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Executives

Martin Schwartz – President and Chief Executive Officer

Jeffrey Schwartz – Executive Vice President and Chief Financial Officer

Frank Rana – Vice President of Finance and Assistant Secretary

Analysts

Derek Lessard – TD Securities

Leon Aghazarian – National Bank Financial

Stephen MacLeod – BMO Capital Markets

Joe Bess –Roth Capital Partners

Mark Petrie – CIBC World Markets

Sabahat Khan – RBC Capital Markets

Dorel Industries Inc. (OTCPK:DIIBF) Q4 2013 Earnings Conference Call March 4, 2014 1:00 PM ET

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to Dorel Industries' Fourth Quarter Results Conference Call. (Operator instructions) Before turning the meeting over to management, please be advised, 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 Tuesday, March 4, 2014. I will now turn the conference over to Mr. Martin Schwartz, President and CEO. Please go ahead.

Martin Schwartz

Good afternoon everyone. On behalf of Jeffrey Schwartz and Frank Rana, welcome to Dorel’s fourth quarter and year-end conference call. We will be pleased to take your questions following our initial comments. And as usual, all numbers mentioned are in U.S. dollars.

2013 was a disappointing year. A number of issues we faced were industry and economy related but others were the result of less than perfect execution on our part. Consolidated results were affected by our previously declared restructuring and recreation leisure which was mostly non-cash accounted for $0.25 per diluted share in the quarter and $0.29 per diluted share for the full year.

This charge plus the segment’s weaker 2013 performance due to top-line softness and a poorer product mix accounted for much of the year-over-year shortfall.

Juvenile faced headwinds last year particularly in North America and Europe where the marketplace is challenging. Our Latin American divisions did well as they relatively performed nicely and Real Brazil vastly improved over 2012.

Several projects are underway to address improvement and focus seems across the U.S. and Europe on more efficient product development. I am certain you’ll understand that for competitive reasons, I cannot go into details on this call. But I show you that we are realigning a number of areas to deliver better results.

Work has begun to integrate the Tiny Love business into Dorel and determine how best to distribute our complementary product lines and benefit from the new category of development for toys as Tiny Love brings to Dorel. Tiny Love has a tradition of strong R&D which we will certainly maximize.

There has been intense activity at our recreation leisure segment and I must say the mood is extremely positive. The management team there is fully committed invigorated and it’s confident about the year ahead.

No question 2013 was tough. Not just for us, but for the entire industry. We are tackling what we can control ensuring that we have the best products out there to support our strong brands and cutting cost where it makes sense. We are moving on several fronts. The global restructuring plan we announced in January will reduce supply chain complexity and will deliver competitive advantages to our customers and insurance consumers.

As indicated toward the end of this year the Bedford Assembly and testing facility will be closed and operations there will be deployed elsewhere. In addition, the R&D facility in Bethel Connecticut is being moved to the segment’s new headquarters in Wilton Connecticut.

These initiatives will improve profit through 2014 and 2015 and we expect to realize annualized cost savings of at least $6 million once the restructuring is completed towards the end of this year. Also in line with this plan, the cycling sports group will transition operations of its Australian business to Monza Imports, the leading action sports distributor in Australia effective May 1. We are confident this strategy will bring us the same or greater profits with less invested capital and less risk.

This is the beginning of the next phase in Dorel’s evolution of a global bicycle and bike apparel company and will result in higher quality products and services. Things are progressing well at Caloi where we acquired a 70% stake last summer.

Like our arrangement in Chile, we have an excellent committed partner with true entrepreneurial culture. Caloi has assumed full responsibility from the previous local distributor for Cannondale and GT distribution, promotion and technical support in Brazil. The Cannondale premium dealer relationship program was inaugurated.

Increasing brand distribution in Brazil from less than 30 dealers to over 250 piggybacking on Caloi’s network. At November Brazil Bike Fair the GT and Cannondale 2014s were launched at Caloi’s large booth alongside Caloi’s new models.

From a manufacturing standpoint, our portfolio of Schwinn and Mongoose bicycles have been developed and adapted to the local mass market with production expecting to commence at Caloi’s Manaus plant this spring.

Cannondale and GT assemblies also slated from the Manaus facility this spring. The factory is in a free trade zone and it’s the largest facility outside Southeast Asia. Caloi sponsored road team ended 2013 as the number one team in South America and for 2014, it has been transformed into the Cannondale road team which won the first and most important race in Brazil the Tour de Brazil and currently leads the continental ranking.

This resulted in two cover stories featuring Cannondale and Peter Sagan on the two best bicycle magazines in Brazil. Further recognition for Cannondale is the Synapse 5 105 has been named the Bike of the year by the UK’s Cycling Plus, the biggest cycling magazine in the country.

Cannondale won it over 50 different road bikes including every competitor in the market making it the most important bicycle test in the UK market.

In Home Furnishings, Dorel Home Products and Cosco Home and Office performed nicely with strong sales of mattresses, futon, folding furniture and imported furniture items. The segment’s expansion into the internet sales channel continued at a brisk rate. It was another record year in e-commerce which now represents a significant portion of revenue offsetting reductions in sales to Brick and Mortar stores.

In line with this, drop-ship vendor channel continued to gain traction as the number of transaction is growing rapidly. Jeffrey will now provide a more detailed financial perspective.

Jeffrey Schwartz

Thank you, Martin I will be focusing more on the fourth quarter as opposed to the full year. I just want to remind everyone that our results include a restructuring cost that occurred in 2013. However we believe that the results are more meaningful if we provide you with a business performance of the period where we discussed results that do not include the restructuring cost.

So in my discussion going forward, these will all be adjusted for moving the restructuring cost. Our revenues for the fourth quarter were $633.5 million, compared to $622.6 million, an increase of 1.8% after removing the effective bearing rates of exchange year-over-year and sales from business acquisitions, organic revenues declined about 1%. The principal contributor to the organic sales decline was in the Juvenile segment which recorded a decrease of about 4%.

Adjusted gross profit for the quarter decreased to 22.9% from 2013.5%. That reduction was affected by the increased discounting activity in recreation and leisure as well as a shift in the product mix to lower margin items.

Partially offsetting this decline was an improvement in gross profit in the Juvenile where in home furnishings gross profit remained stable.

If we go down to the pre-tax income line, it was $24.4 million in 2003 versus $35 million in 2012. Excluding the impact on restructuring, income taxes were $5.2 million, or 21.3% of pre-tax income which is in line with our expectation. As a result, fourth quarter adjusted net income was $19.2 million or $0.60 per share fully diluted compared to $29.1 million or $0.91 per share last year.

One line item that is of note here is finance expenses which was $8.3 million compared to $4.5 million in 2012. This increase is primarily due to the higher borrowing and acquired debt related to the acquisition of Caloi.

If we move over to the segments, Juvenile segment, revenue decreased in the fourth quarter about 4.5% compared to the year before, excluding impact of foreign exchange, organic revenue was slightly less than 4%. The difficulties that we experienced during the year were the same in the fourth quarters being both Europe and North America were growing – it’s been challenging.

Partially offsetting this are the revenue gains that we have in the Latin American market where revenue continues to grow in all our markets down there.

Gross profit was 28.8% versus 28%, the year earlier. Most markets saw their currency weakening against the U.S. dollar during the quarter. This weakening was almost completely offset by the Euro which has strengthened against the U.S. counterpart. So from a currency standpoint on the operations and was somewhat neutral, but we definitely had both pluses and minuses occurring because of different movement of currencies.

The operating profit for the quarter, $18.4 million or 7.2% of revenue versus $18.6 million or 7% of revenue last year.

Moving over to the recreation and leisure, revenue increased by $18.8 million or 8.3% in the quarter. Organic sales excluding foreign exchange and the acquisition of Caloi was more like 1%.

Revenues were affected by the global bike market slowdown as sluggish start with holiday season IBN math as well as an unfavorable product mix.

In addition to that, we had approximately $10 million of products that arrived late and were shipped in Q1 and that product was new product with good margin.

Adjusted gross profit excluding the impact of restructuring in the quarter declined to 22.8% from 24.9% a year before. Again, that was partially due to the unfavorable foreign exchange rates on purchases as well as an unfavorable product mix and increased discounting activities on the 2013 models.

Selling expenses were 10.5%, revenue in the quarter versus 9.7%. Most of this increase came from the initiative to support the Guru Fit System program and an increase in CSG retail business. So, we do have a number of stores open. We now have two stores at the last year and the SG&A from those stores affect our SG&A obviously on the global line. We do pick up higher margins from those stores so that’s where the counterbalance is.

As mentioned, from a profit standpoint, 13.5 million in total restructuring for the quarter and as a result, if we remove that, we would have had an operating profit of $8.1 million or 3.3% compared to $7.3 million – sorry, I am sorry, I’ll read that again.

$8.1 million or 3.3% of revenues compared to 7.3% of revenues in 2012.

Over to Home Furnishing; in the fourth quarter, Home Furnishing revenues increased by 3.3% from $128.6 million to $132.8 million. The business was driven by higher imported items, mattresses and futons as well as folding furniture.

Gross profits were flat with the year before. Profit was down from last year of $5 million this year versus 3.8% of revenues versus $7.3 million or 5.7% of revenues. We – I mean, this is one of those strange events, we – this was our budget for the year. We did particularly well. We had some non-recurring expense reduction last year that didn’t re-occur. But, this, – like I said, even though it looks poorer, this was our plan for the year. We actually came in on our plan for the year.

This business is doing what it’s supposed to do. So as one business that internally is setting the metrics as we expect and we are happy with that.

From a corporate expense side, we have a negative expense in the quarter. That’s from a combination versus last year of lower compensation for head office management in terms of bonuses and stuff, as well as a gain on FX on our contingent liabilities.

This is something that happens when we get a major change in the countries where we have contingent liabilities such as South America, a big change in the currency will abstract the operations negatively or if the currency shrinks, I should say, operations get affected negatively but our contingent liability goes down and we get a gain from that.

So, they are not all put through in the same area. The gains from contingent liabilities goes into the corporate and the losses go through the actual segment itself. So, we got a bit of a disconnect on that.

If we move over, compared to 2012 levels, one of the largest variations on the financial statement balance sheet is an increase in inventory from $501 million to $555 million. Caloi represents 55% of that increase and another big part of that increase is an increase in home furnishing which is now increasing some inventory to support the drop-ship program and the internet sales channel which has become a very major part of that business.

Cash flow provided by operating activities was $144 million compared to $107 million previous year an increase of $37 million. This was despite lower year-over-year earnings and due to improved working capital management. And for the same reason, our free cash flow improved to $43 million in 2013 versus 2014 like $6 million in 2012. With that, I’ll pass it back to Mart.

Martin Schwartz

Okay. Thank you, Jeffrey. As for our outlook, we are now two months into 2014 and we are seeing an encouraging start to the year. Specifically in recreation leisure, the restructuring and cost-cutting initiatives under way coupled with an expected rebound in all markets and a full year of Caloi in Brazil make us confident for the year ahead.

The weather is always a variable that we cannot control, but if last spring's record rain and cold in both North America and the Europe are not repeated, we are definitely well positioned to return to a much higher levels of profitability. Earnings for the first quarter should improve by at least 20% to 25% over the last year.

In Juvenile, we expect most markets to improve their earnings in 2014. This along with the contribution of Tiny Love acquired in January should translate into earnings growth of at least 10% for the year. This forecast excludes the negative impact of the cost of the one-time U.S. legal case that we recorded in 2013.

Currency challenges in Canada, Australia and Latin America should result in the first quarter being slightly below last year, but this does not dampen our enthusiasm for the full year.

In Home Furnishings we expect moderate growth in sales and earnings as we continue to capitalize on our on the channel distribution through both traditional and online retailers. I will now ask the operator to open the lines for your questions, and as always, please limit your initial question in the first round to two. Operator, please?

Question-and-Answer Session

Operator

Thank you. And Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) Your first question comes from the line of Derek Lessard from TD Securities. Please go ahead.

Derek Lessard – TD Securities

Yes, thanks guys. A question on the Rec division. We’ve been hearing some – about some dealers not being able to access the Cannondale portal whereas others up to two weeks ago hadn’t received the majority of orders from October and in other cases, there are some dealers who have brought in competing brands while others are pushing the competing brands more than Cannondale.

I guess my question is where do you guys stand in fixing these issues? How deep do they run and was it in Canada only? And a follow-up to that how confident are you in weather aside and hitting that 20% to 25% number given these issues and more importantly beyond Q1, what are you doing to ensure that you guys don’t get put into the penalty box?

Martin Schwartz

Well, frankly, Derek, I am not aware of this being a major issue. Perhaps some dealers are not happy, perhaps some dealers didn’t get stock. I assure you – I know we relayed on a number of items that we shipped in January and we probably have some hot selling items were behind on, but it’s not a systemic problem. Again, our Canadian portal system is just getting going.

The U.S. system and the European systems are different. So that’s not an issue. But, we met with our President, our interim President today and things are good. We're very confident that we are going to hit a minimum of 20% or 25% and like I said, perhaps you are aware of a few accounts, but it’s certainly not a systemic problem that’s affecting the global sales.

Derek Lessard – TD Securities

Okay, that’s fair enough. And can you maybe just – any updates on the hiring up a new Rec head?

Martin Schwartz

We are still interviewing and still deciding where we want to go with that.

Derek Lessard – TD Securities

Okay.

Martin Schwartz

But the meantime, we are making a lot of progress within our business.

Derek Lessard – TD Securities

Okay. Thanks guys.

Operator

Your next question comes from the line of Leon Aghazarian with National Bank Financial. Your line is open.

Leon Aghazarian – National Bank Financial

Hi, good afternoon. My first question is regarding the Rec business again, I mean, you are mentioning that, you expected – you unexpectedly saw a rebound and that the rebound is in all markets. Can you give us some more color as to what that's driven by and if this is just natural growth following a weak year or is it a new product introduction that’s been really pushing this demand?

Jeffrey Schwartz

I think it’s a little bit of everything. It’s a combination of – I think the retailers – now again mass works little bit different from the independents. The mass dealers finished the year with lower inventories than normal. Many years, they buy a lot in Q4 and have high inventories going into beginning of the year. I think this has been the opposite where the inventories actually weren’t that high. So, we were getting good flow through on our mass side.

On the independent channel, there were a lot of deals going on and a lot of people looking to make by the end of this 2013 model. I think now they are gearing up for 2014. We’ve had a lot of success with some good products. And, we are getting a fairly good demand. I mean, there is a couple of products like every year some of the hot products we ran out of already where we are getting some more in.

So I am not going to say we are in stock on every model. But it’s a combination of some like – Martin mentioned, we won an award for top bike in the UK last week, certainly spurring demand. Some new products, it’s the stores getting more – I think serious about stocking up and having the good, and in many cases, they are getting demand, people are coming into the store, the IBDs and they are actually buying already. So, it’s nice to see. So it’s not just the pipeline fill, but it’s a natural demand for the product. So, what- definitely just be confident.

Leon Aghazarian – National Bank Financial

Yes, and then just a follow-up on that is, so you expect the profitability also to be higher necessarily, I mean, because if you look at the quarter itself, I mean the sales in the Rec space weren’t I mean they were pretty strong, yet the operating profit was still negative. So I mean is that’s fair to assume that there was a lot of discounting that occurred to kind of get rid of that inventory?

Jeffrey Schwartz

There were lot of discounting, the mix was not right. We didn’t have – we still are selling a lot of older models, last year which, obviously you sell them they are gone. We are not 100% gone, but you can only mean it’s now we are selling the 2014 models which carry full margins. So exactly, that we are expecting the gross margin to go up quite a bit.

Leon Aghazarian – National Bank Financial

Okay and one last one for me would be – regarding the inventory, again, you mentioned that a couple times now. Just to clarify Caloi represents how much of the increase, 55% or 65%?

Jeffrey Schwartz

55%.

Leon Aghazarian – National Bank Financial

Okay. So what is your optimal comfort level, assuming no further acquisitions right now for inventory?

Martin Schwartz

I am going to assume that we are at a level now. I mean, there is an opportunity to take out it obviously ideally, $25 million to $40 million perhaps, I mean, I know in some areas in the Home Furnishing, they are working on bringing it down a little bit, but as the online business increases, we do a lot of drop-shipping and we need to carry a little bit more to do that. So, it’s in this range. It’s not a lot different, but I think there might some room to bring in that.

Leon Aghazarian – National Bank Financial

Thank you.

Operator

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

Stephen MacLeod – BMO Capital Markets

Thank you, good afternoon. Just wondering if you could just give some more clarity on the top-line for the recreational and leisure segment, how much of that contribution was from Caloi?

Martin Schwartz

Again, we are not at this point breaking it down. We don’t generally breakdown the pieces.

Stephen MacLeod – BMO Capital Markets

Okay, got it.

Martin Schwartz

Caloi was definitely profitable during the quarter. Not as much – I mean, I think it had a very good year. We didn’t record all the profit, I think I mentioned the last quarter that we had a number of – how much is that?

About $2 million that was – purchase price, yes, about $2 million of profit was recorded as a reduction of goodwill in the quarter because of the purchase price accounting that would next year we would get credit for that. But overall it was just quite profitable.

Stephen MacLeod – BMO Capital Markets

Okay, and on the top-line, was it materially different than sort of what your expectations were when you bought the business?

Martin Schwartz

Not at all, we are very pleased with – so far even in the first quarter. Now the first quarter is not a – it’s the weakest quarter by far because it’s the end of summer in Brazil as well as Christmas just passed us. So it’s kind of too negative. So it is definitely the weakest, but we saw some strong demand in the end of January the weather got nice in Brazil, kind of that got a little bit warmer and demand picked up again. So, overall, we are – I’d say we are very pleased with what we have.

Stephen MacLeod – BMO Capital Markets

Okay, and then in the – just turning to the Home Furnishing segment, you mentioned that there was some – I understand them to be one-time items that drove the year-over-year variation in EBIT, was there anything else that was going on in the operating profit line, considering gross profit was up 3% and operating profit was down 30%.?

Jeffrey Schwartz

That’s pretty much, there is a bit of I guess, sales mix, but really it is some of these charges that we didn’t have last year for various reasons.

Stephen MacLeod – BMO Capital Markets

Okay, that’s great. Okay, thank you.

Operator

Your next question comes from the line of Dave King with Roth Capital Partners. Please go ahead.

Joe Bess- Roth Capital Partners

Good morning this is Joe Bess for Dave. In terms of the juvenile business in the U.S. it appears that growth rates have been stabilizing. Are you seeing any signs of improvement at this point in time?

Martin Schwartz

In birth rates or in our business?

Joe Bess- Roth Capital Partners

In your business?

Martin Schwartz

In our business we are seeing it’s pretty stable so far. We’ve got some work to do, particularly in the US to improve our business which we are in the middle of, now we’ve kind of launched it last year. The good – from our point of view, our sales are down, our profitability in the U.S. is actually fairly stable and again we’ve done that through cost reductions and increased margins where we can.

But we need to focus on products that will pick up the top line again. Europe is a little less internal, I think it’s still – there is still lot of countries there that are struggling. We are seeing Europe pick up a little bit and certainly the Euro currency is going to help us. I mean, it’s at a nice level.

So, that’s a positive news. But again, Europe as a whole is still – it’s challenge in certain areas and in certain markets we are finding difficult, not from a competitive standpoint just people not spending money.

Joe Bess- Roth Capital Partners

Okay. And then, I believe there is a large – you have a large supplier in China in the juvenile business the names would be slipping my mind right now, but, I believe they recently bought a brand and are vertically integrating their model. Can you talk about how this impacts Dorel moving forward?

Martin Schwartz

Well, I mean, in Europe, they have – that company has been competitor of ours. That – the company Good Baby that you are referring to – they sell, we buy strollers from them, they sell strollers to a lot of our competitors. They are now going to be vertically integrated.

They are going to have the cost of actually managing a distribution business as well as a marketing business. So, it’s something we are watching, but initially for this year, we are not overly concerned, but it is something that we are watching.

Joe Bess- Roth Capital Partners

Okay, great, thank you.

Operator

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

Mark Petrie – CIBC World Markets

Hey, good afternoon. I just wanted to follow-up on the European juvenile business and wonder if you could just comment a little bit about the structure of the market there as it relates to independent specialty shops versus hypermarkets? How you see that market continuing to evolve and how Dorel might reposition its business or tweak its business given the shift in dynamics?

Martin Schwartz

That’s a good question. Here is just again an interesting story. When we started in Europe in 1994, we came over from America, Canada and looked at the marketplace and Walmart have just bought a German company and we were sure that the future of Europe was going to be mass market.

The Walmart, the Carrefour and we got to push the business towards that a little bit, but we got a lot of pushback from our people in Europe saying it’s not going to happen and at the end of the day, they were right and the mass market although picked up a little bit, it didn’t really do very much.

If we fast-forward to about 2008 or 2009, again the European crisis, North American crisis started. We again anticipated more shoppers would go to places like Carrefour and the mass market. And again, we were wrong, what happened was the independent and the chains, what they did was they brought down the price point.

They started carrying lower price points in their shops. And that’s how they handled sort of the pricing pressure. So we still don’t see a large increase at the mass level. What we do see however, if the marketplace is changing it’s going to be changing along the lines of online retailers.

So really the dynamics that we are seeing, if anything, any major changes happening in Europe, it’s definitely on the online retailers and we are definitely getting our act up to speed on dealing with people like that. So, we are ready for those cuts.

Mark Petrie – CIBC World Markets

Okay, that’s helpful and in North America, can you just comment on the business and strategy of bringing some of the higher-end premium European brands into that market, how that’s going?

Martin Schwartz

Yes, that’s actually – I mean that is the highlight I guess of the U.S. where we are actually growing in that market. Our Quinny brand, our Maxi-Cosi brand is becoming more and more popular in the higher end independent channel, some online channel. We are making actually quite a bit of progress there. And are hopeful. So that would be kind of a shining star I guess, of our U.S. operations right now.

Mark Petrie – CIBC World Markets

And in the mass business for juvenile, are you through the process of cutting less profitable SKUs or do you think there is more to go there?

Martin Schwartz

Yes, I think – but I think it always happens. I mean, I think we are always looking at that. We are looking at – I think the focus is more to kind of operate the value proposition on the product and hopefully be able to improve margins by improving the product itself without making a radical price change.

I mean, you can’t take an item that’s $59 at retail and say, move it to $79 or $89 and expect the same results for the sales. But, you might be able to get that $5 or $10 jump by giving a product that has more value to it than the old one did. And then making everyone, both the consumer, the retailer are happier. That’s kind of the strategy we have going forward.

Mark Petrie – CIBC World Markets

Okay, but in terms of the structural shift in gross margins in that business because of a focus on higher margin product. That’s played out effectively and this is sort of your ongoing strategy?

Martin Schwartz

Yes, I don’t think you are going to see a material change because of – in gross margin, I think – I don’t think gross margin in the U.S. is the problem right now. We have actually improved that over the last with a while. We need to now increase the top-line.

Mark Petrie – CIBC World Markets

Yes, understood. Thanks a lot.

Operator

Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan – RBC Capital Markets

Thank you. I just had a quick question on kind of your outlook or thoughts on return of capital whether by increasing your dividend or maybe getting more active on your non-NCIB. So I just want to get your thoughts on that?

Jeffrey Schwartz

Well, right now we’ve just done a couple of large acquisitions. So, we need to – I think reducing the debt for a little bit might be a priority, but that doesn’t mean, we wouldn’t review. I think we would review the dividend policy before we review a larger increase in the share buyback.

Sabahat Khan – RBC Capital Markets

Okay, thanks. And just on juvenile side, just one more question. Would you say the overall market in Europe and North America is kind of a market-wide issue where kind of where the sales was struggling, or is it just really competitive and it’s just kind of a share fight right now there for you guys?

Jeffrey Schwartz

I think it’s both. I really do think it’s both. I think the markets are not moving and there is a lot of competitive issues. We are winning in some categories, but honestly we are not winning in some categories as well. So, that’s kind of our focus and getting that part right.

Sabahat Khan – RBC Capital Markets

All right, thank you. That’s it for me.

Operator

(Operator Instructions) Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Please go ahead.

Stephen MacLeod – BMO Capital Markets

Thank you. I just have one quick follow-up question with respect to the recreational leisure business. I don’t know if you have already answered this fully, but can you just characterize currently kind of the order level outlook for the IBD channel and the mass channel?

Martin Schwartz

Well, you know what, it’s funny, because, in most industries if you have a backlog that’s a good thing. It’s not necessarily a good thing, means that you are not shipping as fast as you should in our bike industry. So, I think on a mass side, I can say our backlog is not that great. But, we are still selling the stores and hoping for the season to break. That’s the big issue.

Right now, like I said, we are very confident on the numbers, because so far everything has been good. But March is generally the first month where in the southern parts of the U.S. and the mid part of the U.S., the weather breaks and people start really buying bikes. So we’ve got to hope that happen, if that happens, things are going to be great.

On the IBD side, we actually we do have a bit of a backlog. And again, it’s related to both demand and the fact that we don’t have everything in stock yet and subs coming in. So again, it’s good news we have a backlog, but it’s not so good news that that means some of the stuff should be in the stores and it’s not.

Stephen MacLeod – BMO Capital Markets

Okay and then just related to that, do you see – I guess, where your backlog stands now and what the demand environment looks like? Do you see the risk for discounting not continuing into 2014 the way it did in the end of 2013?

Martin Schwartz

A lot of people got on that. I can’t tell you everybody got rid of their excess stock. We certainly got rid of a lot of it. But, so far, we are seeing the retailers are buying 2014 full price products.

Stephen MacLeod – BMO Capital Markets

Okay, great. Thank you.

Operator

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

Derek Lessard – TD Securities

Yes, thanks, guys. A last question here, just maybe if you can add a bit more color on the Guru initiative, where you are in it in terms of the pilot and you said you spent some extra capital this quarter, just a little bit update on that please?

Martin Schwartz

It’s not so much extra capital versus the previous year capital, right. So we are writing that. The Guru 2 model or 2.0 is been launched, is being sold now. We are moving towards a sales model away from the previous model which was a pay-per-use model.

We found there was some quite a bit of resistance to that type of model. We are finding quite a bit of success now that it’s a little simpler. They buy the product, they use it how they want.

The 2.0 model is really a great item. I’ve seen it recently in action and it is as good as the first one was. This one is the substantial level above that. So we are pretty optimistic that throughout this year we are going to be a placing a lot of those items worldwide.

Derek Lessard – TD Securities

Okay, thanks.

Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead.

Sabahat Khan – RBC Capital Markets

Thanks. Just a quick housekeeping item, you mentioned earlier the tax on an adjusted basis for the quarter was $5.2 million, just want to confirm that.

Jeffrey Schwartz

Yes, yes. Yes, after restructuring, yes.

Sabahat Khan – RBC Capital Markets

Okay, thank you.

Jeffrey Schwartz

Yes, yes.

Operator

Mr. Schwartz, there are no further questions at this time. Please continue.

Martin Schwartz

Okay, well, thank you. Well, this concludes our call and I just want to thank everybody for joining us this afternoon. Thank you. Good bye.

Operator

And ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.

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