final transcript - dorel.com · final transcript august 6, 2014 – 1:00 p.m. e.t. dorel industries...

FINAL TRANSCRIPT

Dorel Industries Inc.

Second Quarter Results

Event Date/Time: August 6, 2014 - 1:00 p.m. E.T.

Length: 42 minutes

FINAL TRANSCRIPT

August 6, 2014 – 1:00 p.m. E.T.

Dorel Industries Inc. Second Quarter Results

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CORPORATE PARTICIPANTS

Martin Schwartz

Dorel Industries Inc. – President and Chief Executive Officer

Jeffrey Schwartz

Dorel Industries Inc. – Executive Vice President and Chief Financial Officer

CONFERENCE CALL PARTICIPANTS

Joe Bess

Roth Capital Partners – Analyst

Derek Lessard

TD Securities – Analyst

Leon Aghazarian

National Bank Financial – Analyst

Anthony Zicha

Scotiabank – Analyst

Stephen MacLeod

BMO Capital Markets – Analyst

Derek Dley

Canaccord Genuity – Analyst

Mark Petrie

CIBC World Markets – Analyst

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PRESENTATION

Operator

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

Second 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 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 Wednesday, August 6th, 2014.

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

Martin Schwartz – President and Chief Executive Officer, Dorel Industries Inc.

Thank you. Good afternoon, everyone. On behalf of Jeffrey Schwartz and Frank Rana, welcome

to our second quarter 2014 conference call. We will be pleased to take your questions following our

comments. As always, all numbers mentioned are in US dollars.

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Overall, we are pleased with the earnings from operations of our three segments. As Jeffrey will

explain, the significant costs related to the Caloi acquisition resulted in our earnings being lower than we

had hoped to see. The momentum of the first quarter in Recreation/Leisure segment continued into Q2.

Both the Cannondale Sports Group and Pacific Cycle made solid headway. CSG benefited from global

sales growth in most IBD markets, particularly in Europe and Japan, while growing demand drove the

improvement at Pacific Cycle as mass merchants. As a result, second quarter revenue in

Recreation/Leisure grew by strong double digits and operating profits rose significantly.

Caloi’s first half of the year’s performance was close to plan. They were affected by Brazil’s

slowing economy and the focus on the World Cup, which shifted attention away from the bicycle

business, but to be clear, Caloi is executing well and is growing its market share. We are expecting the

bulk of its earnings to come in the fourth quarter, as that is both the start of the summer and Christmas

season in Brazil. Despite the softening Brazilian economy, we expect Caloi to grow versus last year and

are confident regarding its future contributions to the segment. We firmly believe in this transaction as

it will be a good long-term investment in Dorel’s future.

Juvenile exceeded prior year, led by strong performance of Dorel Juvenile Europe and continued

sales growth of Dorel Juvenile Brazil. Home Furnishings’ top line was flat and, as anticipated, operating

profits decreased. Internet sales continued their upward trend, offsetting the drop in brick-and-mortar

revenue. The specifics of each segment are detailed in this morning’s press release.

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I’d like to take a few moments to talk about Dorel’s long-term vision. Basically, we are spending

today to build, and we fully expect to reap the benefits in the years to come. The Lerado Juvenile

business acquisition, which at this point we expect to close late in Q3 or early Q4, is a prime example.

This is definitely a new way of thinking for Dorel and we expect will be a game changer for us. We have

never before owned factories in Asia. This is a sound $120 million investment in our future to ensure

that, going forward, we control our own destiny, allowing us to be more flexible in an increasingly

changing environment. It has become more important than ever to be vertically integrated and to be in

direct control of our supply chain. We are confident the Lerado transaction will ensure that we continue

to further grow our leadership in the industry.

The purchase includes four extensive facilities, three based in China and one in Taiwan,

encompassing over 2.5 million square feet of modern production, research development, and testing

resources. We have established a transition team at Dorel Juvenile and have hired a seasoned industry

individual in China as an on-site consultant who will head up operations shortly after the deal is closed.

We also expect to retain current Lerado management.

The acquisition should also accelerate our plans to grow in the Asian domestic market, an area

of opportunity that thus far has been underexploited. The acquisition will not be accretive in the first

year as work will be required to integrate these new facilities into existing operations. We will continue

to purchase other Juvenile products from existing Asian suppliers with whom relationships have been

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built over time. We also look forward to continuing to supply Lerado’s current customers at a service

level that they have come to expect.

Another example of our approach to growth is our confidence in the Latin American market.

Dorel Juvenile Brazil has a strong platform and is growing, and to further support it, we recently bought

the Brazilian rights to the highly popular Infanti brand to expand our position in that market. This

provides great products in the mid and high price point categories, and we will now be able to cover all

bases. The reception from retailers in Brazil has been very good and allows us to better reach the

middle-class consumer, the fastest-growing segment in Brazil. As most of you know, we own the Infanti

brand in many other Latin American countries.

We have also recently taken steps to set up distribution of our Juvenile products in Mexico.

After looking at possible acquisitions for quite some time, we have hired a local industry veteran with

experience in international brands, as well as a number of other people, to get things going on our own.

We have leased premises in Mexico City for our sales offices and showroom. We have had good sales

meetings with most of the major retailers there. Again, this will not happen overnight, but we are

committing today the necessary resources because we believe there is potential for us in this large

market.

We are making similar investments for the future in our Recreation/Leisure segment. We expect

a strong Q4 in Caloi and things look even better for 2015. Its management is executing well and is

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gaining more market share. We see great things coming from this division. Many new dealers have been

added and we have also invested to grow Dorel’s other bicycle brands. We’ve invested resources in our

factory, and since April 1st, we are assembling our international brands at the large Caloi facility for

domestic distribution. We have spent money this year setting up dealers for our Cannondale, GT and

Schwinn brands, as well as spending on sales, marketing and exhibitions.

In yet another move, the Recreation/Leisure segment is preparing to sell bicycles to both the

IBD and mass channels through our proven distribution base in Chile and Peru. We expect to see some

benefits from it this year. So, yes, we are spending considerable funds to establish a stronger long-term

base in many of our businesses. We have developed a detailed plan, and we are executing it. We fully

expect to see the benefits as we move forward.

Jeffrey will now provide a more detailed financial perspective.

Jeffrey Schwartz – Executive Vice President and Chief Financial Officer, Dorel Industries Inc.

Thank you, Martin. I’ll now focus on the quarter results rather than the year-to-date and go

through some key highlights. Revenue in the second quarter, $655.8 million, an increase of $9.2 million

over the same quarter last year. Organically, revenue increases, after removing the impact of foreign

exchange rates and new acquisitions, was about 4 percent. Our gross profit increased 40 basis points to

23.8 from 23.4 last year. The gross profit increase was in Recreation and Leisure, and the Juvenile

segment, partially offset by a decrease in Home Furnishings. Pre-tax earnings increased 13.5 percent to

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$19 million from $16.8 million. Our net income for the quarter was $15.2 million, an increase of 14.9

percent from the $13.2 million recorded last year, or $0.47 per share versus $0.41.

Going through the statement, increases in selling, general and administrative expenses were

mainly due to the acquisitions of both Caloi and Tiny Love. Our finance expenses increased by $4.6

million to $10.2 million, which is a big material number. Included in that is $1.5 million related to

interest recorded on the Company’s put option liability compared to only $600,000 last year. That is a

non-cash item. Our second quarter tax rate was 20.2 percent versus 21.1 percent.

Before I go into details on the various segments, I just want to talk a little bit about the impact of

the Caloi acquisition on our earnings in the quarter, and also actually year to date. So for the first six

months, the Caloi acquisition has actually decreased our earnings by $10.3 million so far, and this is

made up of about $800,000 from operations, which, although below our plan, is not significantly below

our plan. The balance is cash interest from doing the acquisition, and then there’s $6 million of non-cash

charges this year. Of that, it’s the interest related to the Company’s put option, as well as a foreign

exchange loss on that same contingent liability that we have in Brazil. So it’s really taken quite a hit for

the quarter—for the year, sorry. What happens, however, is the bulk of the—or I guess we can say 100

percent of the profit, or more than 100 percent, will be made in the second half and particularly in the

fourth quarter, so we expect to have a huge fourth quarter in Brazil.

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The Company itself, although behind a little bit on operations, is doing well. It’s executed a lot of

our plans on time or early. We’ve expanded store counts, our sales will be up over last year and the

earnings at Caloi will be up double-digit over last year as well. I think we mentioned that in the first

quarter—in second quarter, sorry, we had difficulties because of the World Cup in Brazil; a lot of

Brazilian companies did. I think the bicycle business had it even more because a big channel that we sell

through would be sporting goods and mass market in Brazil, as well as independents, and those retailers

shifted their focus towards soccer and promoting the World Cup, and only in July did we finally see a

real uptick in sales once the World Cup wound down, and today, we’re actually operating in a very busy

environment. So looking forward to the rest of the year but that first half of the year was very tough on

our P&L.

If I move over now to Juvenile, Juvenile segment revenue for the quarter increased $7.9 million

or 3.2 percent. Organically, we were flat for the year versus last year. While the organic revenue was

negligible, Latin America organic growth was an exception and we increased approximately 10 percent

for the quarter. However, upon conversion to the US dollar, this growth was mostly offset by a less

favourable exchange rate. So gross profits increased 80 basis points to 29 percent versus last year.

Operating profits for the quarter were $16.2 million, an increase of 2.2 percent over the $15.8

million last year. One of the drivers, positive drivers in the segment was Dorel Europe, which improved

due to gross margins and operating costs. Additionally, the conversion of European operating profits

was helped by a stronger rate of conversion to the US dollar. On the other side, operating profits in Latin

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America, Canada and Australia were again negatively impacted by foreign exchange rates versus the US

dollar.

For the segment as a whole, selling expenses increased only $1.4 million in the quarter and

general and administrative were up by $3.2 million. A majority of the increases in both selling and G&A

again can be attributed to Tiny Love, as well as some selling expenses in Europe, which, again, is affected

by the higher exchange rate.

Moving over to the Recreation and Leisure segment, our second quarter revenues increased by

$48 million, or 20 percent, to $286 million. Organically, revenue increased by approximately 11 percent

in the quarter. Overseas markets in the IBD, Europe, Japan, as an example, and the North American

mass merchant markets contributed to the quarter’s growth, driven partly by improved weather

conditions compared to last year.

Adjusted operating profit, excluding restructuring costs for the quarter, was $11.3 million—I’m

sorry, increased by $11.3 million, or 200 percent, to $16.9 million compared to the $5.6 million we had

last year. So everybody remembers last year was a very, very difficult year and I think we feel pretty

comfortable we’re past that now.

Excluding restructuring costs, gross margins increased by 80 basis points to $23.7 million versus

$22.9 million. Less discounting on inventory and a weakening of the US dollar against the euro helped

boost our margins in the IBD channel.

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If we look at selling expenses, they declined 6.7 percent. Excluding the impact of Caloi, however,

it actually reduced by 15.3 percent, and the decline in expenses is due to the significant cost cutting

initiatives that were started last year and then continued to be put in place throughout this year.

General and administrative expenses increased by 23.3 percent, and if we take out Caloi, the increase is

only 3.4 percent. Restructuring costs were about $1.7 million for the quarter compared to $2 million

recorded last year.

In the Home Furnishings segment, second quarter revenues were flat versus the previous year.

Sales in the segment’s drop ship vendor program and online sales increased; however, these increases

were offset by declines in brick-and-mortar. People that heard the last conference call will notice that

seems to be a trend, where brick-and-mortar sales are definitely moving towards online sales in this

category.

Operating profits, $5.3 million versus $7.2 million, a decrease of $1.9 million or 27 percent.

Although again a big decrease there, it’s in our budget. Some of it could be explained by a shift in some

of our large customers taking in orders for the back-to-school season. Last year, 2013, a lot of that was

shipped in June. This year, it shipped in July, so we’ve gone through July, which was a particularly strong

month for us and we’re feeling good, so that’s certainly not an issue.

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Gross profit, 13.4 percent, a decrease of 100 basis points from the 14.4 percent last year. While

our input costs rose slightly versus last year, particularly in particle board, gross profit deteriorated

mostly because of the less profitable sales mix.

If we move over to some other statistics before I give it back to Martin, inventories did increase

by 6.7 percent when we compare it to the end of the year last year. Again, inventory’s higher,

particularly for back-to-school, which were shipped in July. July was a pretty strong month so inventories

have reduced again, so we don’t consider that to be an issue. Of course, some of the increase is also

coming from Caloi, where again they’re building bikes to be shipped in the second half of the year. So

between those two, that’s a significant part of that.

On the statement of cash flows for the first six months, cash flow from operating activities,

$16.6 million versus $44.4 million, a decrease of $27.8 million. The main reason for the decrease was the

increase in receivables and inventory, which was partially offset by an increase in accounts payable.

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


Okay, thank you, Jeffrey. As we look ahead to the second half of this year in Recreation/Leisure,

excluding the restructuring costs, we anticipate slight growth in operating profit for the third quarter

and significant growth in the fourth quarter. In Juvenile, even after excluding the impacts of the US

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product liability settlement case in Q4 of 2013, we expect double-digit earnings growth in the second

half. This excludes any impact on earnings related to the acquisition of the Juvenile products business of

the Lerado Group. We’ve foreseen improvement in Home Furnishings’ second half, which will make up

the earnings shortfall from the second quarter.

Please note that due to the seasonality of our Recreation/Leisure and Juvenile divisions in Latin

America, approximately 90 percent of the operating profit of these businesses will be earned in the

second half this year, primarily in the fourth quarter. Interest costs and the non-cash charges relating to

the put option liability are expensed throughout the year.

As I have outlined, we are focused on investments which will provide Dorel with growth for the

long term. The Caloi acquisition and the Lerado transaction are two such examples. As well, while aware

of a cooling of the Brazilian economy in the short term, we remain bullish on Latin America in general

and have set in motion initial steps to develop a distribution base in Mexico.

I’d now like to ask the Operator to open the lines for your questions, but please limit your

questions in the first round to two. Thank you. Operator?

Q & A

Operator

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

have a question, please press the star, followed by the 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

ensure you lift the handset if you are using a speaker phone before pressing any keys. One moment,

please, for your first question.

Your first question comes from Dave King with Roth Capital Partners. Your line is open.

Joe Bess – Analyst, Roth Capital Partners

Good morning. This is Joe Bess asking for Dave. My first question is, can you talk a little bit about

what your targeted leverage ratio is longer term, and then after you kind of achieve that, how are you

guys prioritizing your use of free cash flow at this point?


Sure. I mean, we’re going to be—with the acquisition, we’re going to above 3 to 1. Obviously,

we want to get below the 3 to 1 range. We’re comfortable, very comfortable with the 2 to 2.5 range,

although, again, we produce cash and we’re forecast to produce cash again this year. So after that, you

know, difficult to say. We, obviously, got to use lot of the next little while’s cash flow to get us down to

that level, and then we’d look at possibly an increase in dividends or increased share buyback,

depending on.

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Okay, great. Then thinking about the Lerado acquisition, it sounds like it’ll be earnings dilutive in

the first year, but thinking about after that, how should we be thinking about its contribution?


It’s a little—I mean, it’ll probably be dilutive. We don’t for sure yet. I mean, there’s a lot of

moving parts on it. We’re converting a company that’s got a significant amount of customers to one

that—although we might have other customers, we’ll primarily have one customer, so we’re not sure

how that’s going to work out and how fast it—it’s difficult to give you a prediction on that, basically.

That’s why we’re kind of putting out there that people shouldn’t expect a (inaudible) in the first year,

but we don’t have any hard numbers yet.


Okay, great. Thank you.

Operator

Your next question comes from Derek Lessard with TD Securities. Your line is open.

Derek Lessard – Analyst, TD Securities

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Good afternoon, everyone. Couple of questions. The riding season’s now in the dog days of

summer, we’ve heard some early rumblings of discounting going on, and I’m just wondering if you’re

hearing anything on this level and how aggressive has it been; and, secondly, how comfortable are you

with your 2014 model inventories and your ability to draw them down ahead of 2015 introductions?


Yes, it’s a good question. Of course, there’s discounting, this is the time for discounting, this is

what you budget, so this is where we expected to see some discounting. Discounting is not ahead of

what we expected, so that’s good and that fit in. I mean, last year, they were discounting, I believe it

was in April, versus (inaudible) now is the time that it happens. Our inventory’s fine, again because we

didn’t have to cut early. We’re not in a position where we have a lot of excess and I don’t believe that’s

going to be an issue going forward.


Okay. With the August 1st transfer date now passed, can you guys maybe talk a bit about your

plans for the Cannondale Pro Team in 2015, and what, if anything, has changed since taking over title

sponsorship?


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Shorter answer to that is, no, I can’t comment until we finalize everything. I promise you, as

soon as we do, I’ll be happy to explain everything that we’re going to do going forward, but right now,

we can’t say anything.


Okay. Thanks, guys.

Operator

Your next question comes from Leon Aghazarian with National Bank Financial. Please go ahead.

Leon Aghazarian – Analyst, National Bank Financial

Hi, good afternoon. My first question’s regarding Juvenile segment. You’re expecting double-

digit earnings growth in the second half of the year and so I mean, so far, we’ve seen organic growth

was flat in the quarter and it’s up very slightly year to date. I know Latin America has been a big

contributor. I just want to see, you know, is it really driven by Latin America in terms of the organic—

sorry, the earnings growth that we’re expected to see in the latter half of the year, or has the US

competitive pressure kind of subsided little bit? Just your comments on that, please.


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Yes, we expect—I mean, it’s certainly Latin America, there’s no question, as we mentioned, but

there are some other areas that are really starting to gel well. Places like Australia, believe it or not, are

looking forward to a very good second half compared to the first half. Places like Tiny Love, they’re a

big—also, for whatever reason, their earnings are going to be mostly second half earnings.


And what about the US, what’s the competitive landscape looking like there? I mean, we know

in the first quarter you benefited a little bit from, I guess, from a recall from one of your competitors?


US is still tough. I don’t expect a major second-half revival, but Lerado is one of the big sort of

solutions to our issues that we have in the US. We’re going to be able to be more competitive in the US

market, I think, going forward with having our own factory. So that’s where it’s going to take a little bit

of time and it’s not necessarily going to be a second-half business in the US.


Okay, great, and a last one from me would be, regarding the SG&A, I mean, you mentioned

quite a bit about Caloi, but talking about the Juvenile SG&A, we see that has risen as well on a year-over-

year basis. Is that primarily driven by Tiny Love, and if so or not, then what are some of the reasons for

the increase in SG&A?

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Primarily driven by Tiny Love.


Okay, thanks. I’ll turn it over.

Operator

Your next question comes from Anthony Zicha with Scotiabank. Please go ahead.

Anthony Zicha – Analyst, Scotiabank

Hi, good afternoon. Martin, could you elaborate a bit more on the Lerado acquisition in terms of

the integration plans, like how much business do you figure you’ll be able to take in-house and how

much business could we anticipate losing when the transition occurs; and, finally, like how are we going

to finance this acquisition?


As far as the transition, I mean we expect to keep a good part of today’s existing business for a

little while. We’ll see how we manage the relationship with today’s customers, but there’s an awful lot

of goods that we will be able to transition into the Lerado facilities. We should be able—just what Dorel

needs for Juvenile products, we could fill that factory, and we’re starting the transition already so it

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should go as smoothly as we can make it. Like I said, we will fill the factory if we need to and if we want

to.


As far as financing, we’re looking at and we’re analyzing all the different options still, so we

haven’t come to any conclusions yet.


Okay, and with reference to Caloi, you mentioned market share. Like, what market share do you

have, and how has that evolved since you’ve acquired the company? And, Martin, what do you see is

the biggest challenge in Brazil in terms of the competitive landscape?


I’ll take that. We actually haven’t—we don’t have market share numbers. I mean, Caloi is by far

the biggest brand. Going forward, we see Caloi growing probably with the market. I don’t know that

they’re going to gain market share. Where we’re making the big impact is we’ve already introduced, for

instance, Mongoose and Schwinn brands in the marketplace, and those products are produced in Brazil,

100 percent produced in Brazil, so now we have two other brands that we can use in the portfolio. As

well, we’ve got Cannondale and GT, which are coming in either imported or semi-imported, and those

brands are also being expanded, and that’s where we’re gaining significant market share. Cannondale,

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for instance, had, I think—where it was sold in about 80 stores prior to the acquisition and we’re about

250 today. GT, we’re almost—we’re aiming for 200 locations throughout the country. So there’s lot of

brands that are going to help us grow that business, not just the Caloi brand.


Okay, excellent. Thank you, Jeffrey, Martin.

Operator

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

Stephen MacLeod – Analyst, BMO Capital Markets

Thank you, good afternoon. I just wanted to get some more clarity on the $6 million in non-cash

charges from accretion interest and unrealized FX losses. How much of that was actually in the quarter?

I mean, I know, Jeffrey, you said—I thought you said that it was 1.3 or something, but I thought that was

maybe only for the (cross talking).


Of the total—I’ll tell you what, I have—of the $10.3 million, as opposed to the $6 million of the

total there, about—just under 40 percent is Q2 versus Q1.


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Okay, but you don’t have the breakdown for the 6?


Breakdown of each individual piece, no.


Okay. Then can you just talk a little bit about the sort of cost and pricing environment on the

Juvenile business in the US and elsewhere?


Are you talking about, like, our input costs or selling?


Input cost, input cost and selling price environment?


Out of Asia, the costs have been very stable. Their materials have been stable. Labour has gone

up a little bit. We’re doing fine with cost of freight. So, if anything, there’s no upside—upward pressure

on our costs. On the selling side, the retail side, competition is still very tight. We have to do whatever it

takes to maintain our market share and try to grow our market share, but I think we’re handling it pretty

well.

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Great, okay, okay. Then just finally, Jeffrey, you alluded to the financing for the Lerado

acquisition. Do you have a sort of preference for an optimal structure in terms of how to finance it?


Like I said, we’re looking at it still. We really don’t have any comments on that. We haven’t

made any decisions.


Great. Okay, thank you.

Operator

Your next question comes from Derek Dley with Canaccord Genuity. Please go ahead.

Derek Dley – Analyst, Canaccord Genuity

Yes, hi, guys. I’m just wondering if you could give us an update on the new product pipeline at

Juvenile and when you really expect that to kick in, especially now with the acquisition of Lerado?


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I mean, there’s product all the time, right? This is like a two-year pipeline, so we’re constantly

introducing new product. Obviously, there’s going to be an impact of Lerado on that. That’s probably—

it’s going to be nine months. I was going to stay Q1 to Q2 next year is probably the earliest we’ll see

some of the new Lerado type of product, but we already have stuff in the pipeline, so it’s a difficult

question. It’s not like we have—you know, we’re going to see one major sort of push on that area.


But we do have some products—well, actually lot of products in the schedule from now until

even out to early 2016, in car seats, in strollers, there’s new products coming out in our safety lines. So I

mean, we are constantly developing.


Okay, that’s great. Then at the Recreational division, looking ahead to the back half of the year –

obviously, you guys have noticed some very strong growth potential – where do you guys—what

markets do you see outperforming outside of Brazil? For example, do you see the US outperforming

Europe or vice versa?


I don’t know that we have it broken down.


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Europe has been very strong this year.


Yes, I would expect Europe to stay strong. We’re expecting a very strong fourth quarter for—I

mean, just having Brazil putting all of that income into the fourth quarter is going to have a major—a

positive impact for us. Third quarter’s going to be a little bit more challenging because we actually had a

good third quarter last year, so we’re not expecting to see a ton of growth there. But when we look at—I

think there’s going to be a lot of shipping of 2015 bikes for the IBDs, for the Cannondales, which occurs

primarily in Q4. So I think in addition to Brazil, you’re seeing a very strong introduction of new bikes into

Q4, as well as our mass channel, which always does well in the Christmas season, so it’s kind of mixed. I

mean, with the two big ones being the IBDs selling the new bikes 2015, and Brazil, it’s going to lead to

significant profit improvement.


Okay, that’s great. Thank you very much.

Operator

Your next question comes from Mark Petrie with CIBC. Please go ahead.

Mark Petrie – Analyst, CIBC World Markets

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26

Good afternoon. You mentioned that Lerado’s going to make you more competitive in the US,

and is that just matter of flexibility or lower production cost—like, flexibility around product and

innovation, lower production costs, or is it a matter of being able to get back into some of the products

that you may have had to exit because the margins were getting squeezed?


Yes, well, there’s a couple of things. First of all, it definitely will give us better costs on our

purchases out of China, as well—like you say, we had to exit certain areas because there were some

Chinese vendors selling direct to the retailers, and in many cases, off-brands that they’re selling direct.

We will now be able to easily compete with that and give the retailer and the consumer a brand that

they recognize.


Okay. Then just in terms of the SG&A in Juvenile, is it—I know you said that the increase is sort

of basically the acquisitions, but should we expect it to be fairly stable from here then?


I would think—I mean, again, we’re going to end up with another one, another acquisition by

the fourth quarter so, obviously, that’s going to bump it up, but, yes, I would think it’s going to be fairly

stable.

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Okay. Then just as it relates to the Rec and Leisure business, and the IBD channel specifically,

what do you think accounts for Europe outperforming the US? Is it a matter of just different sort of

weather and that kind of thing, or do you feel like the brands are behaving differently or you have a

different sort of marketing push?


No, well, certainly the marketing push isn’t different. I think it’s a better environment right now

for biking, but weather is huge, we don’t want to underestimate it. I mean, we used it as an excuse last

year, I think a valid excuse for the problem, and I’ll tell you this year, we had an early spring and then

we’ve had a really good summer, and that’s really helped.


What’s your view on the health of the IBD channel in the US specifically? Do you feel like it’s—is

it over-stored, are you seeing more people coming into the business still, and what’s your view on the

inventory levels at the sort of retail level?


I think the biggest single impact on why the US isn’t doing as well as Europe is the inventory

overhang from last year. I keep hearing that that’s still—somebody told me something like the best-

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28

selling bikes of the year, among the top 10 bikes of the year being sold, three of them are 2013 models.

You know what I mean? So people are still clearing out bikes. It hasn’t really affected us that much,

other than it’s been a little bit sluggish. Certainly, we’re doing better than last year. We don’t have—we

didn’t have that excess inventory that we needed to clear, so we were able to sell our goods at full

margin, which meant we had a good year. But I think the biggest impact on the US is definitely the

overhang on inventory from last year.


Okay, thanks very much.

Operator

Your next question comes from Derek Lessard with TD Securities. Please go ahead.


Yes, have you guys gotten any feedback or buzz surrounding your new 2015 models?


Yes, I think they were great. I was down at the sales meeting a couple of weeks ago, in late June

in the US, and yes, they got excellent response. We’re pumped up on the bike side, on the product side,

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I think we’re doing a great job there. I see what’s in the pipelines for the next couple of years. It’s pretty

exciting as well.


Okay. You guys still think you’re taking market share?


In some categories, yes, I do. I really think we are. I think we’re putting out some great products

now and…


And we’re getting some great reviews.


Yes, again, we’ve got some Bike of the Year reviews and stuff, and we’re certainly—we’re

focused on that and we’re focused—I think next, 2015, you’re are going to see best year ever for parts

and accessories, Cannondale.


We’re totally rebuilding our parts and accessory lines.

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30


So, you know, we’re—that part of the business is—it looks great.


Okay, and one final one. It’s nice to see some good news in Juvenile Europe. Can you just maybe

talk about what’s going on there?


You know what it is? It is some pretty good news. Obviously, the exchange rate helps, but we

are seeing some growth in a number of territories. You know, we can’t (inaudible)—again, they tend to

be the northern territories. The south is still somewhat challenging, but overall, we’re picking up a little

bit of momentum. It’s still tough, don’t get me wrong, this is—right now, it’s still—you know, we’re still

struggling a little bit here and there, but at least we’re not moving backwards anymore.


Great. Thanks for your time guys.

Operator

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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 Anthony Zicha with Scotiabank. Please go ahead.


Yes, Jeffrey, could you please remind us of what free cash flow do you anticipate for the year?


We haven’t forecasted that.


Okay.


I haven’t issued it, so I can’t say now.


Okay. Well, thank you.

Operator

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There are no further questions at this time. Please continue.


Okay, well, thank you. We are confident about the road ahead for Dorel. We are making very

strategic investments which we know are in the best interest of our shareholders. These include

expenditures to support our brands and allow us to be in a better position to control our destiny. We

have great teams in place at our business who are committed to getting the job done. The future is

exciting and we see great things ahead in many areas.

In conclusion, I want to thank everybody for joining us this afternoon. Thank you.

Operator

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

Please disconnect your lines.

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