if I could and then I’ll get back in the queue. Just turning to the Home business, can you talk a little bit about you know what you saw in terms of month to month progression through the quarter and into Q3.

You talked a little bit about June sales, sort of moderating slightly from higher levels early in the quarter, but can you talk a bit about where you are now. And I guess is it fair to read through the outlook that you know you talk about revenues and operating profit expecting to be strong.

I assume you mean continuing to be up year-over-year in Q3?

Yeah, so we started off with both May and June with record sales. Not May and June, sorry.

April and May record sales. June came down slightly, but still very good and that’s the level we are continuing to see right now.

Some of that is constrained by running out of inventory. So we are again, similarly we are getting more supply.

Fortunately it's not 90 or 150 days, so we're able to get stuff a little bit earlier than the bikes, but we're still running out of skews or running out of inventory on certain skews which is limiting. So it's difficult when you're in an online environment to understand the true demand, because when you're out of stock, your product is not, you know nobody's asking for it, you know on an online site.

So we're seeing lower than peak sales months now, and probably will through the quarter. A lot of that again is constrained by demand, although it's a little more difficult like I said to know what true demand.

However, it is like you said, it is going to be a very good quarter again in Q3 as we see. Again, sort of more of a stable environment compared to the bikes, which is far more volatile than from a demand standpoint.

Okay, that's great. I’ll hop back on the line, thank you.

Yes, thanks and good morning gentlemen. I was just wondering in terms of the strong demand, if you have – you know what – how do you intend to keep I guess the momentum up once the COVID impact begins to recede.

I mean you're going to be coming up against some pretty tough comps in 2021 as we start to lock these quarters. Just wondering what your thoughts are there?

So going into the year, we were looking at increasing market share, that was our strategy and that's what we were doing pre-pandemic, and again very short sample, but we thought typically on bikes that we are doing a good job there. When the pandemic hit and sort of you know all data points don't make a lot of sense, we do believe next year that supply will catch up to demand, so this unprecedented sort of whatever you have, sales probably won't be there next year.

But again our strategy of increasing market share of the pie is still there and that's still what we're working on. We do believe the pie will be bigger and therefore give us an opportunity to do that, but you're right.

It's going to be a little more challenging given you know what happened this year. Our costs are probably going to go up.

You know we didn't do a lot of marketing this year, we didn't do a lot of event planning and all of the stuff that you normally do, so there was some savings there, which will probably come back next year. But again, we do think the pie will be bigger and we do believe what we're doing will allow us to increase our market share within the pie.

Okay, and I guess maybe if you could just highlight some of the mitigation efforts that you have in place for Juvenile. It's obvious – the segment is facing some pretty tough challenges and obviously some of the market are still opening up.

Just wondering if you’ve thought about, is there still cost cutting going on, layoffs or…

Yeah, well certainly in places that are more challenging such as South America, particularly Chile and Peru that are per capita one of the worst countries in the world for the virus. So a lot of stores are not opened; however, this is baby products, so people do have to buy.

We are looking at trying to continuously reduce our footprint in those markets, so that's probably the area of the biggest continual cost reductions. Things in U.S.

and Europe are somewhat back to normal by now. So as you know we've already done quite a bit of cost cutting in Europe and that's working out well, and so there's not – you know we started off in a bad place, but we finished the quarter with a much better run rate.

So where what's going well, we're fine, and then where it's not we're looking at additional cost cutting.

Okay, and maybe just a couple of housekeeping for me. Just on – I think last quarter you had mentioned a CapEx number around $25 million to $30 million.

Is that still the right number for this year, and I guess how you see that playing out in future in ‘21 and ‘22.

Yeah, I would think that that’s probably still a good number, maybe with the higher side of it now that things are coming back. We certainly pushed stuff back a bit, but as I said, with business getting back to somewhat normal for us, even in the Juvenile business, we're coming back.

But we're definitely going to – as we look forward, we're going to try and spend less than we have in the past through a better R&D system, particularly in the Juvenile side where we think we can get more product out of the system with spending less money. So I think you're going to see a down from our peaks, but we don't have the final budgets ready for the next year.

The goal is to get the CapEx down.

Okay, and one last one for me is on the corporate expense line. It was back up in the quarter.

Just wondering if that’s still you know stock based comp and I guess what's the right level we should be looking at. You know its typically right around $6 million a quarter, that was $2.5 million in Q1.

Just to get your thoughts there.

Yeah, I think $6 million a quarter is still probably a pretty good number. I mean a lot happened between you know cost cutting and I'm sure all compensation bonuses were removed from everything in Q1 and now that we're actually doing well, we put them back in and so there's some of that going on there.

But overall I think you know at the end of the day $6 million is probably still the right number, I don't see much growth from that.

Okay, thanks guys.

Thank you. Just a couple of follow up questions for me.

Just on the Juvenile business, you know you talked a little bit about some of the improvements as you moved sequentially through the quarter. Do you feel as though you're in a position to have – you know when you talked about improvements in EBIT, are you talking about improvements in the back half of the year being sort of up year-over-year or you’re talking more improvements sequentially.

Well, everything we're looking at is year-over-year, so that’s what I've been talking about.

Yeah, okay great, that’s what I thought. And then can you talk a bit about the SG&A level going forward.

You talked about lower selling expenses, but do you have to ramp that selling expense back up you know into Q3 and beyond or do you feel as though the organic demand is still there and you can still ratchet that number, have that number pulled back a bit?

Yeah, that's a really good question. So it's a bit of both you know and if you look at our Juvenile business, in Europe we did get some relief from some government agencies to keep the employees on during the time that all the stores were closed.

That has now gone away given that the stores are opened, but you know – so we won't have that relief in Q3 and you know our expenses will go up in Q3 in our Juvenile business because of that. On the flip side, you know in Sports right now, I mean there's no need to be spending promotional dollars or trying to sell a bicycle, so very little of that happening.

Also in the bicycle world, a lot of promotions are event based, where you got to get out there and you know you're sponsoring some event. All those events for the most part are canceled, so I don't see that coming back this year.

I think we'll be able to maintain lower SG&A’s. And then ultimately in the selling world, you know we’ve learnt a lot.

I think a lot of companies have learned what they can and can't do with the reduced sort of spend and I think as we look forward into next year, we’ll be able to reduce some spending as well on a permanent basis. So it’s a little bit of a mixed answer.

Right, okay. And would you expect, like in the Home business similar to Sports, you know there's no need to spend promotional dollars to drive home furnishings, product sales?

We do still spend money there, but a little bit less. I mean depending on the skew, I mean there are certain skews that are selling very, very well now, so we would likely spend a little less on those skews and other skews that we will spend on.

I mean that's the way that market works. It's a lot more – promotions are done almost on a skew level as opposed to a brand level that we have in other businesses.

So that'll be selective based on what inventories we have and what products we want to move and all of that.

Okay, okay, that's helpful. And then in the Home business, can you quantify how much of your business is online versus in-store?

I believe that’s about 65% ballpark.

Yes, it is.

Yeah 65%.

65% online?

Yeah.

Yeah, okay. And then just…

Sold to online dealers, like online retailers not dealers. People like you know the Amazons and stuff like that.

So that includes online sales at you know a large mass customer as well or no?

Yeah, yes. So we would look at somebody like a Walmart, and say there’s Walmart stores and there’s Walmart.com.

So we allocate what is sold at Walmart.com for instance would be put into that 65%.

Right, okay, okay. And then maybe just finally for me.

It might be a bit too premature to think about this, but with debt coming down and you know earnings coming up, how do you think about the dividend at this point?

Yeah, it is a bit premature. We’ve had one great quarter.

We think we're going to continue. It’s a good discussion to have later, but right now that’s not on the table.

We need to build a little bit more of the secure base. So it just feels good to at least get that sort of – the way we look at it, there was $100 million of excess inventory that we shouldn't have been sitting on last year, you know with the whole – particularly in the U.S.

with the whole tire thing, and that you know ended up being $100 million debt, which really was a burden and now that burdens gone. So we feel you know a lot less lighter, so I think you know one step at a time.

Yeah, okay, that’s great, that’s it for me. Thank you very much.

All up for me gentlemen. On the Juvenile side, I guess I wanted to get your thoughts on whether or not you think you're past the worst and in terms of the sales environment and secondly, I was wondering if you're expecting sales growth for the second half of the year.

Yeah, good question. Yes, I do think we are behind us.

We are seeing – I’m trying to think. We are definitely seeing improvement, particularly in our two largest markets, which is the U.S.

and Europe and we're having some success with new products in Europe. So I know the worst of our business was last year in Europe in Q3 and Q4 where things were really, really kind of going down and now that we have those as comps, I feel pretty good that we’ll be able to beat that despite having some laggards like Chile and Peru that are just probably still going to be down from last year.

[Cross Talk] be able to beat last year, yeah.

Okay, thank you.

Okay, well thank you everybody. This concludes today call.

I want to thank everybody for being with us and everybody please stay safe, stay healthy. Thank you.

Thank you.