Q4 2023 BRP Inc Earnings Call
Speaker 2: Good morning ladies and gentlemen. Welcome to the BRP Inc's FY23 fourth quarter results conference call. For participants who use the telephone line, it is recommended to turn off the sound on your device. I would now like to turn the meeting over to Mr. Philip Deschenes. Please go ahead Mr. Deschenes.
Speaker 3: Thank you, Judy. Good morning and welcome to BRP's conference call for a fourth quarter of fiscal year 23.
Speaker 3: Joining me this morning are Jose Bocheri, President and Chief Executive Officer, and Sebastian Mater, Chief Financial Officer.
Speaker 3: 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.
Speaker 3: The forward-looking information is based on certain assumptions and is subject to risk and uncertainties, and I invite you to consult BRT's and DNA for a complete list of these.
Speaker 3: 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 Xochitl.
Speaker 3: Thank you, Philippe. Good morning, everyone, and thank you for joining us. Please turn to slide four.
Speaker 3: I am very pleased with our Q4 performance, which was our strongest quarter ever.
Speaker 3: It allows BRP to conclude fiscal year 23 with record sales, normalized EBITDA and normalized EPS.
Speaker 3: It was a very dynamic year marked by our ability to respond to continued strong demands for our innovative products while showing tremendous resilience by working to supply chain pressure in a cyber incident.
Speaker 3: Our teams once again demonstrated its incredible agility. We adapted to evolving market conditions and executed diligently in a challenging environment. As a result, we've delivered solid retail growth and off-base competition.
Speaker 3: by recording an exceptional 5% market share gain in North American power sport industry.
Speaker 3: During the year, we continue positioning the business for long-term success.
Speaker 3: We accelerated investment in product development, completed our side-by-side capacity expansion project at URS3, introduced multiple market shaping products, notably our new award-winning pontoon generation, and completed three strategic acquisitions.
Speaker 3: As you can see, it was a very busy year.
Speaker 3: Let's turn to slide 5 for key financial highlights of the year.
Speaker 3: with delivered record results on both top and bottom lines.
Speaker 3: Revenues increased 31% from the previous year, surpassing the 10 billion mark for the first time in our history.
Speaker 3: This was driven by higher volume and favorable pricing across the portfolio.
Speaker 3: Normalized EBITDA grew 17% to $1.7 billion, representing a very strong EBITDA margin of 17%.
Speaker 3: normalized EPS increased 21% to reach $12.05 above the higher end of our guidance.
Speaker 3: As for retail, our North American power sport sales were up 6% for the year, or 5% excluding the C2 switch Ponto, compared to a decrease of about 10% for the industry.
Speaker 3: We ended the year on a strong note, as you can see with our outstanding 4th quarter retail performance on slide 6.
Speaker 3: In Q4, our North American retail sales were up 21%, or 19% excluding the switch compared to a low single-digit industry decline.
Speaker 3: Our performance was also very strong in other markets, with retail up 36% in EMEA, 32% in Latin America, and 16% in Asia-Pacific.
Speaker 3: In addition to strong demand, the solid performance was driven by our strategy to produce incomplete units that were retrofitted at our plant or by dealers when missing components were received.
Speaker 3: As the supply chain improved in the second half of the year, we were able to rapidly convert units to retail, allowing us to significantly outpace the industry in Q3 and Q4.
Speaker 3: You can see this outperformance on slide 7.
Speaker 3: We ended the year with nearly 35% market share in the North American power sport industry, representing a 5% increase for the year and a 15% gain since fiscal year 2016.
Speaker 3: Our performance was very solid across the product portfolio, with important gain in off-road and snowmobile. We also maintained our leading position in three-wheel and personal watercraft, despite shipping Model 22 units past the peak retail season.
Speaker 3: This performance was driven by sustained strong consumer demand across our portfolio, which demonstrates the strength of our lives.
Speaker 3: On this topic, let's turn to slide 8.
Speaker 3: In Calendar 2022, we won 16 product awards, one of the best years for BRP.
Speaker 3: The CIDU switch and the new many 2-pound tunes were notably recognized in multiple competitions.
Speaker 3: And just a few weeks ago, our new Rotac S outboard engine with TEL technology won the Outboard Engine Innovation Award at the Miami Boat Show.
Speaker 3: On top of these product achievements, VRP was named Brand of the Year by Strategy Magazine.
Speaker 3: We celebrated the 100 years of success for ROTAC and we've launched a new corporate social responsibility plan with ambitious targets. I'm proud of these milestones that show that our innovation mindset is not just applied to product but also across all the area of our business.
Speaker 3: With these achievements, we gained further traction with dealer as shown on slide 9.
Speaker 3: Our success stems from our ability to constantly innovate as we bring new products to market that drive consumer demand and buy, our unique value proposition which drives dealers to sell our products to maximize their profitability.
Speaker 3: To such initiatives we have attracted the best dealer and gained floor space in their showroom.
Speaker 3: Early in fiscal year 23, for the first time ever, we became the number one OEM in terms of average retail unit per dealer, a position that we further extended in the second half of the year.
Speaker 3: launch almost 20 years ago, becoming the best OEM in the industry for consumers and dealer was one of my objectives.
Speaker 3: I can see mission accomplished.
Speaker 3: Turning to slide 10 for a quick update on consumer interest.
Speaker 3: Please on our indicator, consumer interest for our product remains healthy.
Speaker 3: In fact, we've delivered our strongest Q4 ever in terms of retail with growth across all our product lines.
Speaker 3: In looking at demand indicators, the trend remains positive.
Speaker 3: Traffic at trade shows and at diversions continue to trend positively.
Speaker 3: Early season 24 snowmobile booking is trending as expected.
Speaker 3: The un-flux of new entrant remain high.
Speaker 3: Website visits and Google search for brands remain higher than pre-COVID levels. We are monitoring the use vehicle market and value segments that are slowing down.
Speaker 3: Retail trend also seems to indicate a return to more seasonal patterns.
Speaker 3: Finally, some OEMs and dealers are beginning to offer incentives on certain models.
Speaker 3: But in general, consumer interest for our industry and more particularly for our product remains healthy.
Speaker 3: Now let's turn to slide 11 for year-round product.
Speaker 3: Revenue were up 47%, reaching $1.3 billion in Q4, driven by strong shipments across all product lines.
Speaker 3: As for retail sales, Can-Am side by side had its strongest queue for ever.
Speaker 3: benefiting from additional production capacity at URA's tree and from an improving supply chain.
Speaker 3: Our retail was up high 30% in the quarter and season to date significantly outpacing the industry.
Speaker 3: I will get back to this category in a few moments.
Speaker 3: As for ATV, retail was up low 20% in the quarter driven by the momentum of the Canon brand and improved product availability.
Speaker 3: Looking ahead, we just introduced an all-new platform for our Clendur mid CC lineup.
Speaker 3: This long-awaited platform is our most significant upgrade in ETV in almost 10 years.
Speaker 3: It offers more performance, comfort, storage and ease of ownership for the category at a competitive price.
Speaker 3: Moreover, we introduce specific pro packages that cater to a more utilitarian consumer base for which demand tends to be less cyclical.
Speaker 3: With this new platform, we strongly believe that Canon is very well positioned to gain market share in the mid CC category, which represents more than 50% of the ETV industry.
Speaker 3: With this new platform, we strongly believe that Canon is very well positioned to gain market share in the mid CC category, which represents more than 50% of the ETV industry. Looking at three wheel vehicle.
Speaker 3: Although we are in the slow part of the retail season, Can-Am Retail was up over 150% in Q4, driven by improved product availability following late shipment of model year 22.
Speaker 3: We are pleased with the retail trend for 3 Wheel and we are well positioned for the upcoming season.
Speaker 3: On slide 12, let me come back to side-by-side vehicle, which has been a key growth area in recent years.
Speaker 3: We have been growing retail and gaining market share at a fast pace since introducing the Defender in 2015.
Speaker 3: During that period, our annual retail volume has increased by almost four times.
Speaker 3: The Canon brand has gained traction with consumers as we experienced a significant boost in brand awareness over the past years.
Speaker 3: Their perception of the brand is also improving.
Speaker 3: As you can see on the right side of the slide, despite rapid growth and sudden momentum, we still have plenty of market share gain opportunities, especially in the utility segment.
Speaker 3: We believe our strong line-up and added production capacity will support our growth in that profitable business.
Speaker 3: Turning to seasonal product on slide 13.
Speaker 3: Since low product revenue, we're up 26% from last year, we're reaching $1.3 billion driven by higher volume of personal watercraft and the introduction of the C2 switch.
Speaker 3: Looking at the retail, our retail of personal watercraft in the quarter was up over 300% driven by late deliveries of Model Year 22 products, most of which were pre-sold to consumers. The trend is also very good in counter-seasonal market with season to date retail.
Speaker 3: have about 10% in Asia Pacific and mid 20% in Latin America.
Speaker 3: As for snowmobile, with most of the season behind us, we are pleased with our performance as our retail is up low single digit, outpacing the industry which is about flat.
Speaker 3: With this achievement, our global market share now exceeds the 65% mark.
Speaker 3: Turning to our recent snowmobile news. For model year 24, we further strengthened our line-up by expanding the REV Gen 5 platform to more models and introducing new key technologies, notably the industry-first water injection system for high-performance models.
Speaker 3: These additions were well received and early trends in spring unique booking are as expected, which is promising for season 24.
Speaker 3: Furthermore, we introduce our initial electric model, the Sceeto Grand Touring and Lynx Adventure Electric. For the first year, these snowmobiles are designed exclusively for guide tour operators.
Speaker 3: These are the first electric models to be introduced following our commitment made two years ago to launch electric models in each product line by 2026.
Speaker 3: We are proud of this first step, which is a testimony of our market leadership.
Speaker 3: Snowmobile industry experts have tested the product and they were impressed by our technology, the riding experience and the fit for the segment.
Speaker 3: You can expect more product introduction along these lines in the coming years.
Speaker 3: Moving on slide 14 with power support part accessories and apparel and new EM engines.
Speaker 3: Revenue were up 22% to $378 million for the quarter, driven by our growing product portfolio.
Speaker 3: In our part and accessories growth strategy, every new product is designed to be highly customizable with our accessory portfolio.
Speaker 3: For example, the recently introduced Canon ModRender platform is compatible with 125 Link accessories.
Speaker 3: We are pleased with the performance of this highly profitable business segment.
Speaker 3: Moving to Marin on slide 15. As mentioned last quarter, Marin was the last business unit to restart operations after the cyber incident, and combined with some supply chain issues, it impacted production ramp-up for the new many tubes in 2Q4.
Speaker 3: As a result, revenue were down 8% compared to last year, ending the quarter at $124 million.
Speaker 3: Looking at retail sales, in North America Q4 is off-season for boating with typically less than 10% of the annual retail.
Speaker 3: While our retail performance suffers primarily due to the supply chain factor, we remain positive about our plan and prospects for that business, as evidenced by the announcement of the new facility in Mexico.
Speaker 3: As for Australia, retail was down about 20% in the quarter in line with the industry.
Speaker 3: We are excited about the future of our marine business.
Speaker 3: For instance, our recently introduced Many 2.2 and ROTAC-S outboard engine with style technology continue to win recognition from the media and the industry, and consumer demand is very promising. With that, I turn the call over to Sebasti.
Speaker 3: Thank you, Jose, and good morning, everyone. We completed fiscal 23 with another record quarter as we continue to experience solid customer demand for our products and demonstrated strong execution in delivering our production plan.
Speaker 3: Looking at the numbers, our revenues for the quarter were up 31% versus last year, passing the $3 billion mark in a quarter for the first time ever. We generated $788 million of gross profit, representing a margin of 25.6%, slightly down in comparison to last year's level, primarily due to inefficiencies related to the ramp-up of production.
Speaker 3: of the new mini two-point dunes in some overhead investments.
Speaker 3: Worth noting, however, for the first time in many quarters, the pricing actions that we took over the last few months offset the inflationary costs that we were subject to, and we expect this trend to continue into next year.
Speaker 3: Continuing down the P&L, we generated record normalized exhibits for the quarter of $528 million representing a margin of 17.2%.
Speaker 3: And our normalized net income reached $309 million, resulting in a normalized earnings per share of $3.85 for the quarter, ahead of expectations and resulting in a foliar normalized diluted EPS that came in above our guidance range.
Speaker 3: Supported by these strong results, we ended the year with a robust balance sheet with over $200 million of cash and a healthy net leverage ratio of 1.5 times, providing ample flexibility for further investments in the business and capital distribution.
Speaker 3: One thing I want to highlight about our financial performance is the structural improvements we delivered in the recent years that significantly enhanced our normalized dividend margin profile. You can see this on slide 18.
Speaker 3: In fact, our normalized EBITDA margin is up 370 basis points over the last three years, primarily driven by sustainable improvements such as the wind down of the Evanrude outboard engine business, which helped by about 60 basis points. The positive impact generated by volume mix and cost improvements coming from
Speaker 3: our volume growth especially as we leverage our Mexican manufacturing footprint.
Speaker 3: Our richer product makes notably driven by the growth of our SSV business.
Speaker 3: and the development of our modular design across more models. These elements help our margins by about 110 basis points.
Speaker 3: and we gain about 300 points coming from a more efficient operating structure through our ability to leverage our marketing, R&D and administrative spend across more product line of meaningful slides.
Speaker 3: For instance, we gain efficiency in R&D by being able to develop technologies, components, and engines that will be leveraged across multiple product lines.
Speaker 3: All of this unlocked by our modular design approach. We do the same on marketing by leveraging our website technology, CRM, dealer events, and our teams across multiple brands.
Speaker 3: We gain about 470 basis points driven by these structural improvements, bringing our normalized ruggedness.
Speaker 3: Now there were also elements that were more temporary in nature that impacted our margin over the last three years. Notably, the lower sales program driven by the low product availability and the network, and the tight supply chain environment which drove higher inflation and turbulence costs, especially in fiscal 2023. The net of these temporary elements was a negative in back of about 100 basis points.
Speaker 3: As these temporary alignments normalize over time, the structural changes will mean that we will be well positioned to continue delivering strong normalized dividends of margin of at least 17% in the coming years.
Speaker 3: Moving to slide 19 for an update of our network inventory situation.
Speaker 3: Driven by the better utilization of our production capacity and the improved supply chain environment, we have been able to continue increasing our throughput in Q4, allowing us to further replenish our dealers' inventory.
Speaker 3: As a result, we have seen a healthy increase of 66% in product availability as a dealership driven by SSV, ATV and snowmobile.
Speaker 3: And when you account for a slightly higher than usual inventory for three-wheel and personal watercraft for this time of the year due to the late shipments of all your 22 units in the fall. Our overall network inventory is up 130% from last year's level.
Speaker 3: Still, given our significant market share gains over the last few years, our network inventory remains below optimal levels.
Speaker 3: So as unit availability continues to improve across our product lines over the next quarter, we will be in an even better position to serve our dealers and customers and support our market share momentum.
Speaker 3: Now moving to the guidance, starting with a bit of context on slide 20.
Speaker 3: As we build our guidance for fiscal 24, we are cognizant of the environment in which we operate, with inflation remaining above historical levels and higher interest rates.
Speaker 3: While it is difficult to forecast how these factors will evolve throughout the year and how they will impact the industry, based on our current environment, we expect our industry to remain above stable when compared to fiscal 23.
Speaker 3: representing a decline of low single digits from pre-COVID levels. That, despite all the momentum we have with new entrants, and the fact that we were not able to fully meet customer demand over the last year due to limited product availability.
Speaker 3: Still, in this context, we are well positioned to continue to grow as we enter the year with significant momentum.
Speaker 3: We've gained five percentage points of market share in fiscal 23, driven by the robust demand for a product lineup, especially in side-by-side. We have strong momentum with our dealers, driven by a unique dealer value proposition, which led us to reach the number one position in the industry in terms of number of units per dealer.
Speaker 3: and execute in a challenging environment to outperform the industry, all the while maintaining strong margins.
Speaker 3: As such, we are well positioned to continue our growth trajectory in Fiscal 24 with expected revenue growth of 9 to 12%, driven by continued market share gains in year-round products as we further gain traction with the Can-Am brand, benefit from our increased production capacity for side-by-side.
Speaker 3: leverage our new mid CC platform for ATV and sustain our momentum with Ryker.
Speaker 3: Moreover, we expect our growth to be supported by the first full year of production of the C2 switch and the many 2.2.
Speaker 3: and by the continued momentum in PA and A driven by a growing fleet of units and usage and the continued innovation in our extensive lineup of accessories.
Speaker 3: And to put things in perspective, while some may perceive fiscal 24 to be less predictable than typical, we are comfortable with our guidance given that the full year impact of price increases we did last year is expected to contribute to our revenue growth by low to mid single digits. As usual, we have been conservative in our assumption for the upcoming snowmobile and personal autocraft.
Speaker 3: for which initial shipments in a network are expected to support our growth.
Speaker 3: On the margin side, our guidance assumes a normalization of the supply chain environment, and as such, we expect the following impact on the normalized dividends margin. A reduction in turbulence costs for a benefit of 150 basis points.
Speaker 3: a positive impact from pricing net of inflation for about 100 basis points, which will be offset to a return of sales program for about 200 basis points and a slight increase in OPEX as a percentage of revenue for about 50 basis points.
Speaker 3: As a result, we plan to deliver a normalized dividend growth of 9 to 13 percent and to maintain our strong normalized dividend margin of 17 percent.
Speaker 3: Continuing down the P&L, the increase in our normalized DPS is expected to lag normalized divisor growth due to higher depreciation and interest expense. The increase in both expenses is expected to represent an incremental $1.35 per share. Still, we believe the fundamentals of our business continue to be very strong as demonstrated by expectation of solid growth in normalized DPS.
Speaker 3: some of the investments we made in fiscal 23.
Speaker 3: In fact, we are very well positioned with the flexibility we have to consider multiple capital allocation options in fiscal 24.
Speaker 3: Turning to slide 21 for capital allocation priorities for fiscal 24, our priorities remain to continue investing in growth projects and to return capital to shareholders.
Speaker 3: As such, we expect to allocate between $750 to $800 billion to CapEx, focusing our investments on growth projects that have attractive expected returns.
Speaker 3: Our ability to identify and execute on these projects is at the core of our success and is what is allowing us to outperform our industry, as you can see from the chart, which shows our track record of delivering very high return on investment capital.
Speaker 3: Furthermore, we plan on continuing to provide strong returns to our shareholders in fiscal 24 and as such we have announced the increase of our dividend by 12.5% and we are planning to be active with share buybacks as we still have 3.5 million shares available under our current NCIB program.
Speaker 3: Note, however, that our guidance does not factor in any share repurchases. Now to wrap things up, a summary of our guidance on slide 22. As mentioned, we expect fiscal 24 to be another solid year for BRP with revenue growth of 9 to 12% and normalize it as a growth of 9 to 13%.
Speaker 3: sustaining our strong normalized IBITDA margin of 17%.
Speaker 3: Our normalized DPS is expected to end between 1225 and 1275, representing a role of more than 300% over the last three years and making continued progress towards our M25 objective of reaching 1350 to 1450 of normalized DPS by fiscal year 25. Finally, while we expect to deliver solid quarters throughout the year, we expect to be able to deliver solid quarters throughout the year.
Speaker 3: Note that a stronger growth is expected to come in H1, notably with 2.1 APS up between 40 and 50 percent as we are lapping a quarter that was significantly impacted by supply chain challenges last year. On that, I will return the call back to Jules. Thank you, Sebastian.
Speaker 3: I am very proud of our team achievement in fiscal year 23. We are now looking forward to a promising future and we are well positioned to deliver solid growth in the years ahead.
Speaker 4: In fiscal year 24, we will continue to progress on our strategic initiative.
Speaker 4: We are confident that our investment in innovation in R&D will lead to further market share gain in the marine and power sport industry, more particularly in side-by-side vehicles supported by additional production capacity.
Speaker 4: Furthermore, in the past two years we prioritized output over efficiency. Now with the supply chain stabilizing, we are focusing again on execution and efficiency.
Speaker 4: Over the mid-term, we remain on track to deliver our M25 objectives.
Speaker 4: Looking beyond, we are maintaining our focus on the three addressable markets that we have presented last June at our investor day.
Speaker 4: And we are committed to growing sustainably as we make further progress on our journey towards electrifying our product lines.
Speaker 4: In conclusion, I want to thank all our key contributors to our success.
Speaker 4: This includes all BRP employees whose dedication, resilience, and constant efforts are second to none.
Speaker 4: I also acknowledge the strong support of our dealers and suppliers who help us get to market the industry leading products that forge our reputation.
Speaker 4: On that note, I turn the call over to operator for the questions.
Speaker 2: Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchstone phone. Please limit yourself to one question and one follow up. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please give the handset before pressing any keys. One moment, please, for your first question.
Speaker 5: Your first question comes from Mark Petri from CIBC. Please go ahead. Hey, good morning. We're hoping that you could just shed some more light in terms of the commentary with regards to consumer demand. And I guess specifically those areas where you are monitoring and momentum in used units and value segments, as well as some OEMs and dealers.
Speaker 4: If you could just share a little bit more detail on that, that would be helpful. Thanks. Yeah, good morning, Mark. On consumer demand, obviously, like I said in my intro, and I will try to give you a bit more colors, there is many, many positive RQ4 retail WhatsApp, I-number. I-number is a little bit more positive. RQ4 retail WhatsApp, I-number is a little bit more positive.
Speaker 4: sales and we're looking at the trend on a daily basis is tracking to pre-COVID numbers, then very strong and on slowmobile about a third of our production typically is pre-sold to consumers and our website traffic and Google search are again above pre-COVID numbers.
Speaker 4: Now, on other elements that we're watching, the youth market has slowed down. Obviously, dealers still own...
Speaker 4: used units that were traded at high value and the dealers are at a tendency to maintain their pricing right now, then the retail have slowed down on the used unit. The seasonal pattern is coming back to a more normal, I would say, pattern.
Speaker 4: and some OEM and dealer started to give some incentive. Then when you look at all this, there is a lot of mixed signal in the industry, but we feel confident that we can continue to grow despite that macroeconomic situation. And if I could have...
Speaker 5: I want to follow up on that last point you mentioned, Jose. I'm waking up to some of the recent developments in the US around liquidity and access to credit. I'm just curious to hear your perspectives on the availability of financing for your customers and any views on that in 2023 or maybe any recent conversations with some of your finance partners that you could pass along.
Speaker 3: Thank you. Good morning, Marcus. If I look at the Q4 numbers, they were in line with what we were seeing in Q2 and Q3. So no slowdown in terms of availability. What we are seeing quarter to date is that the actual number of applications is going up.
Speaker 3: significantly and so people are curious in assessing what the credit market is. And overall the closure rate, the take rate is higher than what we've seen pre-COVID. So one interesting trend that we see is that yes, obviously interest rates are higher, so the cost is higher, but what we've seen is that people have...
Speaker 3: extended the financing terms. So instead of doing a 54-month, they'll go to a 60-month. And we're seeing that trend across all of the product lines. So some of them are shopping for a monthly payment, and the way to achieve their monthly payment with higher interest rates is to extend the financing term. So micro scores are still trending.
Speaker 6: kind of some of the, your mentions of what competitors are doing with sales programs. Would you describe the types of programs out there as being just kind of typical what they were to pre-COVID or maybe even not quite that aggressive? I wonder if you could characterize it. And then also, are you seeing that from some of the newer entrants in the market?
Speaker 4: programs are not as aggressive as they were pre-COVID.
Speaker 4: but more than last year, obviously. And I would say it depends on the dealers and the OEM, but I would say it's about maybe halfway to what they were pre-COVID.
Speaker 4: and we don't see more programs from some of the new EM that are more present in North America.
Speaker 6: So you're saying you're saying you're not seeing it from the newer entrance. So I just want to make sure I understood. So we don't see it.
Speaker 6: OK, great. Thanks. And then just for my follow-up question, can you just remind us on your side-by-side capacity with URS-3, how ramped up are you and what additional capacity you would have by the end of the year or any other future planned additions? Just remind us of your capacity. Thanks. Yeah, on the side-by-side on URS-3, if you remember.
Speaker 4: URA3 phase 1 was having 50% more capacity and URA3 phase 2 was another 50% and basically compared to URA3 phase 2.
Speaker 4: and URA3 together we have double the capacity than we had with URA2.
Speaker 3: And right now it's up and running. We've had five phases of capacity growth for side-by-side Robin in the last several years, since we've been more targeted on side-by-side. And every time we've added capacity, leaders have given us the floor space and we've obviously gained market share.
Speaker 6: This new capacity obviously coming online is another great opportunity to continue growing. And I know the capacity, the facilities done, but is it fair to say that you're not, you still have room to go in terms of actually utilizing all the capacity that is available in that in the, in this new phase? Is that fair to say that that's still kind of incremental? Absolutely. We were probably running at, in fiscal 23 yet.
Speaker 3: with the supply chain constraints at 80% capacity and the plan this year is to run now this with this new capacity probably running between 80 and 85 percent. So we'll have more more room to grow if the market shows there. Okay, great. Thank you.
Speaker 5: Your next question comes from James argument from city group. Please go ahead. Hi, this is Sean Wagner on for James. I guess going back to sort of the market share thing now that shipments in the power sports industry are a little more normalized across industry.
Speaker 7: How confident are you in your ability to protect particularly those side-by-side share gains? And what's the risk of competitors being more aggressive than they are even now on pricing and promotions to regain that lost share?
Speaker 4: First, the industry is still healthy and we can share with the strength of our product, obviously that's the basis, but also with our momentum with the dealers. And we will continue to bring new products to the pipeline. That's really the basis behind the company.
Speaker 4: We're investing a lot in R&D and portfolio side by side.
Speaker 4: then we are confident to continue to grow our market share with our product innovation and the momentum that we have with the dealers.
Speaker 4: then we are confident to continue to grow our market share with our product innovation and the momentum that we have with the dealers, plus the capacity that we just had.
Speaker 7: Okay, and I guess the follow up on that obviously you've spoken about momentum. And utility being a main driver for 2024 new products as well. Your biggest competitor, I guess, has also identified those same 2 drivers particularly.
Speaker 7: sort of increased shipments from them due to sort of their supply chain issues improving. I mean is there room for both of those to happen or is it just a matter of you have confidence in your business and your products and the execution that you've had and that we'll see how it shakes out from there.
Speaker 4: I mean, it's our confidence in our execution. You know, last year we were quite aggressive to run production at high rates with producing units with missing parts that we either retrofit ourselves or the dealer will retrofit it. And I think it gave us a head start versus our competition.
Speaker 4: And this is mainly one reason why we gained so much share last year for all our product lines. Now we continue on this in the sense that now supply chain is stabilizing but we have the production capacity. And again we have very competitive lineups.
Speaker 4: very innovative, competitive lineup, and we have the dealer momentum. When you put all this together, we confident that we can continue to grow.
Speaker 7: Okay. Can you quickly remind us sort of what level of market share you would need to take with that expanded production capacity to be margin neutral given the higher overhead?
Speaker 3: Well, obviously as you saw in the margin bridge that I gave on the call, our expectation is yes, yes, volume is going to increase. We're going to see a positive coming from pricing. We're going to see a positive coming from reduction in turbulence. We are going to invest in sales programming this year, and so our plan is to be about to up 50 basis points on gross margin and also a higher investment to...
Speaker 2: entry from Steve's old GMP. Please go ahead.
Speaker 8: Hi, good morning. My first question is on the industry and your guidance. It looks like from what I read on your slides, the North American power sport industry was down low single digits in 2022 in North America.
Speaker 8: And I think in your guidance you expect stable industry growth in 23. So am I reading this correctly that you're expecting some sort of an improvement year of a year in the industry in North America this year?
Speaker 3: So what we said, Mathé, in the prepared remarks was a flat industry and that industry was actually so flat year over year and that would be down versus pre-COVID, down single digit. So flat industry is the assumption. Okay. And I know it's a tough question to answer, but…
Speaker 3: What gives you a confidence that given the macroeconomic environment that we're not going to see the industry decline this year? Yeah, first, if you look at the dynamic, I mean, you see the demand, I just answered the first question about the consumer demand, but
Speaker 4: Also, I'll give you some other data. The UN trend is still about 40% up versus pre-COVID. 70% of those people are saying that they are there to stay into the industry.
Speaker 4: And those customers are more wealthy, healthy. Basically, the household income of our customers is today 35% higher than they were pre-COVID. This is an incredible numbers. And on top, when you look at our, you know that we are more high-end and entry-level.
Speaker 4: And when we look at our customers, a third of the population in the U.S. earn household income below $100,000.
Speaker 4: and our customers two-thirds or above that $100,000. Then new customer, higher household income, and we are more high-end obviously than low-end and some of our competitors, and I think we're well positioned into the industry to continue to grow.
Speaker 5: Okay, that's helpful. Thank you. Thank you, Mark.
Speaker 5: Your next question comes from Shanshu from BNP Bariba. Please go ahead. Hi, guys. Thanks for the question. Maybe following up a little bit on that, you know, you guys, the flat industry for calendar 23. Can you help us think about how much share do you think you can gain?
Speaker 3: Good morning. Well, the first thing is from a share growth perspective on the seasonal product business, we're not expecting share growth. We are planning for conservative industry, which would be down versus pre-COVID. And we're already at 60% and above market share for these.
Speaker 3: market share and side by side the market share that we've gained in fiscal 2023 would bring 7% revenue growth. The pricing impact is a 4% revenue growth and obviously we will not stop at the market share that we have in 2023. Our expectation is to gain further market share.
Speaker 3: And that could be another 5 to 10% revenue growth driven from those gains. And as we said, obviously we have a solid lineup, but we also have exciting product introductions that are coming this year which will obviously help further fuel market share gains and growth in that business.
Speaker 9: Okay, got it. Thanks. And then maybe on the OpEx D-Library, you mentioned 50 bits. Maybe can you just talk about some of those investments? Is it just the fixed cost from the increased capacity or are you investing more in kind of sales and marketing or R&D? I'm sure that would be helpful.
Speaker 3: Well, as you saw on our return on capital slide that we showed this morning, obviously we have a solid track record and that doesn't come by magic. It comes through investments and obviously talented people and so we'll continue investing in R&D, continuing investing in marketing.
Speaker 3: in order to drive future growth for this business. We're in this business for the long term, so that's been the secret of our success and we'll continue doing that. So as we grow the business, we expand into new segments, obviously it comes with higher audio speeds that will help make that win and lives longer as we see it becoming an
Speaker 5: Okay, thanks guys. Good luck. Your next question comes from Craig Kennison from Baird. Please go ahead. Oh, hey, good morning and thanks for taking my question. Slide presentation has been great. So thanks for that as well. I guess I wanted to ask about.
Speaker 7: first time buyers, Jose, you mentioned that that metric had stayed strong. I'm curious if you've been able to track first time buyers from early in the pandemic purchase cycle, and whether you've seen any behavior trends evolve in terms of trade in cycles or their willingness or desire to upgrade.
Speaker 4: The product sold to new entrants was about 20%.
Speaker 4: And now, like I say, in fiscal year 2021-22, it was...
Speaker 4: slightly above 50% and now it's 42% and it's very, very healthy. And what is interesting is the intent to see in the industry have increased. Now it's at 70%.
Speaker 4: And the other factor is the household income that we're watching.
Speaker 4: And I think that explains also the reason why access to credit remains high. And when you combine all this together, I know there is a lot of macroeconomic concern in the macro environment, but we feel quite good where we stand in the industry. Thanks, and I wonder if I could get...
Speaker 4: dealer meeting for snowmobile and the new ATV a month and a half ago now and the dynamic is excellent and dealer like OEM that push and we introduce again on snowmobile a lot of novelties the electric snowmobile we see that transition to this new technology
Speaker 4: coming in and they see the first product reaching to the market. They were very impressed with the new ETV. Like I said in my remarks, we were like more than 10 years.
Speaker 4: before we since we invested in this We've found that new platform then when they look all of this how dynamic we are and how pushing we are and they're making more money with our product line then the relationship with have With our dealers is the highest I never saw Then when you sell this
Speaker 4: We feel happy, obviously. They would like to keep the margin that we had in the peak of the demand during the COVID, but they are realistic that this time is probably past and it will come back. I hope it won't be to what it was pre-COVID, but an in-between of pre-COVID and what we had last year.
Speaker 7: Great. Thank you.
Speaker 4: Thank you. You're correct.
Speaker 2: Your next question comes from Jonathan Goldman from Scotiabank. Please go ahead. Hey, good morning, guys.
Speaker 4: Good morning. So I just want to circle back to the macro, I guess, seems to be the topic du jour. Some investors, at least myself, are looking to an analog to compare the current environment to past cycles. You guys obviously have a much larger sample size with the company and with the industry, but maybe looking at where we are right now and obviously a lot of uncertainty by formulating your guidance.
Speaker 9: How does the current environment compare to past cycles? And maybe what ways has the industry changed? Obviously, the GMC was an extreme event, but even in cycles before that, any changes structurally in the industry would be helpful.
Speaker 4: But like we said in the remark, we see some.
Speaker 4: slow down into the used market, but I think this is a temporary thing. Everyone is on the fence right now to maintain.
Speaker 4: high value or high cost. And I think when the spring will come, some dealer will start to reduce their MSRP for use and this will come back to a more normal level. The other thing is...
Speaker 4: a lot of OEMs and dealers talk about the slowdown into the entry level. We have the spark and the riker, which is pre-orders is a bit lower than on the high-end watercraft and high-end tree wheel vehicle, but it's still higher than pre-COVID on the pre-orders. And we are not much into the entry level segment. Most of our product line will be selling high-end product with a high-end solution.
Speaker 4: better margin for the dealer and us and I believe we will be less affected than the others.
Speaker 3: Then when I look at all this, I think overall we are in a good position. If I would just add, obviously the unemployment rates are still very healthy and that's obviously people have a job and that is good for our business and that has been the biggest indicator of a slow down when the unemployment rates go up.
Speaker 3: is not the same with the Mexican manufacturing footprint. So I'd say a much more resilient business than we were 10 years ago, and that obviously is a big plus if we were to face a certain economic slowdown. No, I appreciate that. That's very helpful. And then maybe one more for use of FGA on the working cap.
Speaker 4: I think last quarter you mentioned you'd start to see some unwind of the build-up at 500 million in the second half of this year. Has that timeline or a quantum, I think you obviously said you wouldn't get the full 500, has that quantum changed since the last call? Well, the timing of it has not changed....
Speaker 3: this is the floor guidance that we're expecting to grow again this year. It is going to require some investment and working cap, but I do expect that we will recover some of the investments we made last year, so it's north of $400 million cash benefit that I'm expecting to see this year coming from better management of working cap. Just to clarify, that would be $400,000 gross before investments.
Speaker 3: That would be a net. Perfect. Thanks very much guys.
Speaker 3: That will be enough. Yeah. Perfect. Thanks very much, guys. Thank you.
Speaker 3: Next question comes from Fred from Wall Free Search. Please go ahead. Hey guys, I just wanted to come back to the EBITDA margin bridge. It sounds like you're baking in 200 basis points of incremental headwinds from promos next year versus this year, but I think that that was a 300 basis point tailwind. So what gives you the...
Speaker 3: that we've seen in the past and what we are seeing as promotion is much more targeted towards interest rates or we'll call it subsidizing interest rates for retail financing. So what we're seeing now and providing some contingency for the end of the year, we believe that.
holding at least 100 basis points of sales program saving is certainly feasible. And also we've got more sophisticated in how we manage programs over the last few years, and that sophistication is helping us to be much more targeted. And when you're targeted, you get some savings because you're not spreading the money in regions that is not needed. So that's another reason why.
We are confident in that ability of protecting 100 basis points. Makes sense and then just to come back to the used commentary, it sounds like you guys are expecting used pricing to come down as we move into the spring and I know that trade in values maybe aren't quite as important in ORV as some other vehicle categories but do you think that that is going to result in more negative equity and potentially impact the trade in cycle as we move through the spring or not?
done over the last two or three years, some like 14%, 15%, 16% in some product lines. And so some of the used value will be protected by those increases in MSRP as well. So yes, they are very high. Today, the used values, there will be a normalization happening, but I'm not...because of those price increases, I'm not seeing a significant increase in MSRP.
devaluation and use values that would be equal to what it was pre-COVID. Okay, thank you. Your next question comes from Joe Altobello from Remen James. Please go ahead. Thanks. Hey, guys. Good morning. I guess the first question is on inventory. I'm trying to figure out how much below optimal your network inventory situation is. I think you mentioned it's about 8%.
below where it was in fiscal 2020, but given your retail growth, where should it be? Or maybe ask another way, where are dealer terms today and where should they be? It seems like there's still a channel fill opportunity, so any color you can provide there would be helpful. Thank you. And if we give you and this that's always at the end of...
the last two years we in days were minus 40% versus pre-covid.
On side by side we're somewhat equal in units, but we're still a number of days 50% because then when we look at the growth we had you just need more inventory to fuel the retail.
For watercraft and pre-will, we're slightly above pre-COVID volume because of the model year 022. But the pre-order for watercraft is like four times pre-COVID numbers and three times pre-COVID number on a slope. Season 23 will end at the end of March. We believe we'll be at the bow.
the pre-COVID volume, our booking with the Arizona plan and the tracking for pre-order to consumer is also tracking to more normal and when we look at all this we feel confident that we are in the right position.
with inventory by-product line, and in terms of refilling the pipeline, should be done by the end of Q1. Yeah, absolutely.
Thank you very helpful. Maybe a follow up on M25. You mentioned earlier you're tracking well there. Is that still, even with the higher interest expense and higher depreciation, I think you mentioned it's $1.35 a share, are we still looking at a $14 number in fiscal 25 for EPS? Yeah, obviously we have solid momentum. We have exciting products coming in.
Hey, good morning. I have just one quick one. I know it was mentioned in the unprepared documents that there were still production inefficiencies and higher production costs and I'm curious how you guys expect that to play out over the course of the year given that.
The habs could be sort of lumpy, lapping the introduction of the switch, and then also the closures or the slower manufacturing maybe at certain points in fiscal 2023. So I guess, how does the expense leverage or pressure sort of play out?
the more challenging quarter from a supply chain point of view. So we're expecting some benefits to materialize this quarter already. But the back half theoretically could be much weaker on the top line and so maybe there is a little bit more pressure at least from a growth perspective.
turbulence in all of fiscal 24.
April 24.
Your next question comes from Derek Glaise from Canaccord, Ginnureday. Please go ahead. Hi, thanks. Just a clarification on you keep mentioning flat industry, but is that volume you're referring to and then on top of that you're expecting to get the low single to mid single digit benefit from pricing?
I'm sorry, I didn't hear fully your question there. Yeah, sorry, just on the flat industry expectation that you have, is that volumes that you're referring to? Yes. Yes. Okay. Okay, good. And then just coming back to the cash flow statement a little bit, the incremental capex institutionalmodule.
OK, thank you very much.
Thanks. Your next question comes from Cameron Darkfent from National Bank Financial. Please go ahead. Yeah, thanks. Good morning. I just wanted to follow up on the, I guess, the working capital. You mentioned the $400 million tailwind. Seb, can you give us any kind of sense as to when we might see...
some of that unwind? I'm just wondering if that's more of a second half of the year or is that something we might see in the next couple quarters? Yeah, good morning. Obviously, as I've said, we've invested in keeping some unfinished inventory on the books last year and also higher raw material as we wanted to have greater safety stock to...
to adjust for any unforeseen changes in supplier capacity. We will still run with some buffer in H1. And so my expectation is that the benefit of the working capital will happen in the second half of the year.
once we work with our suppliers, stabilize their production, and adjust their capacity as well to shift. Obviously the logistics is improving, so that's why we're seeing an H2 benefit happening with that.
Okay, that's helpful. And just on, I guess, sort of debt and interest expense, I mean, obviously, you've had this big investment in working capital, so you've had to borrow more money here to fund that. But, I mean, the free cash flow profile still looks quite strong for at least the next couple of years. I'm just wondering.
what can you do I guess to reduce debt and by extension reduce your interest expense because I think your guidance assumes a fairly healthy increase in net interest expense.
Well, from a balance sheet point of view first, I mean, we are at a healthy point. I mean, our leverage is 1.5 times at the end of the year, so it's a healthy leverage. Obviously, we've experienced higher interest costs coming from the adjustments in the base rate. We have the advantage that some of our debt is hedged. So overall, we're assuming an average LIBOR of 5.6%.
And even if the rate was to go up an extra 1%, it'd probably have an impact of, let's see, $5 million on the P&L. So the priority is not to deleverage. At some point, interest rates will come back down.
And obviously we have strong EBITDA growth which is allowing us to offset more than the increase in interest expense and depreciation that we're seeing. Right, so from a capital deployment priority, I guess what you're saying is that
Maybe NCIB is a higher priority item than deleveraging? Absolutely, the returns are much higher to do NCIB and we plan on being active on the NCIB this year, as we have in the past years as well. It's a much better return of capital to shareholders and being down-depth. Okay, makes sense. Thanks very much.
is a higher priority item than deleveraging? Absolutely, the returns are much higher to do NCIB and we plan on being active on the NCIB this year, as we have in the past years as well. It's a much better return of capital to shareholders and being down-depth. Okay, makes sense, thanks very much. Thank you.
Next question comes from Brian Morrison from TD Securities. Please go ahead. Thanks. Good morning. I want to follow up on Cameron's question. With your financial guide and your reversal of working capital, that's a billion dollars of free cash flow. The last two years you've done an SIB. What's the trigger point historically to proceed with this form of return as opposed to an NCIB? Well, obviously we've been active in both in terms of NCIB and SIB. The NCIB, there's a certain maximum you could do within a 12-month period. The current NCIB, the maximum shares we can buy back is 3.5 million shares. So as you said, our expectation is for a solid free cash flow.
No material change. Obviously the plan is what we communicated about six months ago in June at the investor meeting. The good news is some of the momentum we were planning to have over the three-year period up to 2025 happened more quickly.
side by side, so given us the confidence that we can achieve our N25 target with the more rapid than it than we saw in certain product lines and obviously from a dealer value proposition point of view, dealers like doing business with us and they see that we're bringing new business to them and just if you look in the last few months we've announced the switch that's a brand new product line for them we announced the C2Rise as well.
gets a lot of market and dealer excitement. So everything is lining up from a product line dealer point of view for us to be able to deliver on our own.
gets a lot of market and dealer excitement. So everything is lining up from a product line dealer point of view for us to be able to deliver on our commitment. Any increase to your $500 million target on the switch?
Nope, not for now. Thanks very much. Thank you. And your next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead. Great. Thanks and good morning. Just a quick question, I guess, on the marine progress. Obviously a big growth number you're giving for next year, but it seems like you called out some supply chain issues. Maybe you can share some color on what specific parts or areas you're having issues and maybe the cadence of this.
ballpark 50% growth that you're hunting to for this year? Yeah, good morning. Obviously, I mean I won't go into detail because it's between us and suppliers, but I won't go into detail, but basically it's a brand new platform.
We were quite innovative the way we designed the product to obviously reduce costs and give to the customers some features. And with one supplier particularly, it's more difficult than what obviously we had planned.
and we are in the middle of resolving it, then we believe that things will improve in each one. Okay, great. And then just a quick one on kind of the Power Sports P&A side.
There's a view out there that sales of this segment could go up during a downturn as maybe people spend on lower cost periphery items. If there is a macro slowdown, is it some sort of that sort of expectation built into your number here for the guidance for fiscal 24? How are you thinking about the evolution of that segment through the cycle, at least over the next year, year and a half?
Well obviously you're right that when there is a slowdown it is a business that is more sustainable because people are still riding and still need to maintain and repair their vehicles. But again in our assumption we're not building an assumption for an economic slowdown in the guidance. So I think that's obviously coming from a business that is more sustainable because people are still riding and still need to maintain and repair their vehicles. But again in our assumption we're not building an assumption for an economic slowdown in the guidance. But again in our assumption we're not building an assumption for an economic downturn in
higher number of units that are out there being used by our customers and also the introduction of new models like the Can-Am ATV that we've just launched obviously has a high accessory attachment rate to it and that's obviously going to drive accessory sales up. So that's where the rope is coming from with pricing as well.
of units that are out there being used by our customers and also the introduction of new models like the Can-Am ATV that we've just launched obviously has a high accessory attachment rate to it and that's obviously going to drive accessory sales up. So that's where the growth is coming from with pricing as well. Thanks very much.
Thank you. There are no further questions at this time. I will turn the call back over to Mr. Philippe Deschamps to close the meeting. Thank you, Judy, and thanks everyone for joining us this morning and for your interest in BRP. We look forward to speaking with you again for a Q1 earnings call. Thanks again, everyone, and have a good day. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect. Thank you.
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