Q3 2023 BRP Inc Earnings Call

Speaker 1: Not I P.

mar to.

Good morning ladies and gentlemen and welcome to the PRP Inc's FY23 third quarter results conference call. For participants who use the phone line, it is recommended to turn off the sound on your device. And I would like to turn the meeting over to Mr. Philippe Deschines. Please go ahead Mr. Deschines.

Thank you, Sylvie. Good morning and welcome to BRP's conference call for a third quarter of fiscal year 23.

Joining me this morning are Jose Baujaris, President and Chief Executive Officer, and Sebastian Masse, Chief Financial Officer.

Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call and that actual results could differ from those implied in these statements.

The poor looking information is based on certain assumptions and is subject to risk and uncertainties. I invite you to read BRPs and DNA for a complete list of these.

Also during the call, reference will be made to supporting slides and you can find the presentation on our website at brp.com under the investor relations section. So with that, I'll turn the call over to Jotik. Thank you, Philip. Good morning, everyone, and thank you for joining us.

Our teams once again demonstrated incredible agility and resilience as we navigated through the unprecedented challenge of a cyberattack, which forced us to temporarily suspend operation early in the quarter and yet managed to deliver our strongest quarterly result ever.

Given by a strong product portfolio and our team's ability to navigate the tight supply chain environment, we continued to outperform the industry and delivered solid retail growth and market share gains.

With this excellent performance, our financial result came in well ahead of expectation.

Taking into consideration these exceptional results, and in light of the clearer visibility we have on customers' demand and on the supply chain environment for the rest of the year, we are increasing our normalized EPS guidance for the year to a range of $11.65-$12 per share.

representing a year-over-year increase of 17 to 21%. Let's turn to slide 4 for key financial highlight.

Revenue reached $2.7 billion, up 71% compared to last year, driven by solid growth for side-by-side, three-wheel vehicles, personal watercraft and snowmobile, as well as the introduction of the CIDU pontoon.

Normalize EBITDA was up 94% to $488 million and normalize earnings per share increased 146% reaching $3.64.

Turning to slide 5 for a look at our Q3 retail performance.

The strong demand for product and our ability to navigate the tight supply chain environment allow us to deliver a strong retail performance across our product portfolio, a portfolio of product and in all geographies.

In North America, our retail sales were up 42% or 39% when excluding the CIDU pontoon, compared to the industry which was up mid-single digit.

Our performance was also very strong in other regions, with retail up 34% in EMEA and 41% in Latin America.

As for Asia Pacific, while our retail was down 3% in the quarter, it significantly outpaced the industry, which was down in the low 30%.

You can see the key driver of this strong performance on slide six.

Our success over the years have been driven by our ability to constantly innovate as we bring new products to market that drive consumer interest and by our value proposition which motivates dealers to sell our products by maximizing their profitability.

Through such initiatives, we have been able to attract the best dealers and gain floor pace within their showrooms.

Given we were capable of leveraging additional product capacity, we have delivered impressive results.

Our Q3 retail performance was our strongest ever for a third quarter.

We have gained over 2% point of market in North American Power Sport Industry so far this year increasing our global market share to more than 30%

and we have become the industry number one OEM in terms of the average number of units retail per dealers. This makes BRP a must for any power support dealers.

We are very pleased with our momentum and strongly believe that we have set solid foundations to continue to grow in the coming years.

Turning to slide 7 for a quick update of the state of consumer demand.

As you can see with the strength of our retail sales, consumer demand remains healthy despite the ongoing macroeconomic concern.

More importantly, when we look at the different indicator, the trend remains positive.

We continue to see a strong level of pre-orders.

Over 40% of our expected North American retail for Q4 is already pre-sold to consumers.

Cancellation rate remains low.

We completed the international dealer booking following our August club and dealer order came in above expectation.

Retail financing metrics remain quite favorable, demonstrating that our customers are in a strong financial position, with continued increase in FICO scores.

Website visits and Google search for brands remain higher than pre-COVID levels.

As you can see, customer interest for product remains healthy.

Turning to slide 8 for a quick update on our manufacturing operation.

In terms of the supply chain, the situation during the third quarter essentially evolved as anticipated.

This allows us to increase production throughput and progressively ship more units and components to our dealers.

As the environment improves, our strategy of shipping units that are missing a few components and quickly retrofitting them at the dealer deliver great results.

Based on the current state of the supply chain and the healthier inventory level, we are well positioned to have a strong Q4 and deliver on our guidance for the year.

Now let's turn to slide 9 for a year-round product.

Revenue were up 74%, reaching $1.3 billion in 2003.

This was primarily driven by strong side-by-side shipment as we were able to further utilize our increased capacity and by the later shipment of three-wheel vehicle model year 22 due to the supply chain issue earlier this year.

In terms of retail, can Anand side by side add its strongest quarters so far this year, benefiting from the additional production capacity at URS3 and from an improving supply chain.

Can-Am gained market share in all industry segments, but more importantly, made significant gain in utility, which is the largest segment.

Our retail was up high 40% in the quarter and so far in Season 23. We are close to our M25 objective of 30% market share in the category.

As for ATV, retail was down low single digit in the quarter due to the limited product availability, as we made the decision to prioritize components for side by side.

Still, Canami TV continues to gain traction with customers and has gained over 1.0 points of market share so far in fiscal year 23.

With our solid lineup and additional production capacity, we are well positioned to sustain our growth momentum with Can-Am off-road.

As for three wheel vehicle.

We ended season 22 on a strong note with Can-Am three-wheel vehicle retail being up over 50% in the quarter, driven by shipment later than usual due to supply chain challenges.

For season 22, Can-Am three-wheel vehicle retail was down mid 20%.

Though disappointed with our performance for the season, as our retail was impacted by the untimely product deliveries, we strongly believe that the future is bright for three-wheel vehicle business since we continue to attract a high level of new entrant to the industry.

We also continue to see strong traction with our Rider Education Program, for which course completions are up over 20% year-to-date.

Historically, this completion has resulted in a strong conversion rate towards the purchase of new units.

Turning to seasonal product on slide 10.

Seasonal product revenue were up 133% from last year, passing the billion dollar mark for the quarter.

The strong growth was driven by late shipment of personal watercraft model year 22 and the introduction of the CIDU pontoon.

We also ship more snowmobiles than last year.

Looking at the retail, our retail for Persolagraft in the quarter was up over 100% driven by later deliveries of Model Year 22 products pre-sold to consumers.

These piece-hole units have also contributed to maintaining a selling momentum in November , which retails up significantly.

Looking at counter seasonal markets.

We are only at the beginning of their season and retail was up mid-single digits in the quarter.

Ask for a snowmobile.

We are still early in the season and retail is trending well being up mid single digit for the quarter.

With the strong level of customer pre-order, we are well positioned to have a successful snowmobile season.

Continuing on slide 11 with a look at parts, accessories and apparel in new EM engines.

Revenue were up 5% to $297 million.

Our revenue continued to benefit from a growing product portfolio, which led to higher volumes of replacement parts and increased sales of accessories driven by the Lync ecosystem.

We are currently witnessing solid momentum for our new model year line-up of snowmobile accessories and apparel, both from dealers and consumers which bode well for the upcoming season.

Moving to marine on slide 12.

Marine was the last business unit to restart operations after the cyberattack.

This, combined with some supply chain issues, impacted the ramp-up of production for the new MANI2 product, which affected 2.3 and is also expected to affect 2.4.

As a result, revenue were down 15% in comparison to last year, ending the quarter at $111 million.

Looking at retail sales.

In North America, our retail for the quarter was down low 30% for Alumekara, which we believe is in line with the industry, but I would point out that we are no longer selling welded boats.

Many tools down in the low 60% due to the production ramp up issue has already mentioned.

As for Quintetix, we are in the early part of the season in Australia and retail was down low 10% in the quarter.

We are in the off season for boating in North America, but we believe that with the new Manitou and Alumacraft product, we are well positioned for the future.

Our new boat and pontoon design are very well received.

Notably, MANI2's new MAXDEC platform won the top prize in the innovative onboard design solution category at the recent 2022 Boatbuilder Awards in Amsterdam, where we were competing against high-end luxury boats from well-renowned brands.

MANI2 is also featured on the cover of Pontoon and Deckboat magazine, the segment most influential publication with an impressive readership.

The cover tagline says it all. Time to shake up the industry.

With that, I turn the call over to Sebasti.

Thank you, Jose, and good morning, everyone. Thanks to the sustained robust demand for products and the improving supply chain environment, we delivered results that came in well above our expectations, leading to the strongest quarter ever in our history.

The outperformance was primarily driven by higher deliveries of side-by-sides, stronger shipments of components to dealers in the quarter resulting in a higher completion of unfinished units, and the continued tight management of our expenses.

Looking at the numbers, our revenues for the quarter were up 71% versus last year, reaching $2.7 billion.

We generated $655 million of gross profit, representing a margin of 24.2%, down in comparison to last year's level, as the benefit from higher volume, especially side-by-side, mix and pricing, was more than offset by the impact of inflation, supply chain inefficiencies, and cyber attacks. Note that the cyber attack represented a hit win to gross profit of about 90 billion dollars

up 146% from last year's 2-3.

Moving to our network inventory situation on slide 15.

As we already mentioned, we have been able to increase our throughput during the quarter.

driven by better utilization of our production capacity and the improved supply chain environment. As a result, we have seen a healthy increase of 105% in our network inventory driven by side-by-side ATV and snowmobile, which puts us in a better position to support the strong demand for products in the fourth quarter. We have also ended the quarter with a higher level of inventory for three-wheel and personal watercraft.

resulting from the late deliveries after the summer season due to the supply chain challenges we had to deal with earlier in the year.

The retail of these Model Year 22 units is going well, especially with many of the PWCs already pre-sold to customers, and we expect to be in a good inventory position with these units in the spring.

While we have made good progress on improving the availability of our products in the network, there are still areas where we have a lot of inventory to rebuild to bring it to a more optimal level. In fact, despite significantly increasing ORV deliveries to dealers in the last nine months, we also delivered important retail growth and market share gains, which limited the inventory growth for that product category.

as it is still down 42% versus pre-COVID, and it is still far from an optimal level at roughly 50 days of inventory.

Bringing ORV up to our target of about 100 days and optimizing our inventory for seasonal product still represents about $750 million of inventory to rebuild.

But all in all, things are trending in the right direction as we were able to make headway in improving unit availability to support our retail momentum.

Now, looking at the slide 16 for an update of guidance for the year. While the year has seen its share of challenges, our teams have done an exceptional job to manage through these tough situations, allowing us to outperform our competitors and deliver results ahead of expectations.

As we look to the rest of the year, we are well positioned to sustain our solid momentum as we continue to experience robust demand for our products, and as the improvement in our supply chain is allowing us to better utilize our increased capacity and deliver more units to our network. As such, with two months to go in the year, we are comfortable increasing both our top line and bottom line guidance.

We now expect our total revenues for the year to be up 27 to 32% as we are planning for increased production of side-by-side, and we are well positioned to hit the higher end of our seasonal products guidance. Snowmobile is off to a good start.

You will notice that we reduced our guidance for marine revenues as a result of the delayed ramp-up in production for the new many-two, as Jose mentioned earlier.

Going down the P&L, benefiting from increased volume, we now expect our normalized dividend to grow between 15 and 18% and our normalized DPS to end between $11.65 and $12, representing a growth of 17 to 21 over last year.

Our guidance calls for the delivery of another strong quarter in Q4, carrying our momentum into fiscal year 24, which we expect to be another solid year for BRP given. The strength of our product portfolio where structurally it is driving higher margins.

The strong progress we made in terms of market share gains, especially with side-by-side, the continued momentum with new products such as the Studio Switch and the new Mini 2.2,

All of this supported by better utilization of our increased production capacity and lastly, an improved cost environment with expected lower commodity rates and a reduction in supply chain related headwinds such as retrofit expenses, spot buys and special freight.

On that, I'll turn the call over to Jose.

Thank you, Sebastian. I am pleased with our multiple accomplishments.

We are also making good progress on the CSR front.

Earlier this year we committed to take corporate social responsibility even further with the launch of our new CSR25 program.

It includes ambitious targets and concrete initiatives like the BRP Community Engagement Program, Rideout, and Intimidation.

We are very proud of this initiative and of all the BRP employees worldwide who are embracing the fight against intimidation and raising awareness for this important cause.

In conclusion.

I am impressed with our performance so far this year, as we've delivered better-than-expected results in a challenging environment, while continuing to progress on our strategic initiatives.

This positions us well to deliver on our guidance as we anticipate another record year.

Looking ahead, the new product introduction, additional production capacity, as well as our momentum with dealers and recent acquisition put us in a strong position to sustain our growth trajectory.

I sincerely thank all our employees, dealers and suppliers for their relentless effort, especially given the numerous challenges and headwinds we have had to face.

Without their hard work, resilience, and dedication, it would not have been possible to achieve these exceptional results, and we look forward to keeping our momentum.

On that note, I turn the call over to the operator for questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if you are using a speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question.

And your first question will be from Joe Altobello at Raymond James. Please go ahead.

Thanks. Hey guys, good morning. First question, I guess, is on your retail and the share gains that we've been seeing in previous quarters. Obviously, this quarter very strong, again, particularly in side-by-sides. I guess, what are you guys doing that the competition isn't that's enabling you to get more units to dealers? And how much of that improvement is product availability versus...

capacity in URIs and now with the supply chain that is getting better, the supply chain is definitely helping and we can use a capacity which we could not use in H1.

The third element is the BO strategy. We decided to ship

incomplete product to dealers with little thing to repair or to add on to the unit, a few parts to add on to the unit and we're using their service to PDI the product. Then in 2.3 we had excellent we had good supply chain, we were able to accelerate our throughput in production, ship more dealers.

to the dealer, but also ship components to the dealer. And I think it's a combination of all this.

And we have great momentum with the dealers. We've been working hard to improve the value proposition.

and it's paying off. Then I think it's a combination of all this. I don't think there is a silver bullet, but this is what is making a difference. And the beauty is Q3 was strong, and we see November continuing with that trend.

It's very helpful. Maybe just a follow-up for Seb. I believe you mentioned earlier the pipeline refill opportunity was $750 million, and I think that was $1.4 billion last quarter. So maybe help us bridge that difference.

Well, one of it is timing related. As you saw, we have more inventory for personal watercraft and three wheel. This is really timing related because we had supply issues and so we delivered these units later. So that means there's more inventory of that unit, which should correct itself in the next few quarters.

But obviously what we want is to make sure that the product availability is there for the consumers, for the dealers. And so it's our goal to replenish inventory. We always said that it would happen at the tail end of fiscal year 23 and at the beginning of next year. There's still $150 million to replenish. Some of it is going to happen in Q4. Depends on obviously production and how strong retail is.

But my expectation is that by early next year, we should be in a good inventory position level at the dealer network where there's enough product there for the dealers to meet consumer demand.

Got it. Okay. Thank you guys.

Okay, thank you guys. Thank you.

Next question will be from Robin Farley at UBS. Please go ahead. Great, thanks. I wonder if you could comment on some others in the market have talked about seeing some softness in recreation units. And you did mention your release of the return of some sales program, so I don't know if it was related to that. And then also just a quick clarification on the return of some sales programs.

it does include the units that the dealers have on hand, which are incomplete but also has the parts.

If you were to look at the increase in inventory, we said it's about 200%. If you exclude the units for which the dealers have and the dealers have the parts that are not yet installed, that would be up only about 100%. So there's still quite a bit of units that still need to be retrofitted by the dealers in the network. As of where we stand at the end of October , obviously the dealers will repair them as the season progresses.

But that's in a nutshell what the inventory is. In terms of programs, we've seen a bit more programs happening from various OEMs, but far from the extent where they were pre-COVID. So there's a bit of money being put towards certain products. I think it's more a...

getting customers through the doors, attracted them at the dealership. It's not a cause by excess inventory. Definitely not.

Okay, no, that's very helpful and if I could just fit 1 more quick 1 and I'm just wondering what the P. W. C. you mentioned there were some later than normal deliveries than you expected. Is there a way to quantify? You know, were there some of those units where there were deposits on them that then. Were canceled due to how late they arrived and were dealers able to adjust their orders for next summer to sort of factor in that.

which we, dealer knew that it was there, then this is done. What we're hearing, and again, we don't have a hard data on this, but most, all the dose units were pre-sold to consumers and there was some cancellation, but very, very little. And when you have a cancellation, you find a customer who is ready to take it because those units are the dealer and they will be there next spring.

for the snow belt. And what we're hearing is a portion of the customer take it now because they want to secure the delivery and everything. But many customer...

Say we will stick to R22 and we will take it when spring comes in the snow belt. Then, to be honest, we're not worried about those units at all.

And if in the spring we see that the retail is not going as expected, we could reduce or adjust model year 23 or convert 22 to 24. We could adjust depending on the retail trend, but right now those 22 for us is a non-issue.

Great, thanks very much. Thank you.

Next question will be from Joe Spark at RBC Capital Markets. Please go ahead.

Thanks so much, everyone. I guess the, was wondering if you could comment on just working capital and free cash flow, because you mentioned, you know, some of the changes in production and getting it to dealers, and I know working capital has been an issue really all year long. Should we expect some relief to begin?

in building more retrofit units and you see it in the retail numbers. I do expect a small release happening in Q4 as the supply chain is improving, but nothing too material. And we're still going to be running with high levels of working cap in Q1, Q2 of next year. And as we get more comfortable with our suppliers.

delivering to the levels we want with the logistics headwinds that we saw around the world. Obviously, we'll encourage the teams to reduce the working cap. If it happens, it's probably going to happen in the tail end of next year. But with the second half is when we should see improvement.

Okay, thank you. And then maybe one more since you delved into next year a little bit. I know interest expense has got it up a little bit here. Obviously we know your capital structure with the floating rate, but I do think you have a good amount of cap contracts as well that limits your exposure there. So how far out do those go? I think you're continuing to roll the...

Obviously, we've seen rate and that's on the term beat. We've seen rate increase by the spend. There are two rate increases since we talked, one in September , one in November . We've also obviously done a few acquisitions, so we've used the revolver more and so that's what's driving the increase in interest. Next year, probably expecting in the range of one.

That's peaceful. Please go ahead.

Hi, good morning. You've touched on next year and you expect sustained momentum and I was wondering if you can talk a little bit about industry retail sales in North America. I'm wondering what's your assumption for industry retail sales to do next year?

Well, again, it's a tough call, I'm saying, and I guess my crystal ball is probably not better than your crystal ball, but there's a few things that make us optimistic. If I just look at the industry side, if you take side by side, the industry is down, rolling 12 months.

And even if we were to have a flat industry next year, that means down versus the peak of COVID, probably 25% down versus the peak of COVID, if we were just to maintain the market share that we have in Q3, it would represent almost a 10% volume growth just next year for us. Even with a flat industry.

we'd be able to generate growth with the market share gains that we've experienced. If you look at the personal watercraft industry, the season that just ended, it was the weakest season for personal watercraft since 2017. Snowmobile also had weak seasons, so our expectation is that for maybe seasonal products, the industry should be higher than what we've experienced this year. But despite all of that, we're going to have to be able to generate growth.

With flat to modestly increasing industries for seasonal, we are comfortable in our ability to generate growth next year.

Okay, that's helpful. And I'd like to just touch on Europe or EMEA. You know, your retail sales there were up 34% year-over-year, a significant outperformance. I was wondering a little bit, you know, was that, you know, related to pre-orders or are you still seeing...

New orders coming in. Just trying to get a bit of an understanding of how the consumer is giving the economic and political challenges.

Yeah, good morning, Martin. What we're hearing from dealers, and it's even the case in North America but more in Europe , there is less traffic in the dealership.

That being said, worldwide we do less promotion because we don't want to attract customers to the dealership and they have nothing to see.

We slow down the promotion, there is less traffic. Also, customers are trained right now, if they go in the dealership, they don't have a new product out there. Except for the traffic at the dealership.

and maybe specific country like UK where it's more difficult, retail is still strong. Like you said, North America without Cidu Pantone was 39 and EMEA was 34.

And dealer orders, you know, we had our club in August .

and we gave to the dealer three months, I think, to complete, two months to complete their booking for Model U23. And their booking of the dealer came out stronger than what we were planning, and they are the front line. They are the ones who meet the customer visit.

Then we're hearing like you do, like everyone do, the tough situation with energy and all this in Europe , but it don't show in our numbers.

Okay, that's it for me. Thank you. Thank you. If you liked this video, please sub to my channel.

Next question will be from Fred Whiteman at Wolf Research. Please go ahead.

the next question. Hey guys. Good morning. I was hoping you could just sort of put the three Q results in the context. I know if we go back last quarter, you would give us some guide rails about where you thought EPS would sort of shake out three Q versus four Q. So the four Q number like. The three Q just much stronger. Is there anything that's giving you a little bit of caution about four Q or did you guess what you're saying?

It's very much modeling. Obviously, when we talked in September for the Q2 results, we were coming out of the cyber incident. We were also looking at the supply chain. So there was some, I guess, cautiousness or we were gun-shy on the Q3 numbers, maybe a bit. But the teams outperformed both on the recovery from the cyber incident.

and that came in lower than expected as well. So helping deliver the strong two-tier results.

the supply chain impact and also the cybersecurity impact. I get why the cyber ramp would hit three Cuba. Can you just dig into the four Q outlook is the supply changes worse than you expected there, and if there's anything in particular. It's holding up the marine segment of the business would be great to hear a bit more about that.

Yeah, on the cyber, what happened is, and I think we disclosed this, you know, the hacker came into a third party to our system. And obviously, when all of this happened, we shut down all those third parties. And we were able to ramp up after that, giving them access to our system, but...

At Manitou, it's the whole system that the previous owner had, and there is more third party involved managing the business. And because of this, we were able to restart production, but there was many systems that were not operational because of too many third parties. Like I said, in the kitchen, we were very cautious to reopen those accesses.

and what we had planned in September . And that's why we reduce our guidance.

makes sense.

Thanks, Rob. Thank you.

Next question will be from Benoit Poirier at Desjardins. Please go ahead.

Yeah, good morning everyone and congratulations for the good quarter. Could you talk a little bit about the success of the zero financing for 60 months that you offered on select 2022 CEDU models in order to lower the sold units at the dealer level?

And when we look at your dealer inventory, still down 20% versus pre-pandemic level, but if you were to remove the units that are substantially completed and also the 2022 CIDU models, how down would be the dealer inventory and what would be kind of the inventory replenishment opportunities?

Yeah, I'll take the interest question. I'll try to give you a bit of color as well on the inventory.

We actually had an opportunity with our retail financing partner to offer a program with very low cost to BRP. Again, structurally with this financing partner that we have.

In the last few years, we kind of accumulated credits with them that we could use, and so it was a good opportunity for us to use these credits and offer an attractive financing package for consumers on the retail side. And that's being successful, obviously. We have strong retail. I saw the retail in Q3 and Jose commented on the...

momentum that we have in November as well. That is certainly helping. And from the inventory perspective, as I said, if we were to exclude the incomplete units, their inventory would be up only 100%.

And the personal watercraft, I don't have the number, but whether we could come back to you on this one, what the impact of a personal watercraft is, but it is quite sizable on the inventory growth just for the quarter.

Okay, perfect. The other question, we saw Polaris struggling with recalls over the last three months. Just wondering if you have seen benefits so far in terms of new entrants, whether they are looking more closely at the BRP brand or do you see opportunities to gain additional revenue with those recalls? There is a pretty rapidano effect there.

Yeah, we definitely, if you talk to a dealer that is Polaris and BRP.

and there is 40% of our dealers that are Polaris and BRP, then those dealer obviously right now are overwhelmed because in the snowmobile PDI, I mean, delivering all those units in their short period of time is always a heavy period.

They have to retrofit some of our BOs, but also they have all those recalls from Polaris. For those 40% of the BRP dealers that are also Polaris, for sure it's a difficult fall.

we're lucky in the sense that 60% of our dealers are not Polaris, then those have an easier fall than the first one. Then there is definitely, I think, Benoit, an advantage in the dealerships that are only BRP, not Polaris, but it's very difficult to...

to quantify.

And Benoit, if you were to take the total inventory and just remove personal watercraft and three-wheel the inventory would be up 120%.

Okay, perfect. That's great color. And for fiscal year 24, you gave a great color about how should we be looking at the revenue, the pluses and the minuses. What about the margin side, Seb? Could you maybe provide some color about the key elements that will impact the margin going into fiscal year 24 and whether a 17% is still a...

something that should hold up? Well, absolutely, yes. The 17% is something that should still hold up. And if you look at BRP, they're structurally, we're a very different company than what we were just a few years ago. And there's a few things that obviously are helping us. One, our modularity approach that we've implemented over the last several years is obviously paying off.

benefits for sustained gross margin. Two, we have a better asset utilization as well with the volume growth that we have. Three, our footprint is, as you know, the growth that we've invested in Mexico, and so very cost-efficient. So structurally, that brings good margin improvement. And from a product mix point of view, our side-by-side business has grown a lot in the last few years. Just a few years ago, side-by-side represented our conversion workers.

30% of our revenue. This year will be just almost 40% of our revenue coming from side by side and the parts business that goes with it. And that business drives better margin than the average portfolio of products of BRP. And so that obviously is helping to sustain strong growth margin. And then if you look at fiscal year 23, we've obviously had a lot of headwinds from inefficiencies from retro...

been re-established completely, but we'll certainly get some gains coming from a better efficiency. So when I look at next year, I talked about the top line elements, a lot of optimism, but also from a cost-efficiency point of view as well, there's some great opportunities.

Okay, that's great, caller. Thanks for the time.

Next question will be from Jean-Sue at the BNP Paribas. Please go ahead.

Hi guys, thanks for the question. I just wanted to ask a little bit more about inventory levels. So you're expanding capacity and you're gaining a lot of share. I'm just wondering, is it possible that, you know, I guess in the future when the dust settles that you can have structurally higher inventory levels than pre-pandemic anyways?

and that the pre-COVID, I guess, compare is maybe less relevant as you get the business becomes bigger.

Well, from a dollar perspective, yes, because our business has been growing, we've been gaining market share, we've been adding new products as well, and some products are bigger ticket items as well, if you look at the switch, if you look at the side by side. So from a dollar point of view, yes, we can have more inventory than in the past, and there's been inflation and price increase, etc. But from a number of days, we've been gaining market share.

We were trending sometimes in the 150, 180 days of inventory in the past.

And we want to operate with lower levels of inventory. We said 100 days-ish would be a number that we like operating with, dealers like operating with. There's enough product there so that they can quickly execute on quick retail, but lower the total cost of operations for us and the dealership as well. So that's the targeted number.

Okay, got it. Makes sense. And then maybe just on the NCIB, it sounds like working cap maybe a couple quarters before you really see the big benefit. Just wondering how are you thinking about stepping into the market? Is it when the working cap kind of unwinds or how are you thinking about...

I guess share buybacks. Well, we've always, our priorities have always been investing in the business. CapEx has been one priority where we're investing quite a bit this year, investing for growth as well, so that obviously required some working cap investments. We did 300 million buybacks this year, of which 250 is an SIB.

And we've also done acquisitions, so investing in the business as well. So our priorities remain growth and we are a business that generates good free cash flow and increasing the dividend modestly as well is part of our priority. But then with excess cash, returning that capital to shareholders is a good way to provide good returns and that's something that we'll continue to investigate.

I was wondering if you could just give a bit more color on the topic of dealer engagement and just sort of how you're gauging the impact of that. Obviously, it is difficult to quantify in totality, but any commentary just with regards to sort of floor space or the pace of renovations or updated dealerships, that would be helpful.

Yeah, good morning, Marc. I don't have any hard facts, but definitely we're growing at a fast pace. We're taking more and more floor space in dealerships and at the same time, like you said, you say people, we like to have the BRP space in the dealership space. This is one of the strategies we put together. We want when you enter in a dealership, you have the BRP DNA flavor.

continue to do but this is part of our strategy first to sign the best dealers.

And second, to continue to gain floor space. And to BNS, because we have strong product line, because we have a good value proposition, they're making money, more money with our product than most of our competitors. I would say it's a good value proposition. It's a business discussion and it's not too complicated to convince the dealer.

Yeah, okay, helpful. And then Seb, I'm wondering if you're able to or willing to quantify how much of the revenue in the corridor recognized was from retrofit units that were sort of brought to available condition and are you able to quantify sort of the level of

retrofit units at the dealer today compared to last quarter or earlier in the year? I don't have the numbers with me. Obviously these numbers have been going down every quarter. At the end of 2-3 the number of units remaining in the network is a very small percentage.

Of our total annual production there in the. Super small, almost nothing left in the network, but it was relatively. Wasn't that much as well in the.

in the second quarter and what happens is that the dealers convert them quite quickly or we ship the parts quite quickly. So we might ship on and off.

quarter and what happens is that the dealers convert them quite quickly or we ship the parts quite quickly so we might ship on an O.

We can replenish easily in a quarter of 100% of what we ship. So things turn around quite quickly. Usually it's just a few week window between the time we ship the unit and we ship the parts.

Okay, okay. That's helpful. Thank you. Next question will be from Cameron Dergson at National Bank Financial. Please go ahead. Thanks. Good morning. I just want to talk a bit about the side-by-side market. You sort of called out the market share gains that you've had so far this year for the Defender. Are you able to give us some color around what percentage of your SSVs you've had in the past?

used to be below that in our numbers. But like we said in Q3, we've gained nine point market share in that segment. And right now, we are about in line with the industry. And the utility represents for us about 60% of our retail in Q3, which is a great

which is a great accomplishment. The other thing I would like to highlight to give you more colors, we always also measure the premium product versus the value product. And about 75% of our sales are in the market.

side-by-side sales are premium.

where the industry is 55. Then we gaining share and on top of it, we gaining on the high end, which has been our trademark in the sport with the X3. Then we're very, very happy with the momentum we have in the side by side business this fall. And again, it's a combination of we had the capacity and now the supply chain is getting better and the momentum...

Is there anything that you're seeing out in your markets that would give you, I guess, any reason to be incrementally more cautious than, say, three months ago?

that would give you, I guess, any reason to be incrementally more cautious than, say, three months ago?

Again, it's a bit in line with the question I answered for the European market. When you talk to a dealer, they will tell us that the traffic is not as much as it used to be.

But at the same time, we don't do as much publicity. And when the customers show in the showroom, there is not much to see. Then there is a reason for that. But when you look at our numbers, I mean, our retail in Q3 was exceptional. The new entrant, the new entrant in Q3 was over 30% when typically it was 20%. And it's about in line since the COVID, at 30%, 35%.

Our web traffic is higher than what it was pre-COVID.

The other thing I saw that changed into the COVID period is the household income.

65% of the population in the US

Our household income is below 100,000 US.

And all our products are significantly above, but our lowest product is ATV with $115,000 US, and all the others are above that.

Then when we look at 40% of our Q4 retail is pre-sold to consumers, then when you're adding all those elements, we're hearing like you do about the macroeconomic concern and the slowdown and the interest rate.

Except for the traffic and the dealership, we don't see that in our hard numbers.

And the traffic is down compared to pre-COVID, where it was obviously at an all-time high, but in line with what it was pre-COVID.

Okay, no, that's very helpful. Thanks very much.

Thank you.

Thank you. Next question will be from Derek Delay at Canaccord. Please go ahead.

On the cost side, obviously you had some really strong cost control this quarter. Can you just give us an idea? Derec, could you re-ask your question? We missed the beginning. At least here. Yeah. Yeah, sure. Sorry. Just wondering on the cost side, you guys obviously had some strong cost control this quarter and historically we used to think about R&D as a percentage of revenue in theop presuppos …

trending at a 3%. Some of it is timing related.

Some projects were pushed into Q4, but our expectation is that we'll continue investing in R&D in the range of 4% going forward. That's the expectation. So a lot of it this quarter is very much related to the strong growth in revenue that we've experienced.

Okay, that's helpful. In absolute dollars, the EuroPEC spend is increasing. It's been increasing sequentially there over the last several quarters.

Yeah, okay, got it. And then you mentioned the new entrance, you know, still 30% of product sales or revenue, but if we go back to like the COVID period when you had a big jump in new entrance, can you just comment on any of the buying activity from those? I know it's still relatively early days, but have you seen those new entrants, you know, trade up, buy a second product, you know, what kind of...

what kind of purchasing patterns are you seeing there? Yeah, we're following five things about the new entrance phenomena. First, the numbers, like I said, in Q3 it's above 30% and typically historically it was 20% and in Q2, 21%, in fiscal year 21, 22%, it was 30%. Then we are above 21%, 22%. What is interesting is 55% of those saying that they are...

and more family six point

and the household income is higher than what it was pre-COVID. Then when you addition all this, it's difficult to say 1 plus 1 plus 1 equals 3, but all those things are positive. And the momentum or the statistic didn't change since I would say fiscal default even if the macroeconomic...

at certain dealers. What's the consumer reaction been? You know, you've given us metrics before on Switch and so forth and what's been pre-sold and sell through. So can you talk about the end consumer reaction?

Excellent, Gerec. I mean, the people are very happy with the new Mini 2, like you saw with winning Mini Prize. Alumac Craft, it's a different market. We'll see in the Midwest at the Minneapolis boat show. But we don't have any pre-order system for the boat. I can tell you, we sold out for our production capacity till next summer.

but we don't have any pre-order number to give to you. And again, I would like to highlight, we've done the tour, the North American tour with the boats, that's where we get the feedback, but we don't have any pre-order system with the marine business yet.

that's the only thing that you can do. Okay Great. And then on the model your 22 personal watercraft and three of the field goals that you've you've shipped. What proportion of those are presold? You know, I'm just concerned that you have 22 product out there after the season's over and how that might affect the flow of 23 is. Coming in for next season and then also, you know the

Really, who wants a 22 personal watercraft in December ? Well, so just if we could talk about how much of that's pre-sold and what you have baked into your guide in terms of what you need to discount to move those units before the 23s come in.

Yeah, as I said, we do have a retail incentive program out there offering zero interest for five years to consumers. And so that's helping with a strong retail performance we've seen in the last few months. Obviously, we would have preferred to ship these units in May and June and get them to consumers, because as you know, the level of pre-orders from consumers was very high.

The season last year in the industry ended at an all-time low in the last five years, so there's still a high level of unfulfilled demand.

And the other reason why we're comfortable, and obviously we don't like it, but we're comfortable with the situation is the level of pre-orders at the dealership was high. So dealers are telling us, I'm not getting cancellations for these units. Customers are going to take ownership of these units in the spring.

And the other thing is that there will be price increases on model year 23 that we've announced, 3 to 4% increases.

And so customers, they have an option of taking a Molyer 22 at a price lower than a Molyer 23, and that's something that will also incentivize them not to cancel their order and take the unit.

Okay, so to be clear, what's embedded in your guidance right now or your thought process is the finance offer, not additional rebating?

Okay, great. Great. Thank you.

Once again, as a reminder, if you do have any questions, please press star followed by one on your touchtone phone. And your next question will be from Jamie Katz at Morning Star. Please go ahead.

Hi, good morning. I was hoping that you guys would elaborate on maybe where you're seeing supply chain shortfalls that might lead to opportunities for further vertical integration given the recent acquisitions you've made. Then adjacent to that, it looks like in the financials today, you guys have carved out this low voltage humanness.

assisted group and to facilitate your growth strategy. And I'm curious whether that's just

electric, or is there something else we should be thinking about to figure out what the total addressable market of what you're trying to do there might include? Thanks TOEHLers

First, on the vertical integration, we're happy with the acquisition in Austria. And basically what we acquired is talent. It was a group of about 50 people that are...

deeply competent into electric technology that now is part of our R&D group.

Consbird in Quebec, we were the biggest customer of that division and for us those components are key and they will be even more key going more electric. And Pinot is a different thing. Pinot is a compact gearbox that we can implement obviously on bike.

electric bike but also on other product line or new type of product line. Then right now there is no plan for additional

other vertical integration or activity. We were opportunistic with those and we are very happy with those acquisitions because over and above, and those are not big acquisitions, but we acquired a lot of talent that will be key for the future.

On the LDHA, right now is the name, is an internal call name, but low voltage. Our motorcycle and our power sport electric vehicle will be high voltage. We are right now working on low voltage product that will be electric. And obviously HA is human assist and the pinion gearbox is key.

for the human assist product line. And all of this is a strategy to enter, you know when we're presented at the.

An analyst meeting investor meeting in June in Florida. We had the $34 billion bubble of passport where we have about 30% market share.

We marine is 36Billion. We are a small player. We intend to grow there. We have motorcycle Europe and North America 15Billion. We have a plan with our electric motorcycle. And we're talking about 70Billion urban mobility, our new type of market. And those acquisitions are key to enter in those markets.

is 36 billion. We are a small player. We intend to grow there. We have Motorcycle Europe and North America 15 billion. We have a plan with our electric motorcycle. And we're talking about 70 billion urban mobility, our new type of market. And those acquisitions are key to enter in those markets. Okay, that's helpful. Thanks.

Thank you. Next question will be from Brian Morrison at PD Securities. Please go ahead. Well, good morning. Just very quickly, Seb, when I look at the working capital unwind next year, I know we've spoken about this a bit, but it looks like it should be north of $500 million. And I just wonder if that would be correct. And then with the rising cost of debt, would you plan to allocate some of your free cash flow towards debt rather than the NCIB?

Well, when you look at the overall number of days of working cap and what we've invested, or year to date, we've invested about $526 million. Obviously, this is a growing business. But from a number of days perspective, if you will compare it to, let's say, fiscal year 20, if you were to come back to the same number of days, it's about a $500 million opportunity of reduction in working cap.

have. Now how we use the cash next year obviously it's something that we look at continuously. We have discussions with the board. Our leverage is relatively still low.

The overall cost of financing, yes, rates are going up, but it's relatively still accessible. We have interest rate caps, which are making the overall cost lower for us as well. But we do want to make sure that we optimize returns to shareholders. And obviously, these decisions are based on where the stock is trading and how much cash we have to deploy either to a stock or to a stock market.

Snowmobile business is always a big parts business and obviously we're shipping a lot of units in the fourth quarter both from a ORV point of view, from a personal watercraft point of view as well. And so there are some deliveries to the dealers as well for upcoming season products and getting ready for the season as well. So there's a bunch of things to consider.

Thanks again everyone and have a good day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time we ask that you please disconnect your lines.

And and, and and.

The.

We.