Good morning, ladies and gentlemen, and welcome to the BRP's Q3 FY 2021 earnings call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Maude. Good morning, and welcome to BRP's conference call for the third quarter of fiscal year 2021. Joining me this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien Martel, 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 that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these. Also during the call, reference will be made to supporting slides, and you will find the presentation on our website at brp.com under the investor relations section. With that, I'll turn the call over to José.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. As you know, fiscal year 2021 has been a very volatile year for us. Once the temporary shutdown were lift, we're able to resume production at full capacity, have taken special measure to manage our supply chain, and have been especially vigilant about protecting our people. Given the increased popularity of our product, we feel fortunate to be where we are during this time of international instability. It has been an exceptional period, and it's not over yet. I would like to start by thanking the remarkable dedication of our people, dealers and suppliers who have risen to the occasion and allow us to continue to deliver incredible results while still ensuring the health and safety of our team everywhere around the world.
As you are aware, interest in the powersports sector remains very high, and our strong lineup continue to allow us to outpace the industry worldwide. Although we face some production challenges, we were able to manage them, and we are delivering units in line with our plan. Let's turn to slide four for the financial highlight of this third quarter. Our revenue for the quarter were up 2%, driven by year-round products, partially offset by lower all sales of seasonal product due to a change in timing of personal watercraft production.
Our gross profit margin came in much better than expected at 29.1% as the continued strong consumer demand allow us to reduce our promotional activity and drove a richer product mix than planned. Our normalized EBITDA ended the quarter up 30% to CAD 349 million, resulting in a normalized earnings per share of CAD 2.13, up 41% over last year.
We expect this positive trend to continue over the next quarter and beyond. Based on this, we are increasing our year-end guidance with revenue now expected to be down 1%-5%, normalized EPS up 31%-37%, to a range of CAD 5-CAD 5.25. As I mentioned earlier, the demand for our product remained exceptionally strong in the quarter, leading to our North American powersport retail being up 16% year-over-year. When excluding personal watercraft, for which network inventory was at an all-time low at the start of the quarter, our North American powersport retail was up 29% compared to an industry that was up mid-teen percentage. The strength and diversity of our product portfolio also led to solid retail growth of 16% in Latin America and 22% in Asia Pacific.
Only EMEA experienced a retail decline in the quarter with retail down 9% due to inventory shortage. Looking now at North American retail by product line on slide six. Again, this quarter, we have delivered solid growth across the powersport product portfolio. Side-by-side and ATV both outpaced their industry with very strong retail results up about 30% and low 20% respectively. Three-wheel vehicle ended the season on a strong note with retail up about 60%. I remind you that this is on top of a high of 80% growth in the same quarter last year. Snowmobile is off to a good start for the season with Ski-Doo retail already up low 20%. Personal watercraft was our only product that was down in Q3, as it was for the rest of the industry.
As I already mentioned, this was due to the network inventory being at an all-time low, both in North America and in international markets at the beginning of the quarter. We are pleased with the strength of our lineup, which continue to gain share in this very healthy industry backdrop. On to slide seven and the current trend in our industry. Like others in the powersports business, we are seeing continued consumer interest, and we have delivered another quarter of robust powersports retail growth. For Q3, our powersports retail is up 29% when excluding personal watercraft, following a strong retail pattern throughout the quarter. For example, the ORV industry had its best month in the quarter in October in term of growth, and we saw this year the best start of the snowmobile season we have observed in five years.
This solid growth is coming from both new entrant and returner customers who have decided to expand or extend their interest in powersports. Based on a survey we conducted recently, we estimate that 34% of buyers were new entrants. We are feeling optimistic that this strong level of consumer interest is something that can be sustained. In part, this is due to the continued strong consideration for our product shown online with, for example, Can-Am Off-Road vehicle website visits up 59% in October compared to last year. Personal Watercraft pre-season customer certificates were already up 12% at the end of October versus the entire full season, October to March last year. We also know our three-wheel vehicle rider education program daily registration is trending at twice last year's level since the beginning of November, the interest does not appear to be slowing down.
With our retail and production plan aligned to this current and projected growth, we believe we are well-positioned to capitalize on the growing consumer interest in powersports. Turning to slide eight, I would like to talk about our recent product introduction. In 2020, our traditional launch model for new product evolved to be exclusively virtual. We held two global virtual events in the third quarter, one for Can-Am and one for Sea-Doo. These were both very popular, had over 80% attendance by our dealers around the world, and allow us to reach a growing consumer audience at the same time. Future events will include many of these same elements to reach an even broader audience.
Regarding our product introduction, in the Side-by-Side utility segment, we reinforce our premium offering by adding our very popular cab with HVAC and the Lone Star package to our long box lineup with the introduction of the Defender PRO Limited and Defender PRO Lone Star, considered to be the best in the industry. We also strengthen our mud lineup with the introduction of an improved Visco-4Lok at the ATV industry best four-wheel drive system, which provide equal power to all four wheels at the push of a button, providing an even more agile ride. As for Sea-Doo, our model year 2021 lineup include industry-leading acceleration and control with a completely redesigned RXP-X 300, which include the performance-inspired Ergolock-R system, which hold the rider in the perfect position. We also took the onboard experience to the next level with the launch of a 7.8-inch wide full-color LCD display.
The industry-first app-enabled Bluetooth display, providing full control of music, navigation, weather, and more. These product introductions were very well received by dealer and the media, and booking was very solid. Now, let's turn to slide nine for the year-round product highlight. Revenue was up 11%, driven by lower sales program and a richer mix. Meanwhile, volume of units total was slightly lower than last year due to many of the units produced being in transit to replenish our international yard inventory, despite increasing our production numbers as mentioned during our Q2 call. These units are expected to be sold over the coming quarters. On the retail side, four months into the season 2021, the North American Side-by-Side industry is up low 20%. Can-Am Side-by-Side continue gaining share, especially in the utility segment, with retail up low 30%.
The ATV industry is also four months into its season 2021, retail is up high 20%. Can-Am is also up high 20% over the same period. The demand for our off-road lineup is very strong, we believe we could have sold additional units had we been able to supply more of them. We have broken ground on the construction of our new Side-by-Side manufacturing facility in Mexico, adding 50% of Side-by-Side production capacity. The project is progressing on plan and is expected to be ready for operation by fall 2021. Looking at the three-wheel vehicle. The North American three-wheel industry ended the season 2020 on October 30th, with retail up low teen percent. Our Can-Am three-wheel vehicle retail was up low 20% over the same period, gaining share in both the three-wheel vehicle and two-wheel motorcycle industries. This season was very successful for our three-wheel vehicle business.
Once schools were allowed to reopen, our rider education program continued to attract many potential customers. We now have over 31,000 courses completed with a better-than-anticipated conversion rate to new and used units of over 45%. We also launched the Can-Am Women Mentorship Program. This program is designed to help overcome the barriers that have traditionally held women back for experiencing the pleasure of riding through inclusivity and education. We already have over 6,000 active, highly engaged members. The program has been given significant coverage from magazines such as Forbes and Rolling Stone. We are pleased with the traction we have with this program and the positive feedback received from participants, as well as its potential going forward. Finally, Ryker had another very good season. Over 50% of Ryker customers are new entrants compared to slightly more than 40% last year.
We're also successful in attracting key buyer groups with over a third being women, almost three-quarters of riders under the age of 55, and almost half from diverse communities compared to 1/3 last season. The Ryker has definitely been successful at attracting a younger and more diverse customer base, growing our total addressable market. With these different initiatives, we are paving the way for new entrants to join our sport and to continue to grow the business. Turning to seasonal product on slide 11. Seasonal product revenue were down 8%, primarily due to a change in production schedule for personal watercraft versus last year. The lower shipment volume were partially offset by lower sales program. Looking at retail. The North American personal watercraft industry ended season 20 on September 30th, with retail up mid-single digit. Sea-Doo retail was also up mid-single digit percentage for the season.
With the success of the new GTI platform, Sea-Doo took the number one position in the recreational segment and now lead every segment in the industry in North America. Sea-Doo is also off to a good start in the season in counter-seasonal market, with retail up high 20% in Australia, New Zealand, and up mid 30% in Latin America. Given the strong demand for these products, compounded by the production shutdown we experienced in Q2, we ended the season with network inventory at an all-time low, down 95% from last year. With these low level of inventory and the strong trend in consumer sentiment, we are expecting a strong performance for our personal watercraft business next year. Looking at snowmobile. While still early in the season, the North American industry retail is up mid-teen percent.
Ski-Doo retail is up high 20% over the same period, despite a lower level of inventory available in the network. Given that demand for snowmobile does not appear to be diminishing, we have decided to extend our production schedule until mid-January for season 21. This is accounted for in our increased guidance. Continuing with a look at powersport parts, accessories, and apparel, OEM engines. The same phenomenon we have observed with vehicles, likewise, holds for parts, accessories, and apparel. Revenue were up 15%, driven by a higher volume of P&A coming from strong unit retail sales and higher replacement parts revenue as a result of increased usage of product by consumer. The focus we have placed on our LinQ accessories lineup is paying off. Looking at Marine. Revenue were down 25% in the quarter, driven by the wind-down of the Evinrude outboard engine line.
At the retail level, the positive momentum continue for Manitou and Telwater, both delivering mid-30% retail growth. Alumacraft saw a slight decline in retail due to limited product availability since during this period we have been consolidating our operation into St. Peter, Minnesota facility and closed the Arcadia plant. We are pleased with the performance of our boat brand and the progress we are making on our strategy to transform the marine industry. We look forward to sharing with you soon more detail on our latest initiative. With that, I will turn the call over to Sébastien.
Thank you, José, and good morning, everyone. We achieved very strong results for our third quarter as we delivered on our production plan and benefited from the continued robust demand for products, which led to lower than expected program and a richer than anticipated product mix. Our revenues reached a record level for our third quarter at CAD 1.7 billion, up 2% over last year's third quarter.
Our gross profit margin ended at 29.1%, representing a 220 basis point increase driven by favorable impacts from volume, mix, pricing and sales programs, and partly offset by unfavorable foreign exchange rate variations. Our normalized EBITDA was up 30% to CAD 349 million, driven by improved adjusted gross profit margin and lower operating expenses as a result of the cost-saving measures we have implemented earlier this year to mitigate the COVID impact. This resulted in a normalized EPS of CAD 2.13, up 41% from last year.
The strong performance also translated in a solid free cash flow generation of CAD 228 million in the quarter, bolstering our financial flexibility as we ended the quarter with CAD 1.3 billion of cash on the balance sheet. Looking more details at our revenue by product category and geography on slide 15. As José mentioned, our revenue growth in the quarter was primarily driven by year-round products and Parts, Accessories and Apparel, and OEM engine product categories. In terms of regional breakdown, our revenues were up 6% in Canada, up 7% in the United States, and down 10% in international due to having very low level of yard inventory in many regions. This is why a good portion of our increase in production in the quarter was allocated to rebuilding international yard inventory. Turning to slide 16.
Our quarterly normalized net income was up about CAD 54 million from last year, driven by volume, mix, pricing and sales program for a favorable impact of CAD 77 million and lower operating expenses for CAD 18 million. These elements were partly offset by higher financing costs and normalized tax expense for CAD 42 million. Turning to slide 17 for a look at our network inventory position. Both our North American network inventory and our yard inventory remained at low levels this quarter, with a year-over-year decline of 53% and 39% respectively, driven by the continued exceptional demand for our products. In terms of network inventory, all of our products are seeing declines versus last year, with the exception of three-wheel, which inventory is more flat compared to last year, as we already started shipping model year 2021 units for the upcoming season.
We are taking the necessary actions to manage the growth in our business and meet the strong demand for our products. This is why we have decided to extend the snowmobile production schedule by a few weeks and have increased production line speed for ORV and personal watercraft. As we already saw over the last quarter, that as most of the OEMs were competing on a more equal footing in terms of network inventory, we were back to gaining market share, and we are confident that as we rebuild inventory and maintain our fast pace of product introductions, we will continue outpacing our industry. Now the guidance update on slide 18.
Our third quarter results came in well ahead of our expectations, driven by the continued strong consumer demand for our products, which resulted in lower sales programs and a richer product mix, and consequently, better than anticipated gross profit margins. Accounting for these strong Q3 results and the expectation that we will continue benefiting from lower levels of sales program and a richer mix in the fourth quarter, we are now expecting our year-end results to be significantly better than our initial guidance, which we introduced last August. In terms of revenue, other than the elements I just mentioned, our guidance is also impacted by the extension of the snowmobile production schedule and the continued strength in our P&A business.
Based on these factors, our revenue guidance ranges are now down 2% to up 2% for year-round products, down 2%-5% for seasonal products, up 5%-7% for P&A and OEM engines, and down 25%-30% for marine, which, as you remember, is impacted by the wind down of the outboard engine business. This results in total company revenue guidance of down 1%-5%, reviewed upward from down 5%-9%. Also, based on the same positive elements, our normalized EBITDA expectation has been significantly improved, and we now expect it to grow between 20% and 24% for the year, resulting in a normalized EPS that is expected to grow 31%-37% to a range of CAD 5-CAD 5.25. Our guidance range remains wider than usual for this time of the year as we still face uncertainties related to the coronavirus.
While we have put in place strong measures to protect our employees, we are not immune to the potential risks that the virus could represent on the economy, our dealers, and our suppliers, which could lead to reduced demand, lower production, or increased costs, hence the wider range. As you can appreciate, the guidance does not reflect the impact of more comprehensive confinement measures that could be implemented with a second wave. Measures similar to what we saw last spring. Finally, given the strength of our balance sheet and our positive outlook for the business, the board of directors has approved the launch of the normal course issuer bid and the reinstatement of our quarterly dividends starting in the fourth quarter.
We believe these initiatives allow us to enhance the return we provide to our shareholders while preserving the necessary financial flexibility to operate the business in these uncertain times while continuing to invest in our long-term growth. With this, I will turn the call back to José.
Thank you, Sébastien. As you recall, pre-COVID, our growth trajectory at the end of fiscal year 2020 was very positive, with retail growth in our product line at 15% in an industry that was up mid-single digit. The surge in demand has offered a major opportunity for us to continue this phase. We are working hard to maintain it during this period. Although we recognize the pandemic is far from over, we remain positive. Consumer interest is still growing. We are achieving a good balance between new and existing customers. Our lineups continue to gain attention and therefore gain market share globally due to our ability to introduce industry-shaping innovation. Our inventory is at an all-time low. We have a strong replenishment cycle planned in the upcoming quarters. With our additional capacity next year, we will be in a good position to support this increased growth.
Given all this, we feel we are well-positioned to deliver our new guidance for the year and are optimistic for fiscal year 2022. I would like to end on a personal note. Without the incredible people we have in each of our offices and plants around the world, we would not have been able to continue to maintain the demanding schedule that the COVID situation, combined with higher than ever consumer interest, has required from us. I wish to thank our employees for their resilience and their diligence through their careful and innovative management of our operation. A successful company is the result of many dedicated heads and hands, and we are fortunate to have the best in the industry. On that note, I will turn the call over to the operator for questions.
Thank you. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Robin Farley from UBS. Please go ahead.
Great. Thank you. Just wanted to ask a little bit about retail. Our checks had shown that after a very big month in July, that August and September had still very good growth rates, but a little bit slower than July. I'm curious about the acceleration in October after that in August and September. Was that just October having a lower base of comparison, or was it an increase in product availability? Just kind of trying to think about how October and then any insight you can give us into November.
If I could even ask your thoughts about next year and whether the incredibly strong growth here, obviously you'll have so much restocking that can drive your shipment growth, but is it reasonable to think that maybe the growth rate, there was some pull forward and that maybe the next retail growth won't be till the year after next? Just how to think about that longer term. Thank you.
Good morning, Robin. That's a loaded question. Just to go in sequence, the third quarter, the retail was very strong, every month, August, September, and October. September being the highest, I think. October is always a transition between summer product and winter, but overall, with 29% growth, in an industry that was mid-single digits, we are very happy with our retail for Q3. November is off to a very good start. If I give you, because I know this is an interest for all investors, if I give you some numbers for the first 20 days of October, our retail worldwide is up slightly below 30%. That's despite last year, we had a growth in November of 23% for the whole month. Our growth worldwide is slightly below 30%, and that's despite EMEA, because of a lack of inventory, is up only low single digit.
That means North America is slightly above 35%, then very good retail in November. Now looking to next year, and when you think about it, obviously we don't know if there will be a confinement or what will happen in wave two. When you think about it, snowmobile season last year stopped in mid-March. The riding stopped mid-March, and the dealer gave us their IO in mid-April in the middle of the confinement, and they were somewhat conservative. Watercraft, we ran out of product by the end of July because the factory were shut down for two months. Three-wheel vehicle, the school were shut down for three months, and the retail peak after, but we hope next year it will be better. ORV, we ran out of product.
Our product was very low in inventory. We have a new factory for side-by-side that is planned in the fall of 2021. In Marine, our factory were closed for six weeks, and on top Alumacraft, we had an additional month of closure because of the transfer from Arcadia to St. Pete. I believe all of us learn, and when I say all of us, is our dealers, our suppliers, and us. We are better equipped to operate into this new context of COVID with all the norm for safety of our employee, and that's why we cannot plan for a complete shutdown next year. We feel that if things continue like this, we're well positioned to end the quarter and for next year.
Okay, great. Thank you very much.
Thank you. Our following question is from Steve Arthur from RBC Capital Markets. Please go ahead.
Yes, great. Thank you, and good morning. Just a couple of quick questions. Just first a sense on the cost structure looking forward. You made some pretty heavy cuts in the spring as COVID was settling in. Just wondering how many of those costs you've had to bring back in towards Q3, I guess, or now, and how much of that can have permanent impact, you think, on gross margins and OpEx?
Yeah. Good morning, Steve. We did benefit in Q2 and in Q3 from the cost-saving measures that we put in place earlier this year. With how the business is trending, we've decided to invest strategically in some of the initiatives. I'm not expecting that trend of cost-saving to continue in Q4. I'm expecting expenses to be up year-over-year. For next year, obviously we'll continue that investment. As José alluded to, our expectations for next year are very good. Obviously this comes with well-positioned investments.
We'll continue seeing that rent increase. One thing I want to remind is with the shutdown of Evinrude, that will bring overhead savings of about CAD 70 million-CAD 80 million on a permanent basis. That's obviously going to benefit our results. It's benefiting our results this year, but also for next year as well.
Understood. Out of all the cost measures, it was interesting to see that R&D wasn't cut. In fact, it looked like it was up about 10% year-over-year in Q3. I guess looking ahead with that investment, is that likely to stay at your normal kind of around 4% level, or might you invest more in this time to accelerate some market share opportunities?
Well, you know, innovation is key to our business. It's what's been driving our success in terms of market share gains in the last several years. That's the last thing we want to cut. We've been pretty open with investors over the last few years that if a recession were to happen, the last thing we want to do is to reduce too drastically our R&D investments. We've been able to protect that, and you see it in the investments we're making in the third quarter and next year. Our expectation is that we'll continue to run at the historical levels in terms of percent of revenue.
Okay. Good color. Thank you.
Thank you.
Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.
Good morning. Thank you for taking my question. It relates to your inventory in the channel. I think it's possible that the channel has never been more profitable due to the scarcity issue. Just as you catch up to demand, can you preserve some of that scarcity to improve the profitability of dealers on a sustained basis? To me, it feels like that's been an advantage for BRP and that your dealers are particularly profitable, but I'm wondering if you can sustain it in a better way this time around.
Morning, Craig. First for seasonal product for Watercraft and the Snowmobile, and I would include Three Wheel on this because we don't produce on a 12-month basis yet. It will be difficult because we're producing almost seven to eight months per product line and the retail season is quite short. We're producing basically to orders that are given to us in advance. I think we'll probably go back to the pre-COVID situation in those product line. Now, in the year-round product like ATV and Side-by-Side, this is another story. You're totally right. The low inventory is benefiting the dealer and us, and everyone is happy about that. We plan to reduce going forward by 25%, but it will depend how the competition will also be aggressive because everyone is fighting for market share. I think short to mid-term, we will see the inventory lower than pre-COVID.
Mid to long-term, we could go back to pre-COVID situation when everyone is fighting for market share.
Thank you. With respect to your new capacity in Mexico, that production comes online in the fall of next year. When would those units actually show up in dealerships in a meaningful way?
In the following week. When the production will be running, we will be delivering right away.
By the end of Q4 next year-
Yeah.
...you'll see the impact on our inventory.
Yeah.
Perfect. Thank you.
Thank you. Our following question is from Martin Landry from Stifel GMP. Please go ahead.
Hi, good morning. Congratulations on these impressive results. You seem to have gained market share at retail in a significant way in Side-by-Side during the quarter. I'm just trying to better understand what was the driver. Was it scarcity of products with your competitors, or is it really strong demand of your own products?
Well, I think, Martin, we were already gaining share pre-COVID. We had a very good momentum with our lineups pre-COVID. From what we see, we are able to deliver or to run our facility at capacity probably better than some of our competitor. Right now, we're delivering on plan. I have to admit, managing the supply chain those days is a bit bumpy. There is some difficulty, but our team is very good to manage and very agile to manage those situation. I think in Q3, it was our ability to ramp up production and run the facility at full capacity with minimal interruption.
Okay. Turning to Watercraft, your inventories are at a historical low. Can you give us more color as what you're going to do from a production standpoint to catch up to demand? Are you starting production earlier? By what quantum are you increasing production this year versus last year for Watercraft?
Just to give you a sense, Martin, we shut down the factory in April, May this year in the peak of the production because we were filling up the pipeline for the retail season that is June till the end of September. We shut down the factory in the peak. After, when we restarted the factory, we restarted the factory producing some model year 2021 in advance to make sure that we will not create non-current, but those disappear very quickly. If you look at our level of inventory, it's less than one unit per dealer. The dealer are empty, the network is empty. We have a very solid booking for next year, and we restarted production after the shutdown, let's say in July, and we're running since that time at full capacity.
We believe that for Watercraft, we will be in good shape for next year production. Next year retail, sorry.
Okay. Is there any sense of how much more capacity you're adding versus last year?
Yeah. Just to help you out here, in terms of the inventory situation, usually we finish a season with, in good years, probably 10% of next year retail, 15%. Just that replenishment of inventory would call for a 10%-15% increase in production just to meet that demand.
Okay. Plus the extra demand we're seeing right now, so okay.
Plus the extra demand which we're seeing. Again, we have flexibility to adjust our production schedule. Today, it's too early to call, but just on the inventory side, it's a 10%-15%.
Okay, perfect. Thank you.
Thank you. Our following question is from Mark Petrie on CIBC. Please go ahead.
Hey, good morning. Could you just provide a bit more color and maybe a bridge on the factors pushing gross margin higher in the quarter? I know you called out most of the benefit being from full price realization and lesser promotional activity, just could you quantify that and any other factors, I guess, including mix and specifically the removal of the outboard business?
Yeah. Obviously, this quarter, we saw a big benefit coming from the programs. There is a timing effect on programs when these programs are provided for accounting rule. Some of these programs were provided for when we ship the unit, so back in Q1 and Q2. Obviously with the low level of inventory, and the strong demand, these programs were not needed, so these provisions were released. I prefer looking at a full year basis, so the first nine months of the year will provide you with better comparability as to how the gross margin is performing. From a full nine months, volume and mix and pricing is favorable 90 basis points. Sales programs for a full nine months is favorable, about 200 basis points. Production with the absorption of added overhead cost because we had to shut down operations for two months is - 130.
The impact of the exit of outboard engine is - 140 basis points on the gross margin. We have what we call COVID costs, restructuring, we had to pay employees as well, for about 80 basis points as well. A good overall impact coming from programs, as you see, for 200 basis points. As José indicated, we'd like for that to continue on next year. We believe that early part of next year, we'll be able to benefit from that lower reduction of promotional activity.
Okay. That's helpful. Thank you. My other question was just with regards to how the replenishment cycle in fiscal 2022, how that's going to change the seasonality of your revenue and margins. I guess you sort of alluded to it, that that is going to be helpful in the first half of next year, along with lower sort of promotional programs. How should we think about that as we think about the typical kind of seasonality of revenue and margins-
Yeah.
...for fiscal 2022?
Something which I've already talked about, in the Q2 results, was the fact that we are pushing production more towards next year. personal watercraft, there's going to be a greater percentage of the current model year units are going to be shipped in Q1. Same thing for three wheels. That should bring higher profitability in the early part of next year compared to what we had in our historical numbers. Obviously, in the second half of the year, we're going to be opening up the new plant, so there's going to be a bit more higher cost, but we believe that with the added volume, we'll be able to offset these costs quite rapidly.
Okay, thanks. José, you talked about the supply chain performing pretty well in recent months, and maybe leading to some of your outperformance on a retail level. Is that to say that you really haven't had any material issues with regards to the supply chain? I know you guys are cautious on that, just in general, but have you had any issues to this point or in Q3?
We had situation where we had to air freight parts or reschedule to accommodate a supplier who had difficulty. This is our daily life. We do that all the time. Overall, the team have done a very good job to manage it, and that's what we foresee will continue. It's manageable overall.
Great. Sorry, just one last one of clarification. I think you said new entrants were 34% of buyers in Q3. That's new to the industry or new to BRP?
Yeah. On this, I will give you more colors because I know it's a high interest for many investor and analyst. Here I give you some colors. The first, we don't have any number to compare to last year Q3 because we didn't do any survey last year. We've done a survey this Q3, and here are the colors. We surveyed 2,400 participants in nine countries, people who purchased vehicle in July, August, September, and we surveyed them the first 20 days of October, then quite new. Historically, we have about 20% new entrant in our industry, and this time, with this survey, it was 34%. Now we're getting smarter, and we dig with more question. Out of the 34, 20% were new to powersport, then totally new to the industry, and 14 was new to category.
That means someone who had a watercraft and now decided to buy an ATV. That's 34% new entrant, 66% of experienced customers. What is even more positive for us, out of those 2,400 participants in the survey, 72% were new to BRP and 28% was BRP repurchasers. We feel quite confident in that testimony of our ability to gain market share. We feel pretty encouraged with those numbers because we put a lot of emphasis on new entrant, many are wondering is the new entrant will continue post-COVID. First, we have an indication that they will remain, the growth we had was also a lot because of very loyal, experienced customers and new to the brand.
Okay, that's great. Appreciate all the comments. All the best, guys.
Thank you.
Thanks.
Thank you. Our following question is from Jaime Katz from Morningstar. Please go ahead.
Hi. Good morning. Thanks for taking my questions. I'm curious about Europe and what you guys are seeing from customer behavior there. Obviously, there was some constraint on the inventory levels, which acted as a drag on throughput, but are you seeing the same sort of demand as you are seeing in North America, given that the economic environment is a little bit different there? Thanks.
Well, if you recall our Q2 numbers, we had very strong demand in Europe. It was softer in Q1 because they were more confined. Q2 confinement measures were lessened in Europe, and we saw demand pick up, which obviously resulted in us being lean in yard inventory at the end of Q2. Demand continues to be strong. Snowmobile season is off to a good start in Scandinavia. The outlook for the rest of the business for Q4 is strong as well. We're not seeing any material differences between Europe and North American consumers.
The other thing I would add to Sebastien.
Go ahead
The other thing I would add to Sébastien, Katz, snowmobile is an activity that is really off-road in very remote area. It's perfect for distanciation. We don't feel any slowdown there.
Excellent. Can you talk a little bit about how you are perceiving the new round of lockdowns in maybe Toronto and whether or not there are enough efforts to mitigate the impact such that it's not the same sort of magnitude as it was the last go around? Thanks.
Even in the first lockdown, many dealers were able to operate a different way. That's why I was saying in my remark that we've learned a lot in the first lockdown, and many dealers were able to retail despite all this, being creative and doing more virtual. What's happening in Toronto, for example, right now it's not affecting our business. Business like us, our dealerships are still running. They have measures obviously that they need to respect, but no dealership have been stopped lately, I don't think even in Europe.
No. As you can appreciate, in the spring, it was almost an economic lockdown where plants were being closed and stores. Now we're seeing leisure being closed more so movie theaters, restaurants, but not as comprehensive as we saw in the spring.
Excellent. Thank you so much.
Thank you.
Thank you. Our following question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yeah. Hi, thanks. Well, given that you commented there's already a couple loaded questions that were asked, I'll follow with one. Given the demand increase that you've seen here, is there any changes to your five-year plan that you laid out about a year ago? Could we get to that CAD 7.50 in EPS a year early?
Let's say that it's too early, Derek, to restate the M25. When the situation will be a bit more stable, we will definitely restate it and present it to all of you. Listen, your question is the growth that we're having right now. In the M25, there was not that surge of new customers. There was not that cycle or that inventory that is at a record low right now for all OEM. We believe there is opportunity, but it's too early to tell you about the CAD 7 EPS sooner than M25.
Okay. No, appreciate that. Just in terms of what you're seeing in terms of promotional environment, is there any discounting at all happening right now or is it really just a case of as product hits the floor, it's out the door?
Well, there's a bit of promotion. Obviously, we had some promotions for our spring units, which we announced back in the spring, so these are still in effect. We always provide support to dealers for financing, et cetera. Obviously, as the units fly out the door, the amounts that we spend on either wholesale incentives or retail incentives is significantly lower than historical. There's sometimes a bit, but again, as you saw the impact for the full year is 200 basis points. It's a material decrease versus prior years.
Yeah. Okay. Thank you very much.
Thank you.
Thank you. The following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
All right. Good morning. Thank you. Your operating expense down about 20%. We've discussed some of the puts and takes there, but one big expense we haven't talked about was the annual club event, which did not occur, from a physical standpoint. How much did that contribute to the quarter in terms of savings year-over-year?
Again, it's a material expense, but it's not CAD 20 million, it's not CAD 10 million. Obviously it had an impact. A club is less than CAD 10 million, you can do the math. Do I expect expenses to remain low? As I said, I expect Q4 to come back to where we were last year. Next year, obviously, club events will probably be not to the same level they were historically. Obviously, we want to continue fueling the pipeline. We want to continue creating interest by dealers and consumers for our product, some of that money will be redirected to other marketing initiatives.
Okay. Well, I hope you keep the analyst and investor ride events intact.
Well-
Moving on to another question. These are two questions in one. More art than science here. There have been two very big macro events. One is the U.S. election, and the other is the announcement of three vaccines that look highly effective. We've got a light at the end of the tunnel there. Number one on the election, I'll call a spade a spade here. Overwhelmingly Trump supporters here in the U.S. on the dealer side. How are they looking? What's their outlook? How has that changed, perhaps, if not at all? If there is any change there, and number two, being that there is a light at the end of the tunnel here, how is that impacting your outlook for next year and beyond?
On the U.S. election, Derek, we've been in this business for a long time. We've been able to work with both parties. We don't see for us any impact. There will be some adjustment. We are able to deal with any U.S. administration. We don't think there is much impact there. On the vaccine, obviously, very happy that it's happening. Before the vaccine will be distributed massively around the world, it will take some time. The other thing is, if you look at the leisure industry, that is airline, hotel, gambling, and you know more that than I do, all those industry specialists like you are saying that it will take three years, more to recover. We believe that maybe the surge that we had this summer will be a bit reduced. We have a pretty good runway in front of us.
Again, that's why in my remark this morning, I mentioned the momentum we had pre-COVID. For us, we see this as an opportunity, not as a threat. It's our job to make those new entrants lifetime customers and to continue the momentum that we had. There will be maybe the growth might reduce a bit because of the surge of new customers. At the end, like I explained, the mass of our customer are existing customers.
Yeah. Okay. On those new customers you talked about, I think one thing a lot of people got wrong initially was just thinking that these new customers are like your traditional new customers that you usually get every year. I think they're much different this time. Probably more professionals who are working from home and have some money and higher income kind of earners. Perhaps maybe less loyal to the lifestyle, the experience of the brand. How do you think about those new customers, and are you sort of modeling maybe less retention of those new customers or perhaps more?
Just to give you a sense, we've been able to attract new customer to Spark. We introduced Spark in 2014, Sea-Doo pre-COVID, the Sea-Doo Spark was over 50% of the sales was to new customers. The Ryker last year pre-COVID was 40%, and this year it's 50%. We used to deal with new customers with those product line, and we've learned how to make them lifetime customer. It won't be perfect, but again, instead to see this new customer surge as a threat, we see that as an opportunity, and we believe we are well tooled to continue the growth with them.
Okay. The Spark is a fantastic example. Thank you very much, José.
Thank you.
Thank you. The following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Thanks. Good morning. Maybe just a couple of cash flow balance sheet questions from me. First, just on the working capital. You've had a pretty positive trend so far in fiscal 2021. I'm just wondering what it looks like for Q4. Should we expect there to be a big draw on working capital? I'm just wondering how the year might end as far as that use of cash.
Yeah, we are expecting to rebuild the inventory in Q4 in the yard. There's probably going to be use of cash related to working cap. Obviously, there's yard inventory. We were able to rebuild at the end of Q3, the yard inventory in international. It's still low compared to where it was a year ago. There's more work to be done there. Even in North America, we could work with higher levels of inventory. All in all, still a good cash flow generation for the full year. CapEx is also going to be high in the fourth quarter. We should consume cash in the fourth quarter.
Okay. Just on the payables, it was up quite a bit in Q3 sequentially. Are we back to a more normal level? I think it's been sort of artificially depressed the first couple quarters of the year.
Yes, we are back to normal levels. We tend to trend at probably 90 days of working of AP, and that is where we are at the end of Q3.
Okay, great. Just on the cash position, it remains very high, which is a good position to be in, I guess. I'm just wondering if you can update us on your ability to pay down debt early. I think there are some limitations on what you can do. Just update us on what the latest is there as far as it's probably not the best scenario to be sitting on CAD 1.3 billion in cash.
Yeah. Obviously, it's not the best scenario, but it's a very good position to be in, especially with the uncertainty that is still there. As José said, the vaccine is on its way, but it'll take some time before everyone is immune. We prefer being in this situation than being short on cash. As you saw, we've decided to reinstate our NCIB and the dividend as well. Obviously, there's going to be some cash that's going to be deployed towards those at those efforts. In terms of debt reimbursement, short term, it is not on the agenda. As you all know, we raised an extra CAD 600 million of debt back in May. There is a 2% penalty for early repayment that comes to expiration in May. Until May, our intention is not to look at potential debt reimbursement.
Okay, that's helpful. Thanks very much.
Thank you. Our following question is from Benoît Poirier from Desjardins Capital Markets. Please go ahead.
Good morning, José. Good morning, Sébastien. Congrats for the results. To come back on Gerrick question, could you talk about the new entrants, whether they are brand agnostic and maybe the potential to sell them more products when you compare with your current customers?
Yeah. Good morning, Benoît. For sure. Right now, the focus of the marketing team is when a new entrant is coming in, we try to expose them to other product line. That's why we advanced the launch of the Uncharted Society, where you can rent a snowmobile, a watercraft or an off-road vehicle in other area just to expose them to the pleasure of riding a different experience. This, again, to follow on what I was saying to Gerrick a few minutes ago, for many investors, they are afraid that those new customers run away, and we see that as an opportunity. They came to our industry, and now it's our job to attract and maintain them and expose them to other product line. Again, we see that as an opportunity.
We like to be positive about going forward and working hard with the marketing team and the sales team to expose them to other product line.
Okay. Sébastien, when you talk about the better mix impact on margins, was it driven by a lack of low-entry products or driven by customer preference toward higher-end products?
Well, obviously, given the scarcity of the inventory and the high demand for products, we selectively produce units that we believe will bring the maximum profit to us and to the dealers. Our mix is more richer because we've made that decision to produce a richer mix of products driven by, obviously, the demand from the consumers.
Okay. Given the greater visibility through the pandemic, how does it impact BRP? Could you accelerate some product introduction when we think about Project M, Project Ghost, or maybe electric vehicles? It is something that could maybe accelerate furthermore?
As I shared with you, we did put a pause on certain projects when the COVID happened. Obviously, as we had greater visibility on the year and on next year, we turned the switch back on for these programs. We'll continue introducing the products and the innovations that we do on a yearly basis. For now, no significant change in plans.
Okay.
We believe and while we have plenty coming to remain very competitive.
Okay, perfect. Last one for me. When we look at capital deployment, two times seems to be the optimal level in terms of leverage. How should we be thinking right now, given the bigger growth opportunities, the pandemic? Do you feel comfortable maybe to increase or maybe lower given the visibility we currently have? What about the optimal level?
In terms of, are you talking about CapEx?
In terms of net debt, EBITDA, in terms of leverage ratio, I suggested.
Okay. Well, when we IPO'd, we were at three times leverage. We finished the quarter, again, below two times, significantly below two times. We're comfortable, as we've said in the past, operating at two times leverage. It'll be part of discussions we're having with the board. As I said today, we prefer sitting on a bit more cash, and see how things are gonna turn out. We are lucky we're in a good position. Having that cash flexibility is a huge plus in these uncertain times.
Okay. Thank you very much for the time.
You're welcome.
Thank you. Our next question is from Greg Badishkanian from Wolfe Research. Please go ahead.
Hey, guys. It's actually Fred Wightman on for Greg. Just quickly on snowmobiles, retail was up low 20s in the quarter. I think on last quarter's call, you had talked about the early retail signs were up 70% plus. Can you just talk about what changed and how that fits into your decision to extend the snowmobile production period?
Good morning. What happened, again, you need to be careful at the beginning of a season because numbers sometimes are small and increase numbers or ratio can be very high. Right now, we are extremely happy with the snowmobile momentum. You just need to remind that this year, at this time of the year, we had shipped more unit last year than this year. We're hearing dealers right now when they receive a unit, the PDI, and deliver it to the customer, then it's in and out. We expect the momentum will continue at a good pace till Christmas, and we're hearing that some dealer will be out of product by Christmas. We feel very comfortable with the snowmobile business.
Perfect. Thank you.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschênes.
Great. Thanks, Maude, and thanks everyone for joining us this morning and for your interest in BRP. We want to take the opportunity to wish you all a happy and safe holiday season, and we look forward to speaking with you again for our fourth quarter earnings call in March. Thanks again, everyone, and have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.