Dorel Industries says foreign exchange losses eat into second-quarter profits

By Ross Marowits, The Canadian Press

MONTREAL - Dorel Industries Inc. (TSX: DII-B.TO) expects its bike and recreation business will remain under pressure for the rest of 2009 as consumers opt for less expensive brands and retailers face sluggish overall sales.

"I don't believe that the U.S. is out of the recession from the retail side and certainly Europe isn't out of the recession either and they're probably lagging behind by three or four months," CEO Martin Schwartz said in a conference call about second-quarter results."

Foreign exchange adjustments drove down its profits to US$24.8 million in the three-months ended June 30 as the consumer products maker's revenue sagged 7.2 per cent largely because of currency fluctuations.

The Montreal-based company, which makes child car seats, home furniture and bicycles, reported Wednesday that its profit amounted to 74 cents per share, down 21 per cent from US$31.3 million or 94 cents per share a year earlier.

Dorel booked US$12.6 million in non-cash losses on mark-to-market foreign exchange contracts. Excluding those adjustments, the company said earnings would have totalled US$1.01 per share.

Dorel, which reports its results in U.S. currency, said lower sales and the impact of foreign exchange fluctuations drove quarterly revenue down to $551.1 million from $593.7 million a year ago.

About two-thirds of the revenue decline was due to currency translations.

Analysts polled by Thomson Reuters had expected earnings would fall 19 per cent to 77 cents on $563 million of revenues.

Adjusting for the mark to market effect, the company had one of its best second quarters in a rough economy, Schwartz said.

"We are very pleased with this. Again we surpassed our internal earnings forecast due to the implementation of stringent cost constraint measures, a focus on working cap management, a more stable cost environment and an increase in efficiencies," he told analysts."

Schwartz said Dorel's investment in new products makes him bullish about the future.

"We anticipate a solid second half and we are particularly confident as we look ahead to 2010 and beyond."

The juvenile business is doing well in the United States as earnings improved despite a drop in revenues.

Overall, juvenile segment earnings fell 43 per cent to $16.7 million as revenues dropped 13 per cent to $244.7 million. However, the segment included $12.7 million of the mark to market adjustments. Excluding this factor, profits increased.

Schwartz said Dorel dodged a bullet when non-U.S. currencies recovered to near last year's levels. He said he was nervous at the beginning of the year when everybody was looking at 20 to 30 per cent cost increases.

While Europe remains sluggish, Dorel said it is not losing market share, and that its business will recover when the economy does.

In one of the clearest signals to date that the United States is on the mend, the Federal Reserve said Wednesday that U.S. economic activity is "levelling out." The central bank said, however, that it will maintain its key interest rate near zero for an extended time to come.

Dorel's recreation and leisure earnings decreased seven per cent to $16 million, despite a two per cent revenue gain to $199.1 million. Excluding acquisitions, revenues fell five per cent. Mass merchant sales declines were offset by contributions from the parts and accessories business purchased in June 2008.

The more expensive bikes sold through the IBD channel decreased as consumers traded down to cheaper models and the category was affected by poor weather in North America.

The home furnishings segment's operating earnings more than doubled to $7.7 million despite a 7.8 per cent sales decrease to $107.4 million.

Dorel's shares gained $1.43 to close up 5.35 per cent to $28.18 on the Toronto Stock Exchange.