Morning, ladies and gentlemen, and welcome to the BRP Inc. FY 2018 Third Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr.
Deschenes.
Thank you, Mauve. Good morning, and welcome to BRP's Q3 conference call for fiscal 2018. Joining me on the call this morning are Jose Boisjeli, President and Chief Executive Officer and Sebastien 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 and A for listing of these.
Also during the call, reference will be made to supporting slides, and you can find the presentation on our Web site atbrp.com under the Investor Relations section. So with that, I'll turn
the call over to Jose. Thank you, Philippe. Good morning, everyone, and thank you for joining us. The Q3 is always very busy at BRP as we change model year lineups or 5 product lines and we launched new models during our fall dealer event. In addition, this is here our snowmobile shipments are returning to a normal cycle.
I'm very pleased with our retail momentum, particularly in our off road and snowmobile businesses. And through it all, we stayed focused on our execution in all our operation. I'm happy to report this morning that the team once again did an excellent job and delivered solid results, which put us in good position heading into the Q4. Let's start by taking a look at our financial results. Our revenue grew 15% versus Q3 last year to reach $1,200,000,000 notably driven by the continued strong demand for Can Am side by side lineup and earlier snowmobile shipment compared to last year.
Our normalized EBITDA ended just shy of $200,000,000 up $2,000,000 from last year Q3, which was itself very strong growing 39% from the previous year. Our normalized earnings per share reached $1.05 up 13% from last year. While our financial performance was solid, the highlight of the quarter was certainly the strength of our retail sales, registering 25% growth compared to an industry that we estimate was up high single digit percentage. This strong increase was in part driven by our snowmobile business as we had better unit availability in the network earlier in the season compared to last year. Excluding snowmobile, our retail sales were up 12%, driven by another solid quarter for Can Am side by side business with retail up in the low 30% in an industry that was up high single digit percentage.
Can Ami TV also performed well with the high single digit retail growth, gaining share in an industry that was up mid single digit. Watercraft and Spider had the more difficult quarter as retail was impacted by hurricanes Harvey and Irma. Spider and Watercraft combined were down 18% in Texas and Florida. Another high point of the quarter was our annual Can Am and Ski Doo Club that we held in September. Over 2,800 people join us in Dallas, Texas for one of the biggest dealer event in our history.
It was certainly the most intense in term of product introduction. Delivering on our commitment to introduce a new side by side every 6 months until 2020, the highlight of the club was the launch of the Mavic Trail vehicle. This new 50 ms side by side opened a whole new world for Can Am, since it is the 1st trail ready side by side ever made by BRP. With its superior comfort, agility and handling, we are convinced it will be a success with consumer. Production and shipment have already begun in the Q3 as planned.
We also took steps to consolidate our number one position in the watercraft industry. We revealed a whole new platform that completely changed the onboard experience with its industry leading stability and feature, notably with the introduction of the first OEM installed fully waterproof audio system. Likewise, we had significant news for Can Am Spyder. First, we introduced BRP Connect, a digital instrument panel that will enhance the consumer experience by offering smartphone connectivity for seamless apps integration while riding. This new user interface will be available on most of our 2018 Spider lineup.
The other key news for Spider is the upcoming introduction in the fall of 2018 of an entry level Spider family for an MSRP starting at under US10 $1,000 Following the success of our Sea Doos Spark Watercraft, we believe this new model will be key to bringing the Spider business to the next level. Finally, we also strengthened our Can Am side by side lineup with multiple new models, especially adapted to the needs of our riders. One of them is the Mavic X3 XRC, a vehicle with unique and advanced feature that are sure to please the rock crawling community. Other key models were the mod ready Defender XMR and the Defender Max Lone Star Edition specially designed for the Texas market. Yesterday, we announced extension of the Mavic X3 family of vehicles.
The Can Am Mavic X3-900HO with all the popular X3 feature at the competitive entry level price point and MSRP of under US18000 dollars This is our 1st non turbo extreme model, expanding our offering in the mid HP sport side by side market, which is more than twice the size of the high HP sport side by side segment, in which the Mavriq Xtreme Turbo R competes. The industry most powerful and first factory made turbocharged mud vehicle, the Can Am Mavic XMR sure to please the mud lovers who are looking for extreme racing performance and the extension of the industry exclusive smart lock differential on more model of side by side making our lineup even more competitive. We will begin shipping these vehicles in January. Since the introduction of the Defender and Mavic X3 models, our side by side retail momentum is performing above expectation. In June, we invested in additional equipment in URS 2 to increase our capacity by 30%, which should be operational in the Q1 of fiscal year 2019.
We are announcing today a second phase of investment to enlarge and add equipment to our Urales II facility that should be ready in fiscal year 2020. The second capacity increase is earlier than originally planned. It was the optimal and most efficient solution to our capacity constraint since the retail momentum of the Defender and Extreme model demand. We are confident that yesterday's expansion to the Mavic X3 family will increase demand and we have big, big plan for upcoming platforms. This decision is a testament to the strong growth we see with our Can Am side by side business and our commitment to further developing it.
Now let's turn to the product category review, starting with year round product on Slide 9. Year round product revenue were up 20% in the quarter, driven by a higher volume and richer mix of side by side as we continue to see strong demand for the Can Am Mavic X3 and Defender models. We also started shipping the Can Am Maverick Trail. Now looking at the retail performance, 4 months into the season, the ATV industry is up low single digit. For the same period, Can AmityV Retail is up high single digit.
Canami TV is also gaining share internationally with double digit retail growth in Western Europe, Brazil, Mexico and Australia, New Zealand. Overall, Can Amity TV is performing well in both the high and the mid cc segment. Turning to side by side. Also 4 months into the season, the North American industry is up low teen percentage. Can Am side by side continued to outperform the industry in the quarter with retail up over 30%.
Globally, the trend is even better our international side by side retail sales being up over 80% into the quarter. The Defender Max models are generating retail growth of over 100% in multiple markets, most importantly in Mexico, China and Western Europe. Turning to Spider. The North American three wheel motorcycle industry ended its 2017 season, which retail down low teen percentage. Spider outperformed the industry for the season, which retail down high single digit.
As for the 7th state in which we had dedicated teams, retail ended the season up low single digit despite the fact that 2 key states were impacted by both Hurricane Harvey and Irma. We're also successful in rightsizing our network inventory level as we ended the season with inventory down about 40%. While we are aiming for more, we are pleased with the success we had in these key states. The insight from this past season will be applied to more states over the coming years. Now turning to seasonal product on Slide 10.
Seasonal product revenue were up 18% driven by earlier snowmobile shipments compared to last year. As you may remember, due to the introduction of our new snowmobile platform last year, we had to shift production to later in the plan in the year. We are now back to normal production and shipment schedule. We therefore had better unit availability in the network earlier in the year. Looking at retail, although still early in the season, the snowmobile industry is up in the high 20 percentage.
Meanwhile, Ski Doo retail is up in the high 70% range. While our retail growth was strongly influenced by the timing of and should normalize as time goes on. Now turning to watercraft. The industry ended its 2017 season at the end of September with retail up high single digit. Sidhu experienced growth in both the traditional watercraft and Spark segment and ended the season with retail sales up mid single digit.
As a reminder, this is the 1st season where the Spark model had competition in the entry level segment, which had an impact on our market share for this product category. We are just starting the season in country seasonal markets such as Brazil, Australia and New Zealand, where we are already seeing positive signs for 2018. Overall, the watercraft industry is in a very good position. Since the introduction of the Spark, the North America industry has grown by 55%, in part because of the entry level segment. Seadoo continued to gain market share with 3 additional percentage points during the season 2017.
The North American success is similar to many markets worldwide, which shows that this industry is well positioned to continue to grow. This is why we are investing in increasing capacity in our Queretaro facility by 20%, which should be operational in the second quarter of fiscal year 2019. With the strong Sidu brand, the most complete lineup in the industry and more production capacity, we are well positioned to continue to grow in this business category. Now looking at Propulsion Systems on Slide 12. Revenue for Propulsion Systems were pretty much flat in the quarter.
As we have previously explained, the trend of package with boat over loose engine is continuing with the engine only segment weakening. In terms of retail, 4 months into the season, the North American outboard engine industry is up mid single digits. For the same period, even road retail is down mid single digit percentage. We attribute this in part to our belief that we were not aggressive enough in our promotion this quarter. On November 1, we've launched our 10 year warranty coverage promotion that should last until next April.
We are already seeing positive results to date. We also had great news for our Rotax Propulsion System business, where we introduced our first ever Rotax electric power pack for karting. This new power pack provides a new customer experience with extremely good performance and unique feature such as the boost function to pass competitors, low noise and low emission. It represents an important step into electrification for the karting business. Now looking at parts, accessories and clothing.
Revenue of our parts, accessories and clothing increased by 5%, resulting from higher volume of side by side accessories and snowmobile parts sold. Accessories are a significant part of the customer experience and with the new Mavriq Trail, this experience was enhanced with the development of 125 accessories available at launch. And with that, I will turn the call over to Sebastien and will return for closing remarks.
Thank you, Jose, and good morning, everyone. We are pleased with our results, which have been very solid so far this year with year to date revenue growth of 12%, normalized EBITDA growth 21% and normalized earnings per share growth of 48%. With 2 months to go before the end of the year, the demand for our products remains strong and is allowing us to aim for higher end of revenue guidance ranges for year on products, seasonal product and pack. And while our guidance implies for results that may come in below last year for the Q4, This is simply a result of a change in timing of snowmobile shipments. Our business fundamentals remain strong.
We are well positioned to deliver our guidance and continue our growth path into next year. Now let's turn to the quarterly financial results. Today, we reported revenues of $1,240,000,000 for the quarter, representing an increase of over 15% over the same period last year. As Jose mentioned, the growth was primarily driven by higher volume of side by sides and earlier snowmobile shipments compared to last year. Revenues grew across all regions with U.
S. Being up 8%, Canada up 25% and international up 20%. We generated $329,000,000 of gross profit representing a gross profit margin of 26.6 percent, down 180 basis points from last year's Q3, primarily due to higher production costs and unfavorable foreign exchange rate impact. We achieved $199,000,000 of normalized EBITDA and a quarterly normalized earnings per share of $1.05 an increase of 13% over last year. Finally, we generated 100 $56,000,000 of free cash flow, an increase of $27,000,000 over last year.
On the term loan, we successfully completed a US100 $1,000,000 increase as well as a reduction of 50 basis points in pricing, providing us with additional financial flexibility to invest in our growth plans. Looking at slide 15, our normalized net income was up $5,000,000 in the quarter, primarily driven by a positive impact coming from volume and mix resulting from incremental shipments of our Can Am SSV lineup as well as the new snowmobile platform. Partly offsetting this gain were a slight negative impact from pricing and sales program for $15,000,000 driven by a strong growth in retail sales, higher production costs and operating expenses for $44,000,000 and a negative impact from foreign exchange rates for $16,000,000 Now turning to Slide 16 for a look at our network inventory, which ended the quarter up 9% versus last year. Overall, the level and quality of our network inventory remains very healthy. The growth continues to be driven by our side by side business for which inventory is growing in line with retail demand and by the expanding business with new dealers we added over the last years.
Our snowmobile inventory is also up slightly over last year and is currently at an appropriate level ahead of the upcoming season. The increase was partly offset by successful rightsizing of our Spider network inventory, which we were able to reduce by about 45%. And finally, turning to Slide 17 for more details about our guidance for fiscal 2018. As I mentioned earlier, the strong demand for our products is allowing us to aim for the higher end of our year end products, seasonal products and PAC revenue guidance ranges. So we are now expecting year round products revenues to be up 11% to 12%, seasonal products to be up 1% to 3% and packs to be up 7% to 9%.
However, due to the slower than expected retail in the quarter for Evinrude, we are reviewing downward the propulsion systems revenue guidance to down 2% to up 1%. The net impact of all these adjustments brings our total company revenue guidance to up 6% to 8% for the year. Other than these adjustments, the rest of the guidance remains essentially unchanged with the exception of the effective tax rate, which we now expect will end the year between 27% 28%. This change in tax rate is allowing us to increase the lower end of our normalized earnings per share guidance by $0.02 resulting in a range of $2.25 to 2.35 a growth of 15% to 20% compared to last year's results. As usual, at this time of the year, we have good visibility on our shipment volumes and our expenses for the rest of the year.
Our focus at this point is on executing our plans, including the capacity expansion and on ensuring a successful snowmobile season. Again, as mentioned earlier, we are facing a very tough comparable in the Q4 as last year was heavier than usual in snowmobile shipments due to the introduction of the new snowmobile platform. For this reason, our guidance implies a 4th quarter that might come in slightly lower than last year. Still, as you can see with our retail growth, our recent product introductions and our ongoing incremental capacity investments, our business remains very strong and we are well positioned to deliver a strong Q4 and continue to grow in the future. With that, I will turn the call back to Jose.
Thank you, Sebastien. To recap, with the exception of our Evinrude brand, all our business are doing well and our results for the Q3 are in line with expectation. All new products were well received by the network and media and we are sure our customer will feel the same. Quarter, our off road retail result continued to beat the industry. Our snowmobile momentum is ongoing due to the new Ski Doo Gen 4 model that are creating a lot of excitement.
We are building the future with our expansion of the Queretaro facility to support watercraft growth, which will be operational in the Q2 of fiscal year 2019. And to support our side by side momentum, we have initiated 2 phase of URS 2 capacity increase. The first should be ready in the Q1 of fiscal year 2019 and the second is planned to be operational in the Q1 of fiscal year 2020, which combined more than double our current capacity. In addition, we are opening a regional business hub on the outskirts of Dallas, Texas in February 2018. This will provide us greater proximity to that market and the U.
S. At large, allow us to better connect it to our dealers and customers there and position us to seize its growth opportunities. These are some of the highlights that show our commitment to generate growth from launching innovative product to increasing production capacity and transforming our sales operation. I am very pleased with the team's execution in this last quarter and I'm confident that we will deliver our year end guidance, which is a 15% to 20% growth of our normalized earnings per share and we plan to continue this momentum next year. And with that, I will turn the call over to Mo for questions.
Thank Our first question is from Steve Harcher from RBC Capital Markets. Please go ahead.
Yes. Hi. Thanks very much. Just a first question in terms of the capacity expansions. In the MD and A, you talked about allocating yesterday $100,000,000 for these expansions.
Not really looking for specific numbers on the forward years, but if we look at those CapEx plans, does that tend to keep it in that kind of $250,000,000 range that we're seeing this year? Or is this kind of incremental and we'll likely see higher numbers to support these growth initiatives?
Yes. Good morning, Steve. Obviously, this year, as you know, we announced capacity increase investments, which we adjusted our guidance upward to the range of about what you see today the $240,000,000 to $255,000,000 Obviously with that $100,000,000 investment not all of it is going to be next year, but a good part of it is going to be next year and we're still going to continue investing in our lineups and modernizing our other facilities. So yes, I would expect our CapEx to be above the $250,000,000 for next year.
Okay. And with these kind of investments in the Mexican facility, should we read into that your view of there being likely fairly modest changes to NAFTA? Or if there are changes, nothing that would materially alter your manufacturing footprint?
Yes. Well, the investment is not only in our Mexican engine capacity as well. So some investments are happening in Austria. Some investments are also for supplier tooling. So not all of that $100,000,000 is being put into Mexico.
But obviously when you have strong consumer demand for products the worst thing you can do is not meet that demand. And so we are very focused on making sure that we can meet that demand and satisfy the dealers as well. And our view on NAFTA is it hasn't changed for us. It's the status quo. We run our business as we believe it should be run.
And there are many variables that are still pending on NAFTA and we've shared these variables with the investor community in the past. But maybe I'll just cover them again. The first one is, well, what are if any U. S. Content or NAFTA content adjustments that are going to be imposed?
Today that's a big question. What are the penalties or tariffs that can be imposed if you do not meet those requirements? And also the impact coming from tax legislation in the U. S. That also is going to influence investment decisions when NAFTA is known.
And also the time to be compliant, there is going to be a transition period. So for us, given all these variables and given the uncertainty or the unknown related to these variables, we are just proceeding ahead. And these are businesses or investments which have a good return. And that's why we believe it's the right decision to make.
Maybe to add Steve to the comment on NAFTA, we cannot wait for the government to agree to run our business and we're running our business. And if there is some change, we have the agility to adapt and move forward.
That makes good sense. Just one final one for me. You both mentioned looking for continued growth momentum into next year. I expect you'll offer more formal outlook with the Q4 results in a few months. But any commentary related to the kind of anticipated growth rates, margin improvement, any deviation higher or lower from what you previously talked about with your 5 year longer term plans?
Yes. As you said, we'll give you a full disclosure on guidance at the fiscal year 2019 in March when we report on our fiscal year 2018 results. But I've been looking obviously, we are planning for next year. So we our financial planning is underway. And in the recent days, I looked what the market is expecting for next year in terms of EPS growth and I feel comfortable that we'll be able to deliver that next year.
And that would be if you look at the midpoint of the EPS range that we have in our guidance this year, we are at above a 15% EPS growth for next year as well.
Okay. Good comments. Thank you.
Thank you. Our following question is from Anthony Zika from Scotiabank. Please go ahead.
Yes. Good morning, gentlemen. Julien, could you please provide us a bit more color on your snowmobile sales? And looking into fiscal 2019, which areas do you have the least amount of visibility?
Yes. On the snowmobile sales, let's say, we I would say, if you look at our retail curve this year, it's similar to what we had in fiscal year 2016, not 2017, then we are back to a normal curve plus or minus a week or 2. Then it was planned like this and we're very happy because so far we are tracking to the normal cyclical curve of snowmobile. And I would say a bit early to celebrate, but so far the snowmobile season seems to have a good start. I'm talking yesterday, one of our board members is going to ride snowmobile up north over the weekend.
And it's a bit earlier than we typically do, but like we say, we won't celebrate right away. In term of fiscal year 2019, obviously, we have order on our hand for the Spider Model Year 18, the first half of the season. Watercraft, we have order on hand. Snowmobile, we'll take order for next year at our February event, finalized the order booking in April. And ETV and side by side, we are taking a lawyer on a monthly basis that right now we know exactly how much off road will deliver till the end of January, till the end of this year.
But the momentum with off road, to be honest, it's going extremely well and we're very pleased to upbeat the market quarter after quarter. Then overall, if the global situation remain as is, we are quite confident about the capacity to continue our retail momentum.
Okay, great. And then one last question. Could you give us a bit of a perspective on the M and A outlook? If you're looking at a deal, like how large would you consider a deal? And what would be the maximum amount of leverage you'd be comfortable with?
Well, obviously, when if when we announce something, we'll be announcing it to the general public at large. But for now, there's nothing new to announce. The teams are still looking at opportunities. We're having discussions with the Board as to where could be their next play. And so that's ongoing.
And in terms of leverage, well, when we IPO ed, we were slightly below 3 times leverage and that's a place we were comfortable at IPO time and it's a place we could be comfortable operating as well if we were to do an acquisition and needed to lever up.
Okay. Well, thank you very much.
Thank you. Our following question is from Seth Wolff from Northcoast Research. Please go ahead.
Thank you guys and thanks for taking my question. Congrats on
a good
quarter. Two quick questions for me. First, Jose on the product portfolio, big news getting into the entry level market. It's obviously much bigger than the premium market you started with in the sport category. But just what are your thoughts on the price point?
You've got some competitors that have lower price points. And do you feel like over time that's an area that you need to address as well? Or do you feel comfortable with where we're at?
Assuming you're speaking side by side?
Correct. Excuse me.
Yes. Then the side by side, I think we are I mean, obviously, when you start when you're launching a new platform and with the DNA of Can Am, you start at the high end of the And what we're doing right now is just continuing to expand or to leverage the investment that was made in our 2 key platform, the Defender and the X3. And Defender, if I look at the base Defender HD5, we're very well positioned versus the competition. And when I look at the Max Briggs X3-900HO, no turbocharger that we've launched yesterday, we're extremely well positioned with some plus and minus versus the product of our competitor, but exactly at the same price point than the biggest seller into the industry then. Overall, we continuing to expand to leverage the investment we made in our 2 key platform and we are extremely well positioned.
The new one, the Mavic Trail also extremely well positioned in pricing. Then we're just starting to be honest to expand our lineup in those entry level price points and you can expect from us to continue to expand in more model, more variation in those price points.
Okay. Thank you for the color. I appreciate it. And then real quick, Sebastien, you may have touched on it. And if you did, I apologize for the redundancy.
But it looks like the sales and marketing, the rate of change kind of accelerated a lot. Is there something like a timing event or one time that's going into that? And how should we think about that going forward?
Yes. We shifted this year we shifted our marketing dollars from Q1 more towards Q3 for ORV. And so that's why you have an increase of about $13,000,000 $14,000,000 in marketing spend this quarter. And it's something that I would expect to continue going forward. Retail period for ORV is big in the fall and making sure that we're out there being seen is essential and that's why we're going to likely continue that strategy.
Okay. All right. Thanks guys. Thank
you. Thank you. Our following question is from Cameron Doortzen from National Bank Financial. Please go ahead.
Yes, thanks. Good morning. I wonder if I could maybe just ask a kind of a bigger picture industry question and that is you've got, I think, very strong sort of economic indicators out there. Consumer confidence is at like a 17 year high. So it seemed that the sort of underlying dynamics in the industry, certainly in North America, would be very positive.
I'm just wondering if you can comment on what you're seeing out there, maybe some commentary about what markets geographically are particularly strong and what ones are maybe lagging a bit?
Yes. Obviously, North America is doing well and I think it's positioned to continue to do well. If I look at the big picture, if you take APAC and that's the beauty of BRP. As a general statement, right now we're growing in every country in the world. Then APAC is having a constant stable growth.
China for us is growing at a fast pace, small number, but growing at a fast pace. But I think the highlight of the last or the beginning of the year is Latin America. We see Brazil, Chile coming back. We have very strong we put Mexico in Latin America. We put Mexico very, very strong momentum in Mexico, particularly on off road.
And if you look at Europe, Europe the Western Europe is continued growth, not the fast pace that you see in other countries, but constant continued growth, Scandinavia. And now we're starting to see some positive sign of Russia. I mean, we still are in the 25%, 30% of what it used to be, but we started to see some positive signs from Russia. Then when you look at the big picture, what I'm very pleased with the 6 product lines we have are extremely competitive. And on top of it, there is always plus and minus managing our business, but there is right now good momentum in most of the region in the world.
Then we believe it's the global economy don't change. We are pretty well positioned to continue to grow in the few years.
Okay, excellent. Maybe just a quick question on the, I guess, the Q4 guidance items. Just I guess, a couple of things I wanted to ask is first on the CapEx in Q4, sort of the guidance sort of implies that Q4 is going to be significantly higher than what we've had in the previous quarter. So maybe if you can just comment on that. And sort of the same question on depreciation, it seems like there's going to potentially be a big increase in Q4?
Yes. Q4 historically has always been a big quarter in terms of CapEx investments. And this year similar to last year will be the same case. Well, as this year our CapEx is much higher than last year. That's why you're seeing a bump in Q4.
And in terms of depreciation expense, same phenomena as last year. We had higher investments coming in. You'll see that impact on depreciation being reflected as well in the Q4.
Okay. Very good. Thanks very much.
Thank you.
Thank you. Our next question is from Mark Petrie from CIBC. Please go ahead.
Hi, good morning. I actually just wanted
to follow-up quickly on a couple
of the topics that you've already touched on. Jose, when you're speaking about the regional sort of commentary,
could you
just give us a sense of how Western Canada is performing for you guys?
Western Canada is still below Eastern. I would say it's stabilized in the last, I would say, since the beginning of the year. But we see a better momentum in the East than we saw in the West. Let's say, I would call it stable. East is still better.
Okay. Thanks. And then, Seb, with regards to your comments around NAFTA, obviously, you guys have grown quite a bit since you last gave us a sense in terms of the dollar shipments moving from Mexico into the U. S. And from Canada into the U.
S. Could you just give us a sense or a range of where you guys sit today?
Yes. The growth has happened mostly in between U. S. And Mexico. Last year, we were talking about $1,000,000,000 of trade happening between those two countries.
Today, we're looking more at $1,200,000,000 of trade. And now if NAFTA were to be, let's say abolished what are the consequences then we'd fall to pre NAFTA free trade agreement that existed between Canada and the U. S. That could be a likely outcome. And as we had talked 12 months ago, then you're probably looking at WTO tariffs between Mexico and the U.
S. And that could be in the range of 2% to 2.5% on a total trade volume of let's say 1,200,000,000 dollars Obviously, it's something it's not a scenario that we would prefer. We would prefer the status quo. But if it were to happen and if we're talking about let's say a to $30,000,000 impact on our results, it's something that we could most certainly manage and that would be addressed through either supplier reductions or increases over the consumer or do as we do every year. We optimize our business and a 1% to 2% optimization every year is something that we target.
So it's something that we could absorb.
Okay. Thanks. That's helpful. And then just with regards to the additional capacity expansion with Juarez II, I think the Spider S is going to be produced there, if I'm not mistaken. Could you just help us sort of think about how that investment supports potential growth for that product?
Yes. The investment we're announcing today is only for UALES2. You visit the site and right now it will be we're investing for more side by side in URS 2. The Project S will be assembled in URS 1 and still there we have ETV and the Commander. The Commander is still assembled in URS 1.
We cannot because of the configuration of the vehicle, we cannot bring it to URS 2 then. All the investment we've talked this morning is URS
Okay, perfect. Thank you.
Thank you. Our following question is from Jamie Katz from The Morningstar. Please go ahead.
Hi, good morning. Thanks for taking my questions. I'm curious if you guys can talk a little bit about in house inventory. It looks like total inventories have grown a little bit faster than top line, but I think a lot of that is work in process inventory and not finished goods. So just want to make sure that's to facilitate new products rather than anything else.
Yes. One of the impact one of the items that impacts inventory as well is as we will as we're building capacity, obviously, we're building raw material inventory for shipments in January and Q4. And also the personal watercraft business which is growing in international and the lead time to get the vehicles in market through international are a bit longer. And that's why we as that business is growing, that's why we have additional inventory.
Okay. And then can you give us an update on how you think about sort of dealer programs going forward? How that might impact gross margin ahead? Whether you think you can sort of take the pedal off of that a little bit and whether or not maybe some of Arctic Cat's old inventory has been sort of cleaned out of the channel, so there's not so much promotional cadence to get that stale inventory out sort of helping the health of the entire industry?
Yes. Then we don't plan to change drastically our program. If things continue to go as it's going right now, we don't plan to change drastically our program. Obviously, we keep every end of the season of a modern year like snowmobile, the end of the season will be February, March 2018. If depending on how the retail goes, we could adjust.
But except those end of season adjustment we don't plan major change into the program. Obviously in the Q3, some of our competitors were very aggressive with program and we didn't follow. We decided to keep the course. Definitely, despite our 30% up growth for off road, we were able to deliver that growth without following our competitor. But we believe and we hope right now that most of their model year 2017 is retail and it will come back to a more normal, I would say, situation.
But we're very pleased with our momentum in Q3 despite we didn't follow some of our competitor.
Okay. And then lastly, just as sort of a housekeeping, I guess, question. For Ski Doo, it's you guys had mentioned that the retail was up in the high 70% range and that the industry was significantly slower than that. Can you remind us what percentage of sales happens this early in the season just to sort of get a perspective on what the read through for that might be?
That's a good question. We might have to come back to you. But I would say probably 70% 60% happened before Christmas, I would say. Okay.
That's helpful. Thank you so much.
Thank you.
Thank you. The following question is from Craig Kennison from Baird. Please go ahead.
Hey, good morning. Thanks for taking my questions as well. Clearly, your side by side retail strength is a function of your own share gains. But I'm curious to what extent you're seeing improving trends in agriculture or rural markets. We've certainly seen some companies in that universe begin to perform better and maybe there's some percolating demand in that market.
Yes, I think there is all the product that the OEMs are introducing are better. Our product have more features than 5 years ago and ride betters and better performance. And I think this is generating this renewal cycle that we're looking for. Then I think the side by side market right now is healthy, because there is a lot of new good product that are offered by OEM and this is what keep the industry growing.
And maybe just to follow-up on that. In addition to all of the product innovation that you've really led, to what extent do you think that rural consumer just has more discretionary income to spend? And to what extent is that driving any of the upside?
Yes. Obviously, and this is something I forgot. The utility side by side, our Defender category, this is about 60% of the side by side market and that's a at a good pace. And this is for us a very, very important white space that we're trying to continue to benefit as much as we can. Then again, depending on the quarter, there is ups and downs.
And we see that the utility segment, the farmers, the utility, the company that are buying those products, This is a more stable purchase with less variability than the sports segment or the trail segment.
Great. And then with respect to your move into Texas with an additional headquarters there, maybe you could just develop the
rationale behind that move and maybe cover whether there are any
move?
No, it's more a business decision and that decision was taken about a year and a half a year ago, I would say. The situation is this is more and more you need to have the national tactic in country, but you need to also to have regional tactic. And we have we're doing here from Canada the national tactic, but we believe that being based in Dallas in the Southwest and that is where we need to get better, it will be easier when the people are sitting there together to define what are the regional And today marketing is getting more sophisticated. We're trying to do as much as we can, but it's a combination of the national campaign reinforced with tactic in each of the regions. Then this is the main reason why we decided to have a business hub in United States and particularly Dallas because this is an area where it's offering a huge potential and if we believe we believe that if our people are sitting in Dallas in the Southwest, they will do a better job to define regional tactic.
Great. Thank you.
Thank you.
Thank you. Our following question is from Robin Farley from UBS. Please go ahead.
Great. Thanks. I wanted to clarify 2 things on the off road market. You mentioned in your opening remarks that the industry side by side was up high single digits for the Q3. The presentation shows up low teens for the season to date, which I guess is the difference is really just the 1 month.
Does that imply that maybe the industry for just the month of October is actually up less than high single digits? It seems like for there to be such a difference between those two periods that maybe October, I'm just curious if you could give us some color on what's happened just with that more recent trend?
Well, we don't necessarily have the month by month industry trends with us this morning and we'll be glad to share more detail if needed. But obviously, depending on how what's being offered in terms of promotion, that's influencing the overall industry demand. But key message is that we're seeing continued growth in the side by side industry season to date is extremely favorable. The quarter was favorable as well and our performance as well is above industry. So we couldn't be any happier.
And obviously the tactics on product introductions and also expansion of the dealer network is paying off as you see. But we can give you more granularity once we get the data.
The thing, Robyn, there is no industry data in the side by side business than we're doing. We're doing our own survey to better understand and we do it on a quarterly basis. We'll look at it what we have on the monthly basis.
Yes. Just I mean the math of it, right, just based on what you said for the quarter, it seems like the math would suggest that. But, okay, great. And then looking at your changes in guidance, so kind of bumping up to the higher end for revenue. But with the FX impact, it kind of implies that you're going above your guidance range would be up more on a sort of a constant currency basis revenue.
I just want to confirm that I'm looking at that the right way. And then your margin guidance maybe sort of the implied margin guidance maybe down 10 basis points or something. And you mentioned the promotional environment and the selling environment contributing to some of the margins being down year over year. Is that something that you see ongoing? Or just a moment ago you made a comment that maybe implied that there's a little bit less aggressive promotional environment in more recent weeks as some of the model year 17 teen out in the market has been retailed already.
So is that what are you seeing sort of now that we've gone through November in terms of the promotional environment? Do you think that's something that you're going to continue to see at levels as aggressive as what you saw in the October quarter? Or it sounds like maybe you could see that stabilize a little bit?
Yes. Let me try to nail off the three questions that I captured from your statement. The first one on the overall on the revenue versus we announced guidance back in March. The FX is slightly unfavorable to us with the strengthening of the Canadian dollar. And that's about an impact of 2% negative on our revenue number.
So yes, we're still maintaining the initial guidance that we had back in March coming from better volume that we've experienced throughout the year. On the margin side, a bit compressed, yes. The fact that we're running above what I'll qualify as a design capacity obviously makes us incur a bit more cost. On the labor side, you're paying more overtime and not all of the hours when you're running overtime, especially 7 or 3 shifts a day. Not all the hours that are paid are productive hours.
And you're also farming out a bit more work, especially on the engine side in order to allow us to meet capacity. So we're incurring a bit more cost there. On the promotion side in terms of margin impact, yes, it is unfavorable as our retail is higher than our wholesale. If you look at Q3 for just North America, our wholesale was up 17%, while our retail was up overall 25%. So that obviously means that you're paying or expensing a bit more promotion dollars versus a on a unit per unit basis.
And then on your third question on the promotional activity, I mean depending on which OEM has inventory and how they're positioned, that influences obviously the promotional environment. We've had some OEMs that had some inventory issues that have I guess resolved some of that. So there's a bit less promotional activity happening, but the OEMs are still mindful that consumers are looking for discounts and looking for deals. And so that's going to continue going on in the near future, especially on ORV as a lot of the retail that happens in a given model year or season is non current inventory. And for seasonal product, it depends on weather and how OEMs forecasted the industry and if they have too much inventory then yes, there's they'll probably be tempted to push more programs.
But it's topics.
Yes. That does. Thank you.
Thanks.
Thank you. Our following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
On the promotion question, so you're saying that the impact from promotions is 100% from higher retail sales and there's no impact from higher levels of promotion on each unit?
No. Our promotional level is pretty consistent with last year. Our non current inventory as well is healthy, let's say, on ORV. And we've looked at some numbers on our promotional activity versus the competition and we were not more aggressive than some of the other OEMs.
Okay. And can you talk about the impact that's coming through from rising input costs? I'm not talking about your overtime, but materials and things like that.
Yes. We are seeing commodity prices go up. However, the way we have our contracts structured with our suppliers, we are I will call it contractually hedged with our suppliers and therefore we're not seeing those input costs coming in immediately. If the commodity prices were to maintain at that level, we would see prices go up for next year in our overall production costs. But as of today, we haven't felt the pinch of commodity increases.
Right. Okay. And then on outboard, you have the new mid range G2s out there. If you just looked at the G2 alone and excluded the legacy Evinrude, how is the G2 performing year over year in retail?
Yes, the G2 is gaining momentum. Obviously, we enter with the 150 to 100 about a year ago and we're gaining momentum, I would say, worldwide. But we are in that transition phase where we're still producing the G1 in that category and the G2. And we will drop some G1 in time to come in the next few years. But the G2 is doing quite well worldwide and we're convinced that we will continue to grow that business.
Okay. And since I'm probably the last guy here, I'll ask couple more. I'm surprised PAC wasn't better considering total SSV and snow was pretty good at retail. Why is PAC not performing better than plus 5?
Yes. Well, PAC, we've done some, what we'll call it, initial order shipments happening in Q2. We are going to be delivering as well increased pack in the Q4, but it's very dependent on the snow season and the riding. So the dealers finished off with a bit more inventory as well last year following a soft snowmobile season. So they did not need as much replenishment as usual.
And that's one factor as well influencing overall pack sales.
All right. That makes sense. Thank you. Thanks.
Thank you. Our following question is from Jean Francois Lavoie from Desjardins Capital Markets. Please go ahead.
Yes. Good morning, gentlemen, and thanks for taking my question. I was wondering if you could circle back a little bit on the Commander market and give us a little bit color on this particular vehicle, please?
Yes. Good morning. The Commander, this segment is and I'm going by memory. This segment is about flat here. I have the data.
The segment right now is about is growing low double digit year to date and we've lost some market share, we've lost low single digit market share in that product category, then overall we're growing in that segment because of more competitive product.
Okay, okay. Thanks. Good color. And on the Mabry Trail, I was wondering given the excellent reaction with this new project, are you kind of looking at the overall market? And is it something that you think could be bigger than initially expected or?
Yes. First, yes, I believe in that product category, there was not any major product use in the last 5 years and we're coming out with we believe a better product and what's exists out there. And overall, the reception of the vehicle is extremely good by media and we already started some of the retail then. We believe that this is a smaller segment of the industry, but we believe that this segment could get bigger because we believe we did bring to the industry a better unit that what have been introduced in the last 5 years. But it's too early, but that's our feeling at this point.
Okay, perfect. And maybe a last one on the gross margin side. You may mention some production costs related to the capacity. So going forward, how should we look at this impact on the gross margin for maybe Q4 or the beginning of next year?
Yes. We'll also have some challenges in Q4 and next year as well. We talked about when that capacity is going to is going to be coming into play. Next year, we'll be seeing a step in the second quarter in terms of capacity. But we are running, let's say, above design capacity in Queretaro for the Holland deck, we're running 20 fourseven.
In Juarez as well, we're running 20 fourseven on the fabrication side. And so when you're running at these levels, obviously, you're incurring a bit more cost in order to fulfill the assembly line. And so we'll be seeing that trend as I said in Q4 and the beginning of next year as well.
Okay. Perfect. Thank you very much and congratulations on the strong quarter.
Thank you.
Thank you. Our following question is from Tim Conder from Wells Fargo. Please go ahead.
Hey, good morning. This is actually Mark Torrente on for Tim. Great quarter again. You provided some good color on ORV promotions. Just any color you could provide on snowmobile promotions early in the season from a competitive standpoint?
And then you guys are also making very good progress on spider inventories against your goal. How much further do you have to go? And do you expect to have inventories ready and retail stabilize ahead of the Project S launch?
Yes. 1st, on the automobile front at this point, I would qualify the retail environment has normal typical level of promotion on non current and so far on new model there is not much promotion out there. Then I would qualify the start of the season for snowmobile as normal. Typically in snowmobile you have a trend after Christmas. It's rare that before Christmas you see a big gap between the normal situation.
On the Spider, the plan was Spider inventory, the plan was to deplete the inventory over 2 years. We are right on where we were targeting at the beginning of the season. Then we have we will continue on this next year and we believe we will be in very good shape and that was the idea. We believe we will be in very good shape at the end of next season, season 18 prior to the project Essentro. But we are on plan basically.
Okay, great. Thank you.
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. Deschenes.
Great. Thanks everyone for joining us this morning and for your interest in BRP. We look forward to speaking with you again in March for our Q4 conference call. 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.