Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY 2018 second quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Hugo. Good morning, and welcome to BRP's second quarter conference call for fiscal 2018. 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 slide, and you can 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. First, I lost my voice in the last week because of laryngitis. I will try this morning to go through my script. If I can't, Sébastien will take over. We have had a very good summer so far. We kick it off on a high note with the celebration of the Can-Am Spyder's 10th anniversary that saw 3,000 Spyder owners from all over the world visit our hometown in Valcourt. These events are always a great reminder of how fortunate we are to have passionate customers and engaged employees that are both at the core of our success. The piece came together to deliver another solid performance in the quarter.
Our revenue reached CAD 1,027,000,000 , up 20% from last year's second quarter, as we continue to see very strong demand for our product, notably for our Can-Am side-by-side and Sea-Doo personal watercraft. Our normalized EBITDA was up 84% to reach CAD 82 million, and our normalized earning per share ended at CAD 0.18, up CAD 0.17 from the second quarter of last year. Also, we had a very strong retail performance with our powersport retail sales up 14% compared to an industry that was up low single digits into the quarter. The growth was solid in both the U.S. and in Canada as the two countries saw double-digit retail growth.
Side-by-Side led the way with a 50% retail sales increase in the quarter as customer demand for both the Defender and the Maverick X3 is very strong. We continue to make market share gain in both the utility and the sports segment. Our Can-Am ATV performance was also impressive as we achieved high teen retail growth compared to an industry that was up low single digits. Sea-Doo also performed well, continuing to benefit from growing consumer interest for the sport. This performance would not have been possible without the contribution of our engaged dealer network. We have spent the last few years growing our dealer network as we had some gap to fill in certain regions to ensure proper coverage of the market for our brands.
After adding 289 dealers over the last four years, we have reached the appropriate number of stores for the current state of our business. We have shifted our focus from adding new ones to improving our performance with them. To achieve that goal, we have put together a plan to win in the dealership by offering the best value proposition to our dealers, meaning a strong product portfolio, a dedicated sales territory, a flexible order management system, a certification program that rewards dealers for their dedication, and a mutually beneficial incentive system based on retail performance that offers the best dealer profitability in the industry. I'm glad to say that our efforts are paying off.
Not only are we receiving positive feedback from the network, but we are also seeing it in the numbers, as so far this year, our Side-by-Side retail in the U.S. has grown twice as fast in multi-line dealerships than in single-line dealerships. This demonstrates that the strong dealer value proposition is helping us win in the multi-line dealership. This success is at the core of the solid retail performance that we are experiencing at the moment. With this, I will turn to the update by product category, starting with year-round product on slide six. Year-round product revenue was up 35% in the quarter, driven by higher volume and richer mix of Side-by-Side. We continue to meet the growing demand for our Side-by-Side, notably the Maverick X3. On the retail side, the ATV industry ended its 2017 season at the end of June with the retail down mid-single digits.
For the same period, Can-Am ATV retail is up mid-single digits, driven by the continued market share gain in the mid-CC segment. Can-Am ATV maintained its number one position in Canada and continued gaining ground on the number three position in the U.S. We see also good retail momentum continued at international markets, driven by Scandinavia, Western Europe, and Mexico. In comparison for the quarter, Can-Am ATV retail was up high teen percentage compared to an industry that was up low single digits. The growth was primarily driven by market share gain in the mid-CC segment. Turning to Side-by-Side. The North American industry ended its 2017 season up mid-single digit. Can-Am Side-by-Side continued to outperform the industry in the quarter with retail up 50% and ended the 2017 season with retail up in the mid 30%. The demand for the Maverick X3 is strong.
The Defender is performing well. It keep on gaining share every month, and we remain focused on improving the awareness for the product as we are still working on establishing ourselves in that segment of the industry. The same trend we are seeing in North America are also visible across the world. Our side-by-side year-to-date retail has grown over 30% in Asia Pacific, over 50% in Europe, and over 100% in Latin America. We are pleased with the headway we made with our off-road business over the last season. We remain focused on driving growth for that business through building brand awareness, introducing new product, and improving our dealers with the best value proposition. Turning to Spyder. The North American three-wheel motorcycle industry continue on the same trend as the previous quarter and it's still down low teen percentage season to date.
Spyder is performing better than the industry at down mid-single digit over the same period. Remember that we have formed a dedicated team in key U.S. states and in these states, the retail is up high single digits. The program is providing good results and insight, and we intend to deploy it in more states next year. As you remember, one goal for Spyder for this season was to deplete network inventory, and so far, we are on plan to achieve our goal. Turning to seasonal product on slide seven. Seasonal product revenue were up 14%, driven by higher volume of personal watercraft. Ten months into the 2017 season, the North American personal watercraft industry retail is up low teen percentage, primarily driven by the entry in new segment by competitive OEMs.
Sea-Doo retail sales were up high single digits, and it performed very well in the segment it compete in. The Spark continued to grow in its fourth season, notably with the strong success of the Spark Trixx that achieved the highest sell-through for a season model in our recent history. We gain market share in the traditional personal watercraft, notably in the recreational and performance segment. Internationally, Scandinavia, Western Europe, Australia, New Zealand, Mexico, and China continue to be growth markets for Sea-Doo. A quick look at snowmobile. The 2017 Scandinavian snowmobile season ended on June 30th, with retail down high single digits. The Ski-Doo and Lynx combined retail sales were up low single digits over the same period, driven by the strong demand for the new G4 platform, and we maintain our number one position into the industry. Looking at propulsion system on slide eight.
Revenue for propulsion system increased 6%, primarily driven by a higher volume and favorable mix of outboard engines sold. The North American outboard engine industry ended its 2017 season with retail up mid-single digits. For the same period, Evinrude retail was also up mid-single digits. We are happy with the progress made over the last season as we expanded our Evinrude E-TEC G2 engine lineup and continue developing our dealer network. The goal with developing the G2 engine was to provide customer with the best engine to improve their boating experience, and we continue to deliver on that objective as we introduce a new docking system, the Evinrude iDock, which allow user to easily maneuver their boat using a joystick for simple docking in even the toughest condition.
Because of the Evinrude E-TEC G2 technology, we are able to offer the iDock system for a price up to three times lower than the competitive product. This is just another example of the great customer benefit offered by the G2 engine. Following the announcement earlier this summer of Alain Villemure's upcoming retirement, last Friday, I welcomed Tracy Crocker to the management committee as Senior Vice President and General Manager, Evinrude. Tracy bring over 30 year of experience, 20 in senior executive roles in several global company, most recently in the power sport industry. He is a seasoned business leader who has helped organization connect strategy to action plan and action plan to people. Now, looking at parts, accessories, and clothing on slide nine.
Revenue of parts, accessories, and clothing increased by 10%, resulting from the higher sales of side-by-side accessories sold. As there is a very good demand for the Defender and Maverick X3 lineup of over 400 accessories. We are seeing an excellent level of repeat order from the dealers for these accessories, which indicate a strong take rate at the retail level. With that, I will turn the call over to Sébastien, and will return for closing remarks.
Thank you, José, and good morning, everyone. As José highlighted, our second quarter revenues were up 20% over last year, reaching CAD 1 billion 27 million. The growth primarily came from the continued good momentum we have with side-by-side and PWCs, notably in the U.S. and in international markets, where revenues were up respectively 27% and 20%. The gross profit margin was up 70 basis points to 20.8%, driven primarily by a positive volume and mix impact coming from side-by-side and PWC, which was partly offset by unfavorable FX and higher production costs and a higher volume of retail sales program. We spent CAD 47 million of CapEx and generated CAD 42 million of free cash flow, up CAD 64 million from the same quarter last year. We also successfully completed the CAD 350 million substantial issuer bid, effectively repurchasing 8.6 million shares.
Our balance sheet remains strong following the transaction with a net debt to EBITDA ratio of 1.7. Looking at slide 12, our normalized net income was up CAD 20 million in the quarter, primarily driven by a positive impact coming from volume, mix, pricing and sales program for CAD 53 million, which was partly offset by higher production costs and operating expenses for CAD 12 million, a negative impact from net financing costs and normalized income tax expense for CAD 13 million, and a negative impact from foreign exchange rates for CAD 8 million. This generated a CAD 0.17 growth of normalized diluted earnings per share, which ended the quarter at CAD 0.18. Now turning to slide thirteen for a look at our network inventory, which ended the quarter up 12% from last year.
Our network inventory is healthy, with the growth being mostly driven by the ramp-up of shipments of our new side-by-side models to meet demand, most importantly, the Maverick X3, and by the growing business of the new dealers we added over the last four years. As expected, we carried a higher than usual snowmobile inventory due to the weak snow conditions last season. We expect to deplete that inventory over the upcoming season. Offsetting these elements were a decline in inventory of older SSV models and the depletion of our Spyder non-current inventory, which, as José mentioned, is progressing in line with our plan. Finally, a quick update of our guidance for fiscal 2018. With the first half of the year behind us, our outlook for the year remains essentially unchanged. Industries are behaving as we had anticipated.
Our operations are running smoothly. The demand for our products remains strong. We have good visibility on our shipment volumes and our operating expenses for the second half of the year. A weaker US dollar is expected to be a slight headwind to our financial results. All in all, we are still aiming at revenue growth of 4%-8%, our normalized EBITDA growth of 10%-13%, and our normalized net income growth of 10%-16%. For the normalized EBITDA cadence between the third and fourth quarter, we are forecasting both quarters to be similar to last year. We are reviewing our normalized DPS guidance upward by CAD 0.03 to account for the impact of the lower share count following the SIB. The normalized DPS guidance range is now CAD 2.23-CAD 2.35, representing an increase of 14%-20% over last year.
Note that the previous share count guidance was assuming the repurchase of up to 3 million shares under the NCIB. With that, I'll turn the call back to José.
Thank you, Sébastien. The first half of the year was very strong for BRP. The market responded well to our new product. With our solid execution, we're able to deliver results ahead of our expectation. Looking at the back half of the year, our outlook for the industry is positive, and we see many markets around the world improving. However, we remain cautious as the global environment continues to be volatile. We keep a close eye on the constantly evolving geopolitical situation, the ongoing NAFTA negotiation, and recent rapid movement in currency. Still, we are confident in our ability to deliver on our guidance as our business fundamentals remains strong. Our snowmobile volume is secure and the demand for our new platform is strong.
Personal Watercraft and Spyder season are in line with our expectations so far, we are approaching the end of this season with appropriate inventory level. We have seen very solid growth for Can-Am Off-Road vehicle, the demand continued to be robust, and our operations are running smoothly as we are making the necessary adjustment to be able to meet demand for fiscal year 2019. We have a lot of good news to share with you at our upcoming BRP Club. I look forward to seeing many of you there on September 20th and 21st in Dallas, Texas. On that, I will turn the call over to the operator for questions.
Thank you very much. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions, and we thank you for your patience. The first question is from Mr. Steve Arthur from RBC Capital Markets. Please go ahead.
Great. Thank you. Just a couple of quick follow-up questions. First, on the Spyder, does seem to be stabilizing somewhat, and you had interesting comments on the stronger performance in the U.S. with the dedicated teams. Just wondering if you can explain a little bit more about what those teams are and how they're formed, your staff versus dealer staff and then what the plans are for rolling those out to other regions.
Good morning, Steve. As I said, basically, what we're finding in those states where we have a dedicated team is first, the sales funnel on Spyder is about three times longer than what we see in other product line. The motorcycle license school organization needs to be improved. Dedication of the dealership to have a specialist Spyder who will take care of the customers. Also all the momentum that we have with the community that we don't leverage enough. Basically, the small team this summer was focusing on those elements in the key state, and we're very happy with the result going up high single digit in those states. All those insights will be packaged, and we'll try to do more in more states next year. Obviously, we're trying to find ways to do it at the cost-efficient position when we expand to more states.
We're very happy with the momentum and what the team have done so far this summer.
Okay. Second question, just on CapEx. Guidance still the same for CAD 240 million, CAD 250 million for the year, but I think we're only around CAD 80 million or so in the first half. Do you still expect that kind of a ramp in the second half, and what are the key components of that spend?
Yeah. Historically, we've always had a larger second half CapEx investment than we've had in the second half, so it's not unusual to see that trend. The investments are going to be pretty broad. One, as we've mentioned, we're investing for additional capacity in Querétaro and in Juarez 2. Also, with the lineups that we're gonna be launching in the next few years requires a lot of tooling. So tooling is gonna require a big amount of CapEx as well for the next six months. It's not unusual to see a much higher investment in the second half.
All of this is within the current footprint of facilities? There's no new facilities being added?
It's all within the current footprint of facilities. We're adding a lot of equipment to increase capacity within the existing footprints that we have.
Okay, great. Thank you.
Thank you. The next question is from Mark Petrie from CIBC. Please go ahead.
Yeah, good morning. I just wanted to ask about the trends with the dealers in the U.S. on the off-road vehicles. Obviously very strong, particularly within the multi-line dealers. I guess, how do you feel about the outlook from here? Where are your biggest opportunities to grow? Is it continuing to take mind share from the dealers? Is it actually adding more products on the floor, or is it adding more products to your portfolio?
Good morning, Mark. First, as you know, we intend to continue to introduce new product. I committed two years ago to introduce eight new model in the coming four years. A new model every six months for the next few years. Right now, we are halfway. In September, we'll introduce a new platform at Club. We'll continue to expand the lineup, penetrating a wide space in the side-by-side industry. This is definitely one area. The other one, obviously, with our success, with our value proposition to the dealers, we're seeing many dealers, multi-line dealer, converting more floor space to our product line. It's a combination of continuing to push on new product introduction, and with that momentum and with the value proposition, gaining a share in the multi-line dealership. That's basically the base of our plan.
How do you feel about the balance between continuing to gain more floor space with additional products being launched versus the risk of cannibalizing the floor space that you already have?
We don't see much risk of cannibalizing floor space. We see that we coming out with very strong product, and it will continue. Dealer realized that our product are easier to retail than some of our competitor, that's how we view that we believe we will continue to gain more share of their dealership and cannibalizing the existing floor space.
Okay, thanks. Just a question on PWC. I was wondering if you could just provide a little bit more color on the competitive dynamics there. Sounds like you gained share on the traditional side, but maybe the share gains in Spark slowed down a little bit or reversed. Just, could you talk about that, the competitive dynamics, and then anything you're seeing in the used market that might be different?
No, nothing changed in the used market. What happened, Mark, we were the only one in the segment we created, the Rec Lite. One of our competitor this year have introduced a model to compete against the Spark. Obviously, before for three year, we had 100% of their share of the Rec Lite segment. Now this year, they've sold some. We're quite happy overall because we still gain volume in the Spark segment. Despite the entry of that competitive product in the Rec Lite segment, the Spark did continue to grow in unit. Obviously, we've lost some market share, but also the overall market have grown, and we've gained share in the traditional watercraft.
I think at the end of the day, all those new product that are coming to the industry is bringing new customer to the industry, and I think overall it's all positive.
Okay. I really appreciate the color. Thank you.
Thank you.
Thank you very much. The next question is from Martin Landry from GMP Securities. Please go ahead.
Hi, good morning, José and Sébastien. You're entering the second half of the year with a very strong momentum in your side-by-side, in your ATVs, you've really increased your earnings significantly on a year-over-year basis in the first half. Wondering a little bit why you're leaving your guidance unchanged. I hear your comments about concern over the geopolitical issues, a little bit more color as to what exactly are you seeing, or is this a matter of being too conservative, or are you facing real issues that will prevent your earnings from growing materially in the back half?
Good morning, Martin. This is Sébastien. Well, if you recall, in Q1 when we announced results, we announced an increase in guidance overall on the profitability side, but also on the year-round product side, we increased guidance by 2% on year-round products, which was driven by our expected improved demand for side-by-side. We knew the second quarter was going to be a strong quarter for side-by-side on the retail, as now we had a full lineup of Defenders out there. We had a full lineup as well of Maverick X3 and the Maverick X3 MAX. Demand was strong. Demand has continued to be strong. Our plants are running at full capacity for this year, Juarez 2, we're going to be increasing capacity for next year. We're limited in the amount of units we could ship this year on the side-by-side side.
However, when I look at the overall profit distribution between the first half and the second half of this year, we were expecting a slightly weaker first half, we delivered better on the results coming from increased volume. The second half is still going to be good. It's going to be in line with what we delivered last year, which was a strong second half. Don't forget that we had shipped a lot of snowmobiles in the fourth quarter as well. There was a timing there. Overall, when we look at overall demand, our production capacity, currency rates, where they're trending, there's no necessarily extra conservatism in our guidance for the end of the year. I think it reflects the reality of the business, of the industries, and where we think things are going to land.
I know this is a difficult question because you have a lot of moving parts, but any sensitivity for the back half on currency with the U.S. dollar and Canadian dollar would be helpful. Is that something you can provide us?
Well, let me try to give you a bit of color. When we issued guidance, we were looking at a U.S. rate of CAD 1.30. We finished the six months at an average rate of CAD 1.32. Our outlook for the remaining six months of the year is CAD 1.25. If things are to hold up like this, no fluctuation in our guidance. As you saw in the second quarter, we had an CAD 8 million headwind on currency versus a year ago. When you see rapid changes in currencies within a quarter, we might have either positive or negative impacts on our results.
Everything holding as it is today, I'd say no fluctuation, if there was going to be a significant drop in the value of the U.S. dollar as we had in Q2, it might put a bit of pressure on our ability to achieve guidance for the end of the year.
Okay. That's helpful. Maybe just lastly on the watercraft side. You do talk a little bit about introduction in the Rec Lite. Is the market moving increasingly towards Rec Lite and lower price point in the watercraft market? Is that what we're seeing? Have you seen a decline in the average unit selling price over the last three, four years in watercraft?
No. The first two years that we introduced the Spark, obviously, there was significant growth in the Rec Lite segment versus the traditional segment. What we saw in the last two years, Martin, is a continuous growth in both segments. Overall, we're very happy with the I believe the reason why we introduced Spark was to bring new customer into the industry and bring excitement to the industry. What is positive is both category traditional and Rec Lite, the Spark segment, are growing in the last two years, and quite positive overall.
When I look at the ASP for the first six months of the year, when we ship a lot of personal watercraft, our ASP for personal watercraft is up low percentage points, but it's still up there. It means the mix is still pretty calibrated versus what we had last year between traditional and entry-level.
Okay. That's helpful. Thank you very much, and congrats.
Thank you.
Thank you. The next question is from Cameron Doerksen from NBF. Please go ahead.
Yeah, thanks. Good morning. Just if you can talk a little bit more about your visibility on the snowmobile market. I think typically at this point, you'll have most-
Thank you.
Thank you. The next question is from Cameron Doerksen from NBF. Please go ahead.
Thanks. Good morning. If you can talk a little bit more about your visibility on the snowmobile market. I think typically at this point, you'll have most of your orders kind of locked in, maybe you can just give us a bit of an update on what you're seeing there.
No. Like you said, all our orders are in around the world, Russia, Scandinavia, North America. Right now, we are in full production in Rovaniemi and in Valcourt. The beauty this year versus last year, last year, we were shipping the new platform a bit late because we had delivered more than what we had planned originally. This year, it's more a normal delivery timing. All the spring break units that are already retailed or sold to customers will be produced before the end of mid-October. We coming back on a normal production schedule, everything is in line.
Maybe two sort of quick, I guess, modeling items for me. Wondering if you can talk a bit about the tax rate. I mean, sort of the full-year number that you're sticking with sort of implies a material increase in the tax rate in the back half of the year. Maybe you can just talk about that. Can you maybe just discuss about the R&D expense run rate? Is the Q2 number probably what we should expect for the remainder of the year?
On the tax rate, obviously, depending on the regional mix where we have sales in a quarter, you'll have some variations in the tax rate, and there's sometimes some timing elements as well. That's why we had a slightly higher normalized tax rate if I look at just the quarter. For the end of the year, as we've indicated in the guidance, we're looking at a rate between 28 and 29, which is pretty much in line with what we had last year. In terms of R&D spend and the split between H1 and H2, obviously, when we look at the second half of the year, we are seeing increases compared to a year ago in R&D for Q3 and Q4. We'll see a higher increase in marketing spend as well in Q3 than we had last year.
When you look at my implied guidance for the second half of the year, you'll have revenues going between, let's say, minus 2% and plus 5%, and EBITDA minus 3% and plus 1%. Most of that is driven because of operating expenses varying compared to last year. In terms of margin, expecting gross margins to be fairly similar to last year, slightly weaker in Q3 and stronger in Q4.
Okay. Perfect. That's very helpful. Thanks very much.
Thank you. The next question is from Craig Kennison from Baird. Please go ahead.
Hey, good morning, thanks for taking my question as well. Wanted to ask about your exposure to the region affected by Hurricane Harvey, whether you have dealers that are closed in that area and what the lost selling day impact may be.
We have about 13 dealers that are in the area that is affected by the hurricane. I would say about half of them are more impacted than the other half. For 50% of them, it is not too severe, and they believe their business will restart. Where the hurricane hit in the center, it is more serious. For us, obviously, Texas is an important state. Those things happen all the time around the world, but that is basically what it is.
Okay, thanks. With respect to the marine season, what is your take on recent trends? We have seen some data that suggests the marine market may have slowed a little bit in July, but I know that data can be choppy. I am interested in your take on recent marine trends.
On the outboard side, we saw a very solid quarter. As you know, we said very often that we are good in repower that is declining and not so good in selling new engine on new boat. Despite that this trend that is still soft for us, we saw our retail better in Q2 than the industry. We catch up basically the industry in Q2. This is the fact that we introduced the G2 200-300 three years ago, the 150-200, where there is a lot of volume last summer. We started to ship last fall and many boats have been delivered in Q2 with this. For us, we are somewhat introducing a very popular engine, a very popular G2 in a very high number segment, and that is what we saw very strong retail on our product during Q2.
Thanks. Finally, Seb, a question for you. Debt is a little bit lower than we anticipated after the SIB. How should we think about interest expense for the balance of the year?
Yeah, you're right. Debt is slightly lower, driven by currency. We have a U.S.-denominated debt. With the rates going down, that obviously brings down the overall debt. We're looking at, let's say, net financing costs for the full year at about CAD 60 million. That's what we're looking at.
Got it. Hey, thank you.
Thank you.
Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Good morning, gentlemen. If we come back on the Spyder, it seems that you've done a very nice job about reducing inventory. I was wondering if you could be more specific a little bit and provide some color about the magnitude of the change in the Spyder inventory.
Good morning, Benoit. First, this was planned from last year. It started with the booking last year. When we were booking our dealers last fall for model year 2017, we were conservative on the new unit that we were selling. During the year, we've been quite aggressive with retail promotion, but also moving non-current inventory between dealers. We really focus early into the year to try to maximize the movement of non-current inventory between dealers. We've been basically on plan. My recall, we are about 75%.
We are slightly lower than that in terms of overall reduction of inventory. The objective for the end of the season is right, 75%. At the end of Q2, we're at 50% non-current reduction.
Yeah.
Okay.
Overall, we are on plan.
Okay. Overall, it's about 75% non-current reduction, and you are now at 50?
Yeah.
Okay, that's perfect. Okay, that's great color. With respect to the iDock introduction, it seems a very compelling product. How big can be that market opportunity?
For us, first, the iDock was planned from the beginning of the development of the G2, and why we can do it for a third of the price of some competitive system is because in the competitive system, you have all the hydraulic cylinder and all the hardware and software around the engine. In our case, everything is integrated into the attachment of the normal G2. Our system is basically software and the joystick that you attach to the boat. That's why we are very efficient. Now you will see a lot of promotion this fall trying to promote twin application on both. We believe that it will be a very attractive package for the customer.
If you compare two engine from the competition with their system versus two G2 and our system, we'll have a good price or good value proposal for the customer, and we believe it will help us to sell more G2 next year. Very happy about the product, and it's so far very well received by the marine community.
When we look at your debt situation, obviously 1.7x debt is still below the optimal level despite the Dutch Auction. Just wondering what's your interest right now about further share buyback at this level, and am I right to say that this is not included in your share account calculation for the year?
Yes, Benoit, you're correct. Future NCIBs are not included in the share count that I provided this morning. As you know, we still have the option of purchasing shares on the market. We have the opportunity of purchasing about 3.1 million shares, and that's at our discretion. We'll be obviously assessing the market and how the business is evolving and making that decision on a monthly basis.
You can still acquire about 3.1 million shares?
Yes.
Last one for me, could you maybe provide some color about the second half, how Q3 and Q4 will be split in terms of revenue, EBITDA, and also if there's any new product introduction that are included that could be made, let's say, at the BRP Club?
Yeah. I'll try to help you on the quarterly gating. Obviously, we don't give quarterly guidance, but I'll try to just give you a bit of insight as to how we see things trending. For Q3, we're seeing revenues slightly higher than last year, coming from better shipments, with especially the side-by-side business. Now will be a full quarter of Maverick, and that's where you're going to see a pickup there on revenue. Gross profits, I'm seeing it similar to last year and stronger in Q4. As I said earlier, marketing is going to be higher in Q3 and R&D as well higher in Q3 and Q4.
Okay. Perfect. EBITDA bottom line between Q3 and Q4 should be a little bit higher in Q4?
I would say overall profitability, probably flattish. The better gross margin in the quarter is going to be compensated by higher operating expenses, so I would see normalized EBITDA flattish on both quarters.
Okay. Thank you very much.
Thank you. The next question is from Seth Woolf from Northcoast Research. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my questions. I just wanted to start off, I know, Sébastien, you said the first quarter came in a little bit better than you guys, or the first half has come in a little bit better than you originally anticipated. Currency is a bit of a headwind, but if I look at the implied revenue for the second half, it looks like at the low end, it's actually down a bit. Just wanted to see, one, am I missing something? Or two, did you really expected that at this time last quarter? Did you thought that was a possibility as you thought through the last three quarters of the year?
Yeah. If you look at the implied, we're looking at revenues down -2% to up 5%. A few factors can impact revenue. Obviously currency could be one, but also, yes, we have good visibility on pretty much all the orders that we have for the second half of the year, but snowmobile business is a big business for us, and it's a business that also drives a lot of pack sales. Pack is not something where we have firm orders from the dealers, so we can experience some variability there on the pack side. If the snow season were to start a bit later as it did last year, that could influence the overall take rate on the parts side. So that's why you're seeing a bit of flattish sales guidance for the second half of the year.
Okay. Got it. Thank you. Then just if we think back to the last quarter's call, a big topic, the whole Q&A was discussing capacity. I seem to remember you saying there could be an opportunity to make incremental gains if you decided to add a third shift at the Juarez 2 facility. Given the strong retail demand that we've continued to see, is there any update with respect to potentially adding a third shift, even though it's not as efficient?
Good morning. We are right now planning to run the factory at full capacity. We decided the fabrication is running at three shifts because it's not too many people. In terms of assembly, we're running many Saturdays, full Saturdays, going forward. We feel it's more because of the law and the rules in Mexico and the longer hour per shift, then you don't have much additional hour on the third shift, and we felt it's more efficient to run two full shifts for many Saturdays. All of this is planned on the back half of the year. That's why we are at the limit right now for Juarez 2 production.
Okay. Thank you. Then the last question for me is just turning to Marine for a moment. It looks like pretty compelling price point with the iDock. If I think about the competitive dynamics, you've got some of the big players have captive boat brands, so they have a leg up with respect to penetrating the market with those products. I was just curious, is there anything that you could share with us about how longer term you could drive some demand with the competitor and make inroads and take advantage of the price discrepancy that you were talking about?
Yeah. The marine industry in the North America market is very captive. You have many boat brands that are owned by engine OEM. This has been like that for many years. Our strategy with G2 was to come out with a better product to create a pull from the consumer and influence dealers and boat builders, because many boat builders have some flexibility to buy from us. This is what we're doing and working out. Obviously, we introduced the 200, 300 family G2 three years ago, but this is quite a low level of units, if you look at the big picture. That's why we're having quite a lot of success right now with the 150 to 300, where the volume is higher.
We believe the high iDock, which apply on all the engine over 150, if you have a twin-engine boat, will be a very attractive value proposition for the consumer. The dynamic in the industry is just what it is, and we're trying to change that by creating that pull from the consumer.
Okay. Thank you. All right. Well, congrats on a good quarter.
Thank you.
Thank you. The next question is from Jaime Katz from Morningstar. Please go ahead.
Thanks. Good morning. I'm curious if you could talk a little bit about the selling programs you guys have been implementing. It seems like the promotional cadence in the industry has slowed a little bit relative to last summer, and it seems like the programs are working more effectively. Can you talk about what's working and whether you think you can pare back some of that spend maybe next year? Whether you plan to continue to spend robustly to facilitate sales?
If you look at Sea-Doo and Spyder, again, the motorcycle industry, we believe that this season was similar promotion than what we saw in the last few years. Where it's more aggressive, it's in the off-road business. In the ATV segment, some OEM have too much inventory out there, and they are very aggressive with rebates, and this is obviously putting a lot of pressure. What we are very happy with, we have a strong momentum with ATV in North America, despite we are not dropping our price as much as some of our competition. We're very happy about that. On the side-by-side front, it's a combination of two things. A lot of new models coming to the industry and on top of it, again, some OEM have too much inventory, and they are extremely aggressive on the promotional front. We didn't change our strategy.
Our strategy for ATV and side-by-side is about the same. We are less aggressive than some of our competitors, and we believe we can continue on that offering, going forward. That's what we're planning for.
Okay. Can you articulate, I don't know if there's a quantitative way to think about this, but given that Arctic Cat has just gone through sort of this ownership transition, was there any sort of qualitative benefit that you can share with us from the period of time that they went through that transition that may have helped you take a little bit of incremental share in the quarter, if you think that that's what happened?
I would say contrary. The new owner has had very aggressive promotion during the quarter to clean out the inventory. It didn't affect too much our retail. We had good retail during the quarter. The new owner is very aggressive to clean out the Arctic Cat inventory. This is ongoing, continuing in Q3. Long term, the brand Arctic Cat has been removed from the off-road product. We'll see how the new owner will do with their new brand strategy. On snowmobile, they kept the same brand, and we don't see much the dynamic there change much, going forward.
Excellent. Thank you so much. Have a good quarter.
Thank you.
Thank you. The next question is from Garrett Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. I just want to follow up on the sales promotion question. Has there been much of an impact from your strategy to provide dealers with back-end money for better performance?
No impact. Obviously, the strong retail that they've had, some of that was built within the program that we had established with them. We were compensating for the retail beat that they got. That was already built in. No significant variation within versus our plans. That money's been provided for, and it's been built into our items.
Okay. On product costs, they were called out as higher. You say your systems are running pretty smoothly, what's driving that? Is that increased input costs?
No, mainly operational costs. There's obviously more overtime being paid for employees working in Mexico. There is a bit of competitiveness on the labor workforce as well in Mexico, we had to increase labor rates there slightly, still impacting profitability.
We have a bit of more warranty expense versus a year ago. As normal, when you're launching a new snowmobile platform, it's normal that you've accrued for a bit more expenses for a new platform. These would be the main elements.
Also to add, obviously we're increasing capacity in Querétaro and New Orleans, and there is some item you cannot capitalize, and this is going to the P&L.
Yeah.
Okay. What's going on with the steel, aluminum, all those input costs?
We're not seeing big variations. We are obviously exposed to some commodities, but not significantly, which would create a headwind there. There's exposures that could vary between, let's say, CAD 20 million and CAD 30 million on commodities, but we're not exposed to, let's say, CAD 500 million on steel. When there's movements, we have long-term agreements with suppliers, which allow us to smooth the impact of those changes in our results.
Okay, great. Lastly, on channel fill on Defender and X3, is there still space, room there, or are you now on a one-for-one kind of replacement on those models at the dealers?
No, there's still room for increasing inventory. Obviously, as you're taking a greater mind share within the dealer networks, we are working with our floor plan partners to adjust credit limits. There's still capacity to increase inventory as retail demand would dictate.
Great. Thanks a lot, Sébastien.
Thanks.
Thank you. The next question is from Tim Conder from Wells Fargo. Please go ahead.
Thank you. Yes, gentlemen, a few things. One, first of all, if you would, on slide six to eight of your presentation, I just wanted to clarify your industry share comments. Off-road and Evinrude, is that related to the June month, or are you talking your July quarter end? When you're talking industry share.
Yeah, it's quarter end.
Quarter end July.
Yeah.
Okay. José, same question for the PWC. I think you said 10 months, which would also imply for the season there, that being September and the 10 months, correct?
Yeah.
Okay. Thank you. We had a couple questions on that this morning. The multi-line share gains. A little more color here. Is that predominantly coming from North American competitors, Japanese competitors, or kind of equally balanced?
It's a very good question. We've done a deep analysis in our review with the division in July, where it's coming from, because obviously we wanted to adjust our strategy if we saw some trend. It's funny because it's coming from everyone at the same rate, roughly, and we don't see more from Japanese or North American. It's coming from same level from everywhere, everyone.
Okay. Then, I guess in conjunction with that, your order management system ability. Maybe just kind of refresh us by product line, the sort of the timeframe that gives you the ability to dealer sells X unit of Defender or pick Spark or whatever, the ability to replenish that in, is it a couple of weeks or just the timeframe, just by product line, if you would?
Yeah. Here I will talk about North America, because international is a bit different, but if you take off-road vehicle, every month, we're taking an order to be delivered in two months. Here, the dealer have full flexibility, can order more X3, more Defender, more of that model. Full flexibility on that. This, we're doing it on a monthly basis, and it's running extremely well. The thing that we do on off-road, like we'll introduce new product at Club in a few weeks, and when you introduce a new product, you're going with allocation for the first few months. After those first few months are passed, it's full flexibility for the dealer on a monthly basis for delivery to be done in two months. On watercraft, we will introduce the product, new lineup model 18, at Club in September.
The dealer will see it, and they will give us at Club a preliminary order. After that, they go back in their store, they digest, they see the attraction of their customer in the area, and they will finalize the order about two months later. We'll have final read on the watercraft order by November. In terms of snowmobile, right now we have everything on hand for what we're producing, but it's the same phenomenon than watercraft. We introduced the new snowmobile lineup in February. Dealers see it, give us at Club a preliminary order. Snowmobile is a bit different because we have spring break sales where customer can give a deposit to lock their unit, and the dealer finalize their order by the end of mid-May. That's the way we work on off-road, watercraft, and snowmobile. Spyder, same phenomena than watercraft. I should have combined there.
We'll show them the lineup in September at club. They have two months to readjust. Outboard engine, it's a monthly basis. We constantly take order from the dealer. We have introduced our model year 2018 lineup in June. Now the team is doing, with many boat builder, dealer meeting for their boat brand. Over there, dealers are giving us orders. But the dealers, it's a bit different in the marine business. They are not locked in with their numbers. It's the best forecast that they can do, but they are not legally locked in, and we taking order on a monthly basis. Basically that's our system that we have for year-round product versus seasonal product.
Okay. Very helpful. I guess then the last question I have sort of segues from the marine commentary. How is the momentum there going for G2 versus other outboard manufacturers? Is it balanced? Some, as you'd mentioned earlier in your discussion, have more ties to or more captive in with certain boat brands. So is that more balanced? Also, you talked about the cost differential versus four-stroke competitors with the iDock system. Is that largely driven by the cost of the engine itself, or do you have something It would seem to be, just given the order of the magnitude versus the cost of the docking systems.
Two things. First, on the outboard business, our share is about 10% worldwide. Right now we're gaining, and it's very difficult to say from where. It's coming from everywhere, and it depends also in which country. In North America, some brand are stronger than international. It's others. It's coming from everywhere. Why we are able to offer the iDock at this price level is because, again, if you look to the G2, what is unique to the G2 obviously is the E-TEC technology on the engine, but it's the way that we attach the engine on the boat, where the vertical up or down movement and left or right is all integrated into the mounting system. For us, the iDock is just an electronic box with a joystick on the boat that activate this integrated system that you sell with the engine.
That was planned from the get-go when we designed the G2 engine family. That's why we can offer it at a very competitive price.
If you were to buy a off aftermarket system, well, you need a full hydraulic system and actuators, and that's why the cost differential is much higher.
We're selling our system from CAD 5,999, and competitive system can go anywhere between CAD 15,000-CAD 25,000.
Okay. Gentlemen, thank you very much.
Thank you.
Thank you. The last question is from Robin Farley from UBS. Please go ahead.
Great, thanks. A couple of questions. One is just circling back to the idea that your full-year guide is unchanged with Q2 coming in, I think, higher than expectations. Was it just really sort of a timing difference with shipments? In other words, was retail in the quarter sort of as you expected?
Yeah, as I highlighted, we were expecting strong retail in the quarter, especially on the ORV side. Side-by-side, up 50% is a great result. We knew that with a full lineup of Maverick X3 this quarter, which we hadn't done last year, we were expecting strong results. Yes, the overall financials came in better, slightly higher shipments and also tight management of operating expenses produced these results. When we look at the end of the year, as I mentioned, we are going to be investing more in R&D and in marketing, and that's why we're seeing profitability flat compared to last year for the second half of the year.
Okay. That's helpful. Thanks. Then just looking at the off-road market overall, what do you think is sort of driving If you look at the industry growth from both ATV and side-by-side is better in the July quarter than kind of season to date had been the first nine months of the season. Do you think it's better demand from the agriculture sector or oil, or is it just sort of others introducing new competitive product also, or what do you think is sort of overall driving that?
First, the spring, as you know, was pretty bad. The month of April, May was very bad in term of weather, I think some people had delayed their purchase to Q2. The other thing is some of the competitors, because we are on the tail end of the season 2017, some competitors were very aggressive with promotion, that's why I believe overall, Q2 was better than the rest of the season 2017.
It sounds like both of those factors, the weather shifting and maybe competitors doing some aggressive things with promos, not necessarily, in your view, a change in sort of overall market demand outside of the quarter, right? Not sustainable things. Is that-
No.
Fair to interpret?
I don't see much. The only thing I would say, to give you some color, is Western Canada has improved a lot in Q2. Western Canada have done better than the east in the motorcycle industry, was better in ATV than last quarter. Watercraft, the Western Canada was equal to Eastern Canada. The only thing that I would see have changed overall in North America is maybe Western Canada in Q2 have done a very good quarter.
Okay. Great. My last question is just for the motorcycle business. There's been chatter in the media about a motorcycle brand that may be for sale, and I'm just curious whether it would make any kind of strategic sense, in your view, for BRP to do something in the two-wheeled motorcycle segment, knowing that there's a very established brand out there for sale.
As we said, Robin, in many occasions, obviously, we know that Ducati is for sale. As we said, we cannot comment on the rumors or M&A activity, nothing we can add to this.
Okay. All right. Thank you very much.
Thank you.
Thank you.
Thank you. I would now like to turn the meeting back to you, Mr. Deschênes.
Thank you. Thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again in December for our third quarter 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 very much for your participation.