FINAL TRANSCRIPT. Dorel Industries Inc. Third Quarter Results. Event Date/Time: November 7, 2013, 11:00 a.m. E.T. Length: 43 minutes

Transcription

1 Dorel Industries Inc. Third Quarter Results Event Date/Time: November 7, 2013, 11:00 a.m. E.T. Length: 43 minutes 1

2 CORPORATE PARTICIPANTS Martin Schwartz President and Chief Executive Officer, Dorel Industries Inc. Executive Vice President and Chief Financial Officer, Dorel Industries Inc. Frank Rana Vice President of Finance and Assistant Secretary, Dorel Industries Inc. CONFERENCE CALL PARTICIPANTS Derek Lessard Analyst, TD Securities Dave King Analyst, Roth Capital Mark Petrie Analyst, CIBC World Markets Stephen MacLeod Analyst, BMO Capital Markets Tal Woolley Analyst, RBC Capital Markets Anthony Zicha Analyst, Scotiabank Leon Aghazarian Analyst, National Bank 2

3 PRESENTATION Operator Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Dorel Industries third 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 any difficulties hearing the conference, please press * followed by 0 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 Thursday, November 7th, I will now turn the conference over to Martin Schwartz, President and CEO. Please go ahead. Martin Schwartz President and Chief Executive Officer, Dorel Thank you. Well good morning, and on behalf of and Frank Rana, welcome to Dorel s third quarter conference call. 3

4 We will be pleased to take your questions following our initial comments. And a reminder that all numbers are in U.S. dollars. On the surface, our third quarter results look weak. However, after excluding the provisions of $8.5 million pre-tax for the U.S. court case and the costs associated with the Caloi transaction, our third quarter results are slightly above those of last year. In September s jury verdict, Dorel was assessed $26 million as its portion in a case involving an injured child in a 2008 accident. We have launched an appeal to the Mississippi Supreme Court, as our lawyers firmly believe that the process was flawed. They feel we have several strong points to present, which makes us confident that the judge will either be... the judgement will either be overturned entirely, that the liability assessed against Dorel will be significantly reduced, or a new trial will be ordered. Dorel spends millions annually in product development and testing to ensure that our products are of the highest quality. This has always been of utmost importance to us. Thus far it has been a challenging year in our core businesses of Juvenile and Bikes. We ve been making the required adjustments, which include a focus on new product development. Many innovative products have recently been launched, particularly in our Juvenile segment. There has also been improvement since the second quarter in Recreation-Leisure s operating profit. We are continuing to invest heavily in our business. Two examples are the Caloi transaction and our purchase of the majority stake in the Cannondale Pro Cycling Team. 4

5 In Home Furnishings, the segment held its revenue and operating profit steady with last year, thanks mainly to the steady growth in its online sales. Our Juvenile division participated in two important trade shows during the quarter, one in Cologne, Germany and the other in Las Vegas. We also hosted an analyst day at the Cologne show, providing an opportunity to meet with the segment s senior management and get a firsthand look at the many new products being launched in Europe. Customer feedback was also highly positive at the U.S. show for our new product offerings going into Maxi-Cosi won the prestigious Innovation Award at Cologne with its new 2Way Pearl i-size car seat in the World of Travelling Baby category, clearly setting us apart from other car seat manufacturers. The new i-size European standard features improved safety for children travelling rear-facing to better protect their heads and neck, as well as improved side impact protection. Dorel is the first car seat manufacturer to offer a product which meets the new European standard, and we are the first to market with this new safety innovation. The acquisition of a 70-per-cent stake in Caloi, while only completed in late August, has already brought positive results to our Recreation-Leisure segment. Caloi is Latin America s largest bicycle brand, and we are excited with the prospects created by the purchase of this business. Cannondale, Schwinn, Mongoose and GT will be formerly launched in Brazil, along with the Caloi portfolio at the Major Bicycle Show in Sao Paulo, which opens today. The introduction of Dorel s bicycle brands in Latin America will help meet the increasing demands of the Brazilian consumer for 5

6 high quality, innovation and style. As well, Brazil will become a Dorel production centre with Caloi s bicycle factory assembling some items of our other key brands for that market. Eurobike, the world s largest bicycle trade show, was held in Germany this past August. The event attracts thousands of retailers, journalists, consumers from across the globe. Cannondale, GT and SUGOI displayed a range of products that were met with a consistent flow of booth traffic and very favourable feedback. One of the most notable new products was the Cannondale Tramount, the first E- mountain bike in the successful Cannondale E-series line. It features a lightweight and smooth-riding aluminium 29er hardtail frame designed specifically around the latest generation of the classleading Bosch motor drive system, co-developed by Bosch and Cannondale. Our GT Sensor Carbon Team model won a Eurobike Gold award. Across all categories, close to 500 bicycles were entered to win Eurobike awards, and the GT Sensor was named the Eurobike Gold award winner in the Mountain Bike category. The Sensor has been in development for the past couple of years, and was introduced to the media in June. It has had excellent reviews, and receiving the prestigious Eurobike award against some of the world s best full suspension mountain bikes is the highest level of validation in the cycling industry. Last month we again increased our marketing investment in Cannondale by acquiring the majority ownership of Cannondale Pro Cycling and Brixia Sports. The success of the team, and Peter Sagan in particular, has been very positive for the Cannondale brand. 6

7 Now that we will also be marketing Cannondale in Latin America, and given the continuing growth in Europe, we see this as a winning formula. Home Furnishings online sales are maintaining their growth trend with the segment s drop-ship vendor program continuing to drive the growth. Online sales grew 60 per cent over the prior year, compensating for a 6-per-cent decrease in sales to brick-and-mortar stores. We have invested in new software to pick, pack and ship DSV items. The system was implemented during the third quarter, giving us an important advantage in online furniture shipping. This has already begun to pay significant dividends. Jeffrey will now provide a more detailed financial perspective. Jeffrey? Executive Vice President, Chief Financial Officer and Secretary, Dorel Thank you, Martin. I ll focus on the quarter results and will highlight some of the topics. Revenue for the third quarter was $607 million. That was a decrease of 1 per cent from last year. After removing the effect of foreign exchange and new business acquisitions, organic revenue decreased by about 4 per cent. Pre-tax earnings decreased 58 per cent to $10.2 million from $24.4 million last year. Included in that is the expense of a settlement of $8 million relating to the car seat case that Martin spoke about. Net income for the quarter was $11.1 million. That s a decrease of $8.9 million from $20 million the year before. And our diluted earnings per share was $

8 Excluding the one-time charge of $4.9 million after-tax relating to the car seat case, as well as $4.5 million of costs related to the Caloi acquisition, which was principally related to a foreign exchange loss on the put-option liability, net income for the quarter would have been $20.5 million or $0.64 per share compared with $0.63 last year. On the EBITDA side, our EBITDA, after we removed the one-time charges, would have been $ million. So in regards to the Caloi acquisition, we recorded a quarterly unrealized loss due to foreign exchange exposure on the put liability caused by the change in the foreign exchange rate between the date of acquisition, August 22nd, and the quarter end. This loss is a non-cash item, which unfortunately had a negative impact on the quarter. However, I d like to point out that had we closed the deal and avoided... had we closed the deal at the end of the quarter and avoided that loss, we would have paid an additional $5.4 million in cash for the shares that we did buy. So from a cash position this is quite favourable, but unfortunately it did have a negative impact on our results. As far as some people have asked how we recorded that charge. The $4.5 million that we talked about, about $4.171 of that was in the corporate expense, with the balance in the segment of Recreation. Gross profit decreased 60 basis points to 22.2 per cent from 22.8 the prior year. The decrease was in Juvenile and Recreation and Leisure, partially offset by an increase in Home 8

9 Furnishings. Finance expenses increased by $1.6 million to $5.5 million due to higher borrowings involving the Caloi acquisition. The effective rate... tax rate for the quarter was 8.6 compared to 18 per cent last year. The main cause of the variation are changes in jurisdictions in which we generate our income, as well as the recognition of a tax benefit pertaining to the adjustment of tax balances following a foreign reorganization. The company believes that the rate for the yearend 2013 will be between 12 and 17 per cent. Juvenile segment, the revenue was $239 million, a decrease of 4.1 per cent compared to last year s $249.1 million. The overall organic decline was about 6 per cent. The segment s profits were $5 million, down from last year s $16.9 million. The main cause again was that U.S. car seat case. The organic revenue decline was in Europe and North America. And that was partially offset by growth in Latin America where sales are improving in all the markets. Gross profit decreased by 50 basis points to 27.2 per cent from This was mainly due to decreases in Europe where the sales mix affected margins. Overall the segment s selling and expenses increased by just over $1 million due chiefly to new retail store openings in Chile and Peru compared to the same time last year. And again, general and administrative expenses were up $6.5 million, but that would be as a result of the car seat case. Excluding the car seat case, we would have been down about 7 per cent, mainly driven by cost reductions in North America and Europe. 9

10 The Recreational and Leisure segment revenue increased by $2.6 million or 1.2 per cent to $231.6 million compared to $229 million. Organic revenue declined approximately 6 per cent in the quarter. Operating profit for the third quarter increased by $1.6 million or 12.7 per cent to $14.1 million compared to $12.5 million last year. Gross margins decreased 80 basis points to 23.4 from 24.2 recorded last year in the third quarter. The decline in gross margin, while slowing compared to previous quarters, is still attributed to the product mix, as well as unfavourable exchange rates, and the pressure on discounting the 2013 line that we talked about in the past. Selling expenses declined by 5.9 per cent, indicating the cost containment program that began on Q2 is on track. Over in Home Furnishings, revenue increased by $1.5 million or 1.1 per cent to $135.2 million in 2012 to $136.7 million this year. The revenue increase came predominantly from online sales versus last year, and that compensated for the decrease in sales to brick-and-mortar. Operating profit for the quarter was $5.8 million, unchanged from the prior year. Gross profits were 11.4 per cent, an increase of 20 basis points from the 11.2 per cent last year. And while input costs were stable versus last year, operating profit was improved due to the impact of overhead cost control and a slightly more profitable sales mix, as well as the more favourable rate of the Canadian dollar. 10

11 If we look at the general trends, before I pass it back to Martin, debt, as defined as bank indebtedness plus long-term debt, increased by 28 per cent to $440 million compared to $343 at the end of That, of course, is related to the Caloi acquisition. On the statement of cash flows, cash provided by operating activities was $107.5 million year to date, an increase of $53.7 million over last year. The increase was mainly explained by the net changes in balances related to operations, which positively impacted cash flow provided by operating activities, which partially offset by the lower net income. We have you know, our inventory has increased by $37 million on the balance sheet, but that includes the Caloi acquisition. So we ve been able to remove inventory from the system. The Recreation and Leisure group has removed inventory net of the Caloi acquisition, and we re pretty pleased with that. During the first nine months of 2013 the company distributed... disbursed I m sorry $71.9 million in connection with the business acquisitions compared to $14.7 in And with that I ll pass it back to Martin. Martin Schwartz Thank you, Jeffrey. Well looking forward, Recreation-Leisure rebounded from its disappointing second quarter, and with the contribution of Caloi, it exceeded prior year results. We expect the payment of fourth quarter and earnings should exceed last year s fourth quarter. However, the IBD channel is 11

12 being cautious on pre-season inventory purchases, given their experience with last spring s poor weather. Juvenile participated in successful trade shows in both Europe and the U.S. where many of our new products were well received. The Latin American business remains on track for improved earnings this year. With challenges in a number of markets, we have lowered our expectations for Juvenile, and the segment will not exceed 2012 full year earnings. We expect Home Furnishings solid performance to continue, though we have tempered our full year expectations somewhat from our prior outlook. These results are not acceptable, and management is actively working on many fronts to improve the business and its value for our shareholders. We have demonstrated this with our Caloi acquisition, allowing us to enter new profitable markets in Recreation-Leisure. Despite these issues, it is anticipated that operating profit for the fourth quarter will be higher than the third quarter, and will set the stage for an improved I ll now ask the operator to open the lines for your questions. Again, as I always ask, please limit your questions to two on the first round. Operator, please. 12

13 Q&A Operator Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press * followed by the number 1 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 speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Derek Lessard from TD Securities. Your line is open. Derek Lessard Analyst, TD Securities Good morning, guys. Just a question. You pointed to a decline in organic revenue in Recreation. You know, for lack of a better word, is the bleeding slowing there? And can you put into context what you mean by dealers being cautious? Okay, actually there s two issues here. There s a Q3 issue and a Q4 issue. If we look at Q3, actually the decline that we had was on our mass side, and a lot of that s related to timing. Last year a lot of the retailers ordered we ll say the Christmas goods starting at the end of Q3. This year that s going to start in it started in October. So on the mass side we re kind of seeing a switch from a quarterly standpoint. The actual IBD business was solid in Q3. 13

14 What we re seeing going forward in Q4 is a lot of dealers are just nervous, given the weather situation that happened last year, to fully commit to as large opening orders as they have in the past. So I think it s just a matter of again, timing. I think that s you know, if the weather s fine we re going to see, you know, those replacement orders coming in Q1 and Q2. They re just not building up as much inventory as they had prior to last year. Derek Lessard Okay. So that makes sense. So to follow up on that, are you guys ready for let s say a surge in demand should it come to that? We I mean yeah, I mean as much as we can. I mean, you know, we don t want to overcarry too much inventory, so Martin Schwartz We have to talk to some new systems working with our supply chain, and replenishment from Asia will be coming in at a faster pace than ever before. Derek Lessard Sorry, Martin, you have new new technology? Martin Schwartz Well it s not new technology. We worked... we work closer with our suppliers 14

15 Derek Lessard Okay. Martin Schwartz okay. And we work better on scheduling so that, you know, reducing the lead time they need and reducing their production time. So we should be able to get goods here on a quicker pace than we ve ever done in the past. Derek Lessard Okay, perfect. And just one follow-up question. How far along are you guys in doing away with model year introductions? I know I heard that Track has already moved away from that model. Martin Schwartz Well, nobody s moved away fully from that model. But there are products in the line that we will be going to, the everyday products. It s a priority of ours, and we ll definitely be doing it. We won t be doing it across the board. I don t believe everybody s doing it. Certainly on the high-end products it s more difficult to do it. But the everyday products, that s our goal, and I think that s going to start happening in Derek Lessard Okay. Thanks, guys. Operator Your next question comes from the line of Dave King with Roth Capital. Your line is open. 15

16 Dave King Analyst, Roth Capital Thanks. Good morning, guys. I guess... Martin Schwartz Good morning. Dave King...just to follow up somewhat on this on the Rec business, it sounds like then October has trended somewhat better, given the timing of some of that kind of stuff, but you re still somewhat cautious just due to what the IBD channel is seeing out there or what they re saying, you know, due to weather and all that kind of stuff. But based on everything you re seeing so far, it s improved? And then that s why you re getting to better profitability than you had been? Am I understanding that correctly? Well, I mean we have really three major components in our Recreation business. We ve got the IBD business, we ve got a mass business, and now we have a Brazilian business. So the mass business, which was weaker in Q3, is expected to be quite strong in Q4. The IBD business, which had a good Q3 compared to the year before, will have a better Q4 than the Q3, but last year s Q4 was very, very strong as dealers loaded up a lot of inventory in Q4 of last year. Dave King Right. Okay. 16

17 So that s going to be a little bit lighter. So we re expecting that to be lighter, and the Brazilian business is going to be very good in Q4. Dave King Okay. And some of it, it sounds like it s from the acquisition too then in terms of Yeah, absolutely. Dave King (inaudible) outlook. I mean, Q4... Q4 is actually their strongest quarter. Dave King Okay. Okay. When you think about it. It combines both the start of summer in Brazil, as well as Christmas season. Dave King Okay, that helps. And then in terms of the Juvenile business, just a clarification in terms of the guidance you ve laid out. Does that... does that include or exclude the judgment? And then I 17

18 guess just a question on the judgment. It seems like that kind of came in below expectations. Is that... you know, what s driving that or should we expect another charge in the fourth quarter? No, there won t be another charge. I mean when we put out the first press release it was we put it out with speed in mind. Dave King Okay. We had to get it out quickly, so we kind of picked a number that we knew that it wouldn t go over. And then we ve been we fine-tuned the number. So that s pretty much the number that there is today. Dave King Okay. As far as the forecast, that does not include the charge. So we re going to be I think what we re saying we re going to not beat last year. I mean, you know, we were hovering around that mark, and I think we re just going to fall short of that mark of last year s earnings. Dave King Okay. Thanks so much. 18

19 Operator Your next question comes from the line of Mark Petrie from CIBC. Your line is now open. Mark Petrie Analyst, CIBC Hey, good morning. I just wanted to ask again on the Juvenile segment, particularly in the U.S., can you just talk about the trends and shelf space? I think before you were kind of selectively trimming some products that you felt were going to boost your gross margin, although we did see a gross margin decline this quarter. So just if you could comment on the trends and shelf space, and then your expected trends in gross margin, that would be great. Yeah. I mean the one thing I guess that s hidden in our numbers is that although our sales are down in the U.S., our profits are actually up once we remove the court case. So we are making progress on our profitability, and that s our focus. Shelf space, difficult I mean, you know, there s certainly we have wins and we have losses. I don t think we re gaining market share right now. I mean, we re working on that. We ve got some, you know, plans obviously to enhance what we re doing. But we are pleased with the fact that our earnings are holding out, and a lot of that has to do with we re removing low-, low-margin products from our mix. So again, overall we re pleased, although I won t say that s you know, that s certainly not our strong, strongest area. You know, Latin America is our biggest growth area. The U.S. is something that we still need to improve on. 19

20 Mark Petrie Okay. And understanding that the bulk of your business in the U.S. is in the mass channel, where will we see the best growth in terms of the new product introductions that ll be hitting in Q4 and next year? I mean, is it all in mass or will you be seeing some in the specialty side? I mean both. We have some I mean again, the specialty channel s small in the U.S. It s growing. It s up over last year. We are definitely have some great stuff coming through the system. But again, all of that specialty stuff would be our European products being sold in the U.S. That s I m sure that s I assume that s what you re referring to? Mark Petrie Yeah. That s doing very well. On the mass side, again, it s you know, there s only a handful of accounts out there. So depending on what they re planning to buy, how their promotion schedule works, you know, it s difficult to foresee how that s going to go. Mark Petrie Okay. And just sort of one broader question, just still on Juvenile, you know, like I guess a couple of years ago it was a pretty rough situation in the industry overall. You know, where do you think we are in terms of that having recovered in terms of... in terms of actual demand? 20

21 The demand is up a little bit. It s still... it s still a rough situation. I mean, if you look around some there are some people that are doing better, and there s a lot of players that are really struggling in this industry, particularly in North America where, you know, it s more of a marginchallenged environment. So I think demand is creeping up a little bit, but it s certainly not robust. And again, there are winners out there and there s people that You know, we are struggling a little bit in the U.S. We have some plans. They don t... Nothing is an overnight, you know, in this business. It doesn't... you can t change it, you know, in quarter. And we re working you know, we ve got some new people in and we ve got a plan to, you know, get back to our profitability and increase our sales, but it s going to take a few quarters. Mark Petrie Okay. Thanks a lot. Operator Your next question comes from the line of Stephen MacLeod from BMO Capital Markets. Your line is open. Stephen McLeod Analyst, BMO Capital Markets Thank you. Good morning. I just had a question on the Rec business. I m just wondering, the profitability levels in the Rec business, is that reflective, fully reflective of the restructuring that 21

22 you went through in in Q... I guess in Q2, and, you know, we expect to see that maybe move a little bit higher in Q4? Are you talking about percentages or are you talking about dollars? Stephen McLeod Yeah, I m talking about the percentages. I mean, it s... it s a good question, but the problem I guess is Q3 is the weakest quarter for the independent business. So normally we don t make a lot of money at all in that quarter, even when things are great. So we did better this year because sales you know, we got a reasonable rebound in sales and, you know, our cost cutting. But no, it s not a good quarter to base future activity on. It also didn t contain much of Caloi as well, so Caloi s going to have an impact on our numbers for sure going forward. Stephen McLeod Right. Okay. And then just turning to Caloi, two questions. One is what was the is that $4.5 million a pre-tax charge or is that still the after-tax charge? It s an aft... It s basically both. So there s not a lot of there s no tax effect on those numbers. 22

23 Stephen McLeod Okay. Okay, great. And then from an operational perspective, can you just talk a little bit about, you know, what you ve done with the business in the, call it, two months that you ve owned it, and what the integration looks like? And you talked about the rollout of Cannondale and Schwinn into the Brazilian market. Can you just talk a little bit about the timing and what kind of reception you expect? Martin Schwartz Okay. Well, we ve got you know, the first thing we did is we started to merge some of I guess what you d call, you know, the backroom support. We ve looked at how we can take advantage of synergies between our existing bike business and Caloi as far as purchasing parts and finished goods, and we ve looked at, you know, where we can assess it from, you know, logistics. We ve also now like, I mentioned that today s the first day of the I guess Brazil s, you know, largest bike show. We ve got some very interesting displays on (inaudible) with... you know, for Caloi, and you know, particularly for Cannondale and, you know, our other brands. We ll know in a few days, but in the interest from the you know, the dealer the dealership community in our brands has been very strong. And we re going to continue working with them. Like I said, you know, sometime in the near future they ll start assembling some of the of our brands in their factory in Manaus, and that should be you know, put us in a much more favourable, competitive mode than the other bike brands we have to import and pay full duties. 23

24 We ve got a big program. There s 30 or 40 items on the list where, you know, we re working together with the Caloi people. The reaction to from the... from Caloi to our new ownership has been excellent. We seem to be getting along very, very well with the management at all levels. And I think everybody s very excited about the potential. Stephen McLeod Great. Thank you very much. Operator Your next question comes from the line of Tal Woolley from RBC Capital. Your line is open. Tal Woolley Analyst, RBC Capital Hi. Thanks. Just wondering if you can isolate what the contribution Caloi had to the operating profits this quarter? Yeah, we don t usually... if you notice, we don't usually, we don t usually disclose individual pieces within it. Tal Woolley Okay. I guess then But I was just told that it s going to end up being in the MDA anyway, so I guess (inaudible) disclose it. 24

25 Tal Woolley Okay. $1.3 million for the of operating profit. Tal Woolley Okay. And you ve sort of hinted at the seasonality. Is it markedly different, like from the base Rec-Leisure business as you have it right now? Well yeah. I mean, it s kind of reverse because of the seasons, right? So... Martin Schwartz Now they re in spring. Yeah. Q4 is a huge, huge quarter. They look like they ll be on track. I mean, we ll be able there s some accounting rules which won t allow us to record all of the profit this time in Q4. But they re looking to have a huge quarter. And then I would imagine, you know, it s kind of reverse of what we have up here. Tal Woolley Okay. And then I guess when we look out like into Q4 and beyond, so if I m understanding your commentary, you know, we should be looking at the Juvenile business and the growth that 25

26 could potentially be driven there as a margin expansion opportunity, not maybe quite as much on the top line? Well until again, depending on where. You know, Latin America is both, right? Latin America s, you know, becoming more and more important in the Juvenile and for growth and both on the margin side and on the top line. Right now, you know, until we kind of finish our changes in the U.S., you know, we re not anticipating in the next few quarters to have a huge increase in either margin or sales. Europe is still Europe is still challenged. I mean, you know, people saw... they lowered the interest rates in Europe today. Europe, just demand in general for product is just sluggish. And you know, that s having an impact on us there as well. So we re trying to protect our margins. We have good margins in Europe, and trying to grow the business. We have some great you know, we had a great product introduction at the show on the car seat side. Very excited about that product. It s new innovation. It s kind of leading edge stuff, so we re expecting, you know, some growth on the car seat side because of that. So that s kind of in the three categories. North America and Europe right now are a little bit sluggish, and most of the growth is going to be coming from South America. 26

27 Tal Woolley So I guess, you know, like when does that organic number turn positive then in your thoughts? Like so it doesn t really sound like it s going to be soon. You know what, I m not going to comment on that because we re going through our budget process now. And that ll happen in a couple of weeks. So the information flow on next year is very tight now, so I honestly can t comment publicly until we ve gone through that process, and to see exactly when, you know, the things are going to kick in, when the new products are going to be shipped, when all that s going to happen. So I m going to... I m going to... you re going to have to take sort of a few months wait on that question. Tal Woolley Okay. And then just with Caloi s addition, like we its... are its operating margins you know, because it sounds like it s maybe a bit of an integrated manufacturer than your existing bike business are they stronger than the base business? Yeah, yeah. They are. Tal Woolley Like immediately so or a little? I m just trying to get you know, can you give us some sort of order of magnitude or...? 27

28 Again, at this point, no, you can t... you can t really look at historical. And we ve got you know, they re going through right now the exchange rate nightmare that Brazil s going through, so I wouldn t want to predict what their margins are until things settle down a little bit. But having said that, they are they re definitely a higher margin business than the businesses that we currently have in North America. Tal Woolley Okay, that s great. Thank you very much, gentlemen. Operator Your next question comes from the line of Anthony Zicha from Deutsche Bank. Your line is open. Anthony Zicha Analyst, Scotiabank Good morning. I m at Scotiabank. Stand corrected. You re still there. Good. Anthony Zicha Yeah. Of course. Yeah. Martin, with reference to the Caloi acquisition, could you give us some colour on the Brazilian market? Could you remind us, you know, what the mixture is in terms of retail and IBD, and if there are any similarities to the North American markets? 28

29 Martin Schwartz Well there is a you know, a fair sized, what d you call I guess they would call it their mass market, although a lot of them are like specialty sporting good stores. They ve got some, you know, big international chains. There s Carrefour. And Caloi manufactures, you know, bikes from all ranges, right up until I guess the mid-high. And there is also quite a large dealer network across the country. So they re supplying both markets, although it s all supplied under the brand name Caloi. With our new... with our brands, the Cannondale, GT, et cetera, we ll be bringing new brands to some possibly to the let s say the sporting goods chain, and more mostly likely most of them to the IBDs. Anthony Zicha Okay. And could you give us an idea about how the market has performed in the last few years, like what kind of growth was there, and has Caloi been able to capture more market share? Thanks. Yeah, it s Jeffrey. An interesting part of their market, what s happened, as, you know, consumerism has grown in Brazil, the actual number of units sold is up, but what s up more than that are the average price point of bikes that people are buying. So people are spending a lot more money on bikes. So they re moving up the channel from, you know, the local you know, at the opening price point in Brazil are actually like mom and pop manufacturing shops in small villages 29

30 that make bikes. And then it goes up to, you know, the mass-market level and sporting goods that Martin talked about where Caloi is extremely strong. And then from there, you know, it s moving up to the independent channel where Caloi has had a presence, but hasn t been able to deliver the brands and the aspirational bikes that people want, which is where Cannondale and GT come in. So people are spending the market itself has been growing, I believe at least double digits. But a lot of that is on price, and I guess mix, if you know what I mean, as opposed to the sheer number of units being sold. Anthony Zicha Okay. Thank you, Jeffrey. Operator Your next question comes from the line of Leon Aghazarian from National Bank Financial. Your line is open. Leon Aghazarian Analyst, National Bank Financial Yeah, thanks. Good morning. Just a quick question, since we don t have the MD&A, what was the final price on Caloi, price paid for it? Martin Schwartz That s in U.S. dollars? $72,980 for 70 per cent of the business. That s the 70 per cent we paid. 30

31 Leon Aghazarian Okay. So basically what s in the cash flow statement. Okay. And then what was maybe I missed that part, but I know you discussed, reluctantly I guess, the operating profit in the quarters. What was the top line contribution in the quarter from Caloi? Martin Schwartz About $16 million. Leon Aghazarian $16 million U.S.? Martin Schwartz Yes. Leon Aghazarian Okay. And just one last question for me would be on the inventory side, you were kind of mentioning before that the IBD channel I mean they re a bit I guess more reluctant to commit, and you re trying to gauge that inventory level from your perspective, as well as I guess adding some of Caloi s inventory. So I just want to see what the visibility is, you know, particularly in Q4, what your inventory level what you expect your inventory level to be like? Thank you. 31

32 Martin Schwartz I don t believe we re not expecting a big material change. I mean we don t we ve done well in the inventory, like I said, at the IBD level, we ve brought it down over the last year at this point. So again, I m not expecting a big change anywhere. No. Let s leave it with that. Leon Aghazarian Great. Thank you. Operator Ladies and gentlemen, if there are any additional questions at this time, please press * followed by the number 1. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys. And your next question comes from Derek Lessard from TD Securities. Your line is open. Derek Lessard Yeah, guys, just a clarification. Jeffrey, did you say $16 million or $60, 6-0 for Caloi?

33 Derek Lessard Okay. Thanks. And I don t know if you guys mentioned it, just when do you think the Cannondale and GT brands will be available in Brazil? Like when will somebody be able to go to a dealer and pick one up? Well, there was a distributor there before. We have now taken over that distribution. So there are bikes available right now in Brazil. I don t know, I think in the beginning of next year we ll start to actually manufacture a few. But right now you can buy a Cannondale bike in Brazil. Derek Lessard Yeah, but are they still paying the high duty? Yes. They ll be paying the high duty for now until we it s the products that we manufacture that we ll be able to reduce the duty on. Derek Lessard Right. We won t be able to manufacture every Cannondale bike. So we ll still be importing some. Derek Lessard Okay. Thanks, guys. 33

34 Operator Mr. Schwartz, there are no further questions at this time. Please continue. Martin Schwartz Okay, thank you. Well this concludes our call this morning. I want to just thank everybody for joining us. And have a very good afternoon. Thank you. Operator Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines. ***** 34