Notes for remarks by. Mr. Martin Schwartz. President and Chief Executive Officer. Dorel Industries Inc Annual Meeting of Shareholders.

Transcription

1 Check Against Delivery Notes for remarks by Mr. Martin Schwartz President and Chief Executive Officer Dorel Industries Inc Annual Meeting of Shareholders May 17, 2007 Montreal 1

2 Martin Schwartz AGM speech May 17, 2007 Good morning (again). As is customary, Jeffrey and I will now review Dorel s performance over the past year, update you on this year s activities, and outline what we see as the drivers during the coming months. Just before I start my presentation, I draw your attention to the forward looking statement on the screens. I also want to point out that all figures quoted today are in US dollars. As we tend to say, time goes by quickly. So it may surprise you to see this 45 th anniversary logo. Indeed, 2007 marks the 45 th year of operations for Dorel Industries. I thought it would be fitting to take a few moments to share some history with you and take you from our humble beginnings to the global consumer products organization we are today. My late father, Leo, founded Dorel in 1962 as a small juvenile products manufacturer and distributor. The first products were crib bumper pads, designed, manufactured and marketed directly from the basement of our home. Bumper pads didn t motivate me, so in 1969, I established Ridgewood Industries, manufacturing wire products, which evolved into ready-to-assemble furniture. My brother-in law, Jeff Segel and later my brother, Alan, joined me. Ridgewood and Dorel were merged in 1987 and we completed our IPO as Dorel Industries. A year later we made our first in a series of acquisitions, buying Cosco in Columbus, a company twice our size. That was followed by a series of other transactions, as you can see. 2

3 Since Safety 1 st we have bought companies that are immediately accretive to earnings. In the 20 years since going public, sales have gone from under $35 million to $1.8 billion and a market cap of over $1.1 billion. We re proud of these accomplishments and must use what I refer to as the Power of Dorel to further benefit the organization. We have seen our customers react most positively when made aware of the breadth of our operations. Here are a few facts: We have 4700 employees working in 15 countries. Dorel is comprised of three main segments encompassing 9 different operating divisions. We own several very well-known brands. We sell to all the major retailers We operate out of 7.7 million square feet; 6.1 million in North America and 1.6 million in Europe. Globally, we spend $1.1 billion in purchasing. I have made a point of telling our staff who deal with suppliers and customers to ensure that first, they themselves are aware of our scope and, second; that they convey this information to those they do business with. I am proud to say that we ve built a solid reputation and that we are a most reliable company to do business with. We must consistently maximize all opportunities to cross-sell our various strengths and products wherever possible and increase profitability. Looking back on 2006, it was not a growth year. Revenue and net income were both flat as we dealt with some legacy issues. Improvement in the ready-toassemble furniture division has taken longer than anticipated, partly due to external factors which added to an already difficult situation. In the Recreational/Leisure segment, bicycle sales were lower than expected as inventory levels were reduced by some of Pacific Cycle s major customers. 3

4 Progress has been made in these areas and I m pleased to say that we are definitely reinforcing our position in the markets we serve. An important focus for us has been our RTA operations at Ameriwood, the major generator of revenue in our Home Furnishings segment. It has been a challenge, not just for us, but for all domestic RTA producers. Just last month O Sullivan Industries announced they will cease operations. This will take a lot of domestic capacity out of the market in the next quarter and will work to our benefit going forward. While it has been an uphill battle, headway is being made at Ameriwood. Board prices have stabilized and, as far as we can tell, will remain at these levels through There has also been solid progress at two of Ameriwood s three factories. Scrap is down, board yield is up, labor efficiencies have improved and inventories are better balanced to realistically meet our customers needs. With this concentrated effort, both the Cornwall, Ontario and Tiffin, Ohio facilities are operating at high efficiency levels and are working so well that they can accommodate still more business. In line with a strategic shift away from exclusive domestic production, a reoriented supply chain was established last year, which includes both North America and Asia. The results from this initiative have been most encouraging. With our strong Dorel China operations, highly-reliable suppliers are in place, providing Ameriwood with a steady stream of high quality products, integrating solid wood, glass and metal, allowing us to offer our customers competitive pricing. This import program is rapidly becoming a growing part of Ameriwood s business. 4

5 While we remain confident that there will be sustained demand for domestically manufactured RTA furniture, we have concluded that with the improvements that have been made, our manufacturing footprint exceeds anticipated market needs. Therefore, the majority of manufacturing operations at the facility in Dowagiac, Michigan will be suspended as of mid July. This will affect approximately 170 of the 215 member workforce. This is a proactive, sound business decision that will ensure the long-term viability of our domestic operations and speed Ameriwood s growth of profitability. I fully realize the impact this will have on the affected employees and want to recognize and thank them for their efforts over the past several years. This suspension at Dowagiac will result in a pre-tax restructuring charge of approximately $11 million, the majority of which will be recorded this year. Of this amount, approximately $9 million will be a non-cash charge representing the write-down of building, equipment and other assets. As we have said in the past RTA furniture is a business we know well and will maintain and are confident, that despite a difficult environment, we will definitely prevail. Dorel has three other divisions in Home Furnishings. In 2006, both Cosco Home & Office and Dorel Asia continued their growth while Dorel Home Products experienced a slight reduction in futon sales. Cosco Home & Office realizes the bulk of its revenue from folding furniture, step stools and ladders. The remainder is comprised of sales from decorative furniture and home healthcare items. Articulating ladders have been doing especially well and earlier this year Cosco Home & Office displaced a major US competitor for this business. This is all incremental business and is the first on-going program with this customer. The ladders have also been placed for the first time with the 5

6 largest DIY network in France and with a major big box chain in Mexico. The Samsonite commercial line continues to move up-scale, particularly in the office furniture sector, and is commanding higher price points. New business includes catalogue listings for several items at major US office supply companies. At Dorel Asia, whose strength is identifying off-shore products that combine excellence in design and quality, highly competitive pricing and rapid delivery, additional customers were added during the first quarter, mainly among major and club format retailers. New juvenile products including a wooden bunk bed and upholstered items, such as home theatre seating groups, have been introduced. The rest of 2007 will see more of the same with a continued broadening of Dorel Asia s product range and customer base was a record year for the division and more of the same is expected this year. The focus at Dorel Home Products, which has traditionally produced futons, is on adding new customers and offering additional items. Q1 sales and margins were down somewhat, however we are already seeing a rebound and the balance of the year should stabilize. New futon designs are being offered and additional items introduced such as coffee and tables, bunk beds and bed rails. Bunk bed business has already been secured with a major Canadian customer as well as with large US mass merchants. A modular bunk bed is being developed for another major US mass merchant. I would like to congratulate DHP s staff for a very important award announced last month. The division won first place at the INNOVATION gala of the CSST, Quebec s Employee Health and Safety Commission, because of the automated circular blades they developed to cut mattresses. With the previous method workers had to sharpen the blades as they were functioning. The solution is risk free and enables continuous production without interruption. DHP is working 6

7 continuously to prevent working injuries and this award is the achievement of highly dedicated team work. Congratulations to all. JUVENILE In our juvenile segment, 2006 revenue was up just over 6% and earnings from operations decreased 2%. North American sales increased by approximately 5% whereas the increase in Europe was near 8%, with the growth substantially organic. In the US, sales were driven by car seats, high chairs and infant health items. DJG USA is the dominant provider of car seats will be a transitional year for DJG. Exciting Quinny and Maxi-Cosi car seats and strollers are being launched in the US over the next few weeks, primarily to specialty stores. Dorel Europe has had excellent results with these products and we expect the European designs will be well received by US consumers. Extensive work is underway to further solidify and increase DJG s market presence through one of its most elaborate product development programs ever. A good part of this initiative includes an Orient component with significant input from our juvenile suppliers in China. The new products are scheduled to be launched early next year and a majority of items target higher price points and margins. Growth categories include safety aids, bassinets and bouncers. Safety 1 st has also been completely redesigned and we are pleased to unveil the new rebranding here today. Popular Safety 1 st infant health peg products have been repackaged to make shopping easier and to highlight the variety of items available. The full line will begin to be rolled out late this year. An interesting packaging concept is being tested in the US as an alternative to the current corrugated box for car seats. The Cosco Scenera will henceforth come in a plastic bag which consumers can use as a travel bag. The benefits are multiple. We will eliminate approximately 65 tons of corrugated waste as well as 7

8 reduce storage and transportation costs as the number of units per pallet will increase by 40%. For retailers, point-of-sale appearance is greatly improved, they will also save on storage and transport, and in-store handling will be simplified. This initial project is being run for a year at Wal*Mart with plans to expand it to other retailers after that. Dorel Europe has consistently demonstrated its innovative skills through a rigorous campaign of product launches, making it one of the dominant juvenile players abroad in the mid-to-high price point categories. Its first quarter was the best ever. The revolutionary Axiss, a high quality car seat featuring a rotating mechanism and a height-adjustable head-rest to facilitate placement of the child, was introduced to the market in March. As expected, sales of the unit were limited as the launch was in the latter part of the first quarter. They will increase through the rest of the year. Reaction to this product from customers has been very favourable. While now available in France, Axiss will be progressively rolled out throughout Europe during the second half this year. A series of other products are being introduced this quarter including new car seats and strollers under the Quinny, Maxi-Cosi and Bébé Confort brands. Overall, Europe is expecting a strong year, with the best performances coming from the UK, which has experienced dramatic improvement, Germany, Holland, Switzerland and Portugal. Jeffrey will touch on the operational changes underway at Dorel Europe. In March Dorel purchased a 55% interest in Australian juvenile company IGC or In Good Care. IGC is a well established manufacturer and distributor of juvenile products in Australia and New Zealand and has a number of well-known, established brands such as the popular Bertini and Mother's Choice lines. The 8

9 remaining 45% is owned by the founder, Mr. Robert Berchik, who will continue to serve as CEO. The acquisition presents exciting opportunities for Dorel. We believe that working with an established company is the best way to accelerate growth in Australia and nearby countries, as well as reinforce our strong brands already being marketed there, such as Quinny and Safety 1 st. Adding IGC s established names create a powerful market force. The transaction also provides a base from which to introduce our other consumer products. We have tested this strategy over the past two years with Dorel Distribution Canada. The concept was designed to bolster sales and profits of the Canadian unit and to serve as a model for possible future such ventures. The model is working. Two years ago DDC derived all of its revenue from juvenile sales. Currently that s now about 70% on an annual basis as home furnishings and recreational products are being marketed and will increasingly provide more revenue. And, with the expiration of a previous exclusive distribution agreement, DDC has control over bike sales, with strong results expected. Electric bikes are now being sold through Canadian Tire and have been supported by this TV ad Cosco Home & Office s ladder program is yet another driver in Canada with excellent placement at a number of retailers. Dorel Distribution Canada has also launched a car seat safety training program at a major juvenile chain in cooperation with the Canadian Automobile Association. Store representatives receive a solid understanding of car seat safety and are thus more knowledgeable in assisting consumers in selecting the best car seat for their needs. It s shaping up to be an exciting year here in Canada. 9

10 After two years of no growth at our Recreational/Leisure division, Pacific Cycle, 2007 is shaping up as a much better year. There are efforts on several fronts with new products and new product categories. Last year s modest decline in sales was due to lower sales of bicycles in the mass merchant channel. This was generally reversed during this year s first quarter as Pacific s main customers had good sell-through of bikes. Sales to the independent bicycle dealers network were solid, with same store sales up. The bike shop look introduced last year as a new concept at a couple of Wal*Mart stores in Texas has provided strong sales. Parts of the merchandising program have now been rolled out to hundreds of other Wal*Mart stores and 800 are expected to be branded by this fall. Even with more space devoted to the concept, sales are higher per square foot. Pacific s InStep brand also had a good first quarter with its trailers and strollers. First shipments of the Schwinn electric bike were made in Q1. The units feature extremely lightweight batteries and last for about 40 miles on a single charge. While we don t expect large sales in the US, it is felt that the potential in Europe and internationally is far greater. Pacific is very active in product development this year, particularly in non-bike categories. For example, a licensing agreement has been reached to expand Pacific Outdoors presence in the fish and game categories. The objective is to establish this brand across a number of categories with various retailers in the outdoor product space. Playsafe swingsets continue to sell well with major retailers and the brand is picking up market share in this, its second year. In addition to the brick and mortar locations, Playsafe is also seeing strong sales through e-commerce sites. Yet another category, motor scooters, will help further diversify Pacific s revenue base. The motor scooter market remains the fastest growing in the motorcycle 10

11 segment. With the environment front and centre, Pacific now has a wide selection of alternative modes of transport. Also added to the line-up this year is the electric ride-on toy business, transferred from juvenile. With Pacific s well-entrenched recreational distribution channel and a specific team dedicated to the ride-ons, strong growth is projected. It is noteworthy that Pacific Cycle now generates a greater proportion of its revenue from non-bicycle sales as it continues to develop into a true recreational company, as opposed to strictly a bicycle business. Even so, Pacific Cycle sells more bikes than any other US bicycle company with the strong Schwinn, Mongoose and GT brands. Pacific tops the industry at 30 plus per cent of the units sold. DOREL CHINA The influence of China on business in North America is often discussed and well documented. As I have said in the past, the Far East has been an integral part of our strategy and operations for well over 25 years. Our presence in China continues to grow, with now over 150 full-time Dorel employees located in eight offices throughout the country. These individuals work closely with all of our divisions. In 2006 engineering teams were established to assist the divisions in ramping up more product development with our suppliers, and in shortening lead times. Speed to market is critical. During the past few months Dorel China managers have been reviewing team structures, performance and setting action plans. Continuous improvement is top-of-mind with a focus on quality management, product development, cost reductions and on-time delivery. Helping our divisions deal in China is a huge benefit. This simplifies matters for our customers, something they likely could not do on their own, thus creating a barrier of entry for those who might consider going it alone. 11

12 Since we don t own any factories in Asia, we ve been careful to nurture strong relationships with our suppliers and are generally the largest customer of our bigger partners there. In addition to continuous contact through our expanding Dorel China group, each year we host a Far East Suppliers Conference in Shenzhen, bringing together well over 120 suppliers. Last year the theme was Growth Through Innovation where we discussed the importance of their increasing involvement in product development. This is a full day of activities. The morning is a general meeting with strategic discussions and presentations by Dorel executives. The afternoon is devoted to individual break-out sessions between suppliers and the divisions they are working with directly. The evening is an elaborate awards dinner complete attended by 250 people, with entertainment to thank all suppliers and to present awards to recognize those who have particularly distinguished themselves through exemplary service and innovation. Here s a brief overview of that event. As you can see, we devote a lot of effort to building and retaining a positive rapport with our suppliers, and it has paid off nicely. China is all about strong relationships and I am proud to say that Dorel and its Chinese suppliers have developed a great deal of mutual respect. At this time, I ll ask Jeffrey to provide some financial perspective. Jeffrey. Part II Thanks Jeffrey. We are encouraged with the prospects for this year. We have set in motion several initiatives in each of our divisions to capture increased market share and see considerable growth potential. Product development has been a keen focus and the benefits of these efforts will be felt as early as the third quarter. Also this year E-commerce is a focus throughout all Dorel divisions and RTA furniture sales are growing modestly through links with our major customers. This effort 12

13 will continue and we anticipate this area to become increasingly important. Subsequent to our first quarter results and the increased expectations at Dorel Europe, we now anticipate the growth in earnings of the Juvenile segment will be greater than the growth in the Home Furnishings and Recreational/Leisure segments. Overall, we anticipate that earnings will outpace revenue in Indeed, acquisitions have helped build Dorel s global presence by purchasing businesses that offer opportunity and round out the Company s offerings. While we will concentrate on organic growth we will also look actively and carefully at new opportunities. I take this opportunity to recognize all 4700 Dorel employees for their diligence over the past year and into I thank our customers, suppliers and shareholders for their partnership and trust, and express gratitude to our Board of Directors for the guidance they have provided to help achieve our goals. 13