Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s Q1 '18 first quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Mary. Good morning, and welcome to BRP's conference call for the first quarter of fiscal year 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 slides, 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. The first quarter of fiscal year '18 marked another period of steady growth for BRP. Driven by the strong performance of our side-by-side business and the strength of our lineups across all our product lines, we continue to outperform the industry around the globe. Despite a spring season that was late to come in many of our markets, we've delivered results that surpassed our expectations. The strong performance, coupled with better-than-planned snowmobile spring dealer orders, allow us to increase our guidance for the end of the year. In addition, given the strong momentum we have across our product lines and the positive outlook we have for the business, our financial capacity and flexibility has sufficiently increased to deliver on our growth objectives while enhancing the return to our shareholders.
As a first step, I am pleased to announce today the initiation of the quarterly dividend of CAD 0.08 per share and the launch of a substantial issuer bid to purchase for cancellation up to CAD 350 million of BRP shares. This is a testament to our confidence in the outlook for our business. Let's turn to financial highlight on the quarter on slide four. Our revenue grew 3% to reach CAD 956 million, representing a record level for first quarter at BRP. The growth was driven by the continued momentum we have in side-by-side and watercraft, and by the positive impact of our growing off-road business on our accessories. Our normalized EBITDA was up 41% to CAD 81 million, and our normalized earnings per share ended at CAD 0.25, up CAD 0.21 from the first quarter of last year.
As a result of this continued momentum in side-by-side, watercraft, the strong sales of accessories, and the better-than-planned snowmobile spring dealer orders, we are increasing our EPS year-end guidance by CAD 0.05, which bring year-over-year growth up to a range of 12%-18%. On the retail front, we have seen two completely different stories in Canada and in the U.S. In Canada, we had the strong end of the snowmobile season, but the spring was late to come, which had a negative impact on most of our industries. Our retail in the country was down 4% compared to an industry that was down 5%. We believe retail will improve when the weather gets better. We've seen much better traction for our products in the U.S. as the weather was more favorable. Side-by-side and watercraft continued to see significant growth in ATV and Spyder, outpaced their respective industries.
Overall, our retail in the country was up 7% compared to an industry that was down 2%. Regarding our retail performance, our team did an excellent job in the first quarter, we continued to outperform a competitive North American industry as our total powersport retail was up 4% compared to an industry that was down 3%. On the international front, the Russia market is still tough, Mexico, Scandinavia, and Western Europe are positive overall. I continue to witness a solid execution on the part of our team. We remain aligned on our strategic priorities, as a result, I am confident that we will reach our goal for the year. Turning to slide five for the year on product highlights.
Revenue were down 2% for the quarter, primarily due to lower deliveries of Spyder as our objective this year is to reduce our network inventory at the end of the season. This headwind was partially offset by the strong demand for the Maverick X3, driving a volume increase and favorable product mix. Looking at retail, our off-road business continued to perform well. For ATV, the industry had a difficult quarter with retail down high single digits. Season to date, the industry retail is down mid-single digits. For the same period, Can-Am ATV retail is up low single digit, driven by continued market share gain in the mid-CC segment. It now stands at its highest market share ever season to date. Can-Am ATV is also outpacing the industry around the globe, notably in key markets such as WEME, Scandinavia, and Australia. Turning to side-by-side.
The North American industry retail is up mid-single digits season to date. Can-Am side-by-side continued to perform extremely well with retail up about 30% season to date, just like Can-Am ATV, it now stands at its highest market share ever season to date. The Defender continued to gain traction. The excellent quality of our vehicles in our existing lineup is appreciated by dealer and consumer. We continue to gain awareness within the farming and ranching communities, this has driven market share gain quarter after quarter. The Maverick X3 is also performing very well. The demand is strong, we are seeing very good sell-through. Given the strong performance of the two-seater X3, we are very excited about the potential of the four-seater version. The Maverick X3 MAX, which we only started shipping late April.
The four-seat sport side-by-side segment is one where we have lagged the industry in the past, we believe that the new Maverick X3 MAX will turn things around. Given the strong demand for our side-by-side lineup, we are investing in additional manufacturing equipment to increase the production capacity at our Juarez facility. These investments will start this year and will improve capacity in the spring of 2018. The CapEx applications are reflected in our revised guidance. It's important to note that the expansion of the North American dealer network is also having an appreciable impact on our off-road business. Looking at Spyder. Still early in the season, the North American three-wheeled motorcycle industry is down low teen percentage. Can-Am Spyder is down mid-single digits over the same period as it was impacted by the late spring in Canada.
Things are trending positively in the key states where we have deployed dedicated teams. We are already witnessing encouraging reaction from customers and dealers in these regions, and we are seeing a positive impact on retail sales. We are excited to host nearly 2,000 riders in Vancouver this weekend for the 10th anniversary of the Spyder. We have people coming from all over the world, including some Australians and Russians, who are renting units in North America and riding to Vancouver for this event. Overall, for the Year-Round P roduct category, we are pleased with the Can-Am brand's performance as it has been outperforming the industry across all three product lines, and we are planning to continue on that trend with the model year 2018 off-road lineup that we just introduced this morning. This year again, we are pushing innovation to continue to gain share.
Just a few months after introducing the Maverick X3, we are already upgrading it with improved power. The 2018 Maverick X3 and Maverick X3 MAX Turbo R is now delivering 172 horsepower, an increase of 18 horsepower over the previous configuration and serving to maintain our edge in the sport category. We are also improving our offering in the utility segment with two new Defender packages. The Can-Am Defender MAX HD10 cab, a factory-built six-passenger utility side-by-side that comes with a full cabin, and the Can-Am Defender MAX HD8, our new entry-level six-passenger utility side-by-side. We have also introduced several new features across the lineup, upgraded the Commander with more power and improved suspension, and introduced two new Outlander models, one specific to northern climate and one true crossover sport tech model.
All in all, we continue to improve the depth of our lineup with the goal of continuing to outpace the industry in season 2018. Turning to seasonal product on slide 8. Seasonal product revenue were up 7%, driven by a higher volume and favorable mix of personal watercraft. Let's start with a look at snowmobile retail. The North American industry ended its 2017 season with retail down mid-single digits. Ski-Doo retail sales were down high single digits. The retail lag versus the industry was driven by lack of availability of non-current units compared to the competition, limiting our ability to compete in the non-current sector. If you look at the bar chart, you can see that the non-current Ski-Doo retail was very small compared to competitor, whose non-current retail was nearly 50% during season 2017.
However, Ski-Doo performed very well in the current unit sale, achieving its highest market share ever. The strong performance was driven by the introduction of the new Gen 4 platform that is very well received by consumer. In Scandinavia, the season is ramping down, and the industry retail is down mid-single digit season to date. Retail sales of both Ski-Doo and Lynx snowmobiles were up low single digits over the same period. As in North America, the sell-through of the current model year unit was excellent. We recently closed our spring dealer orders for the upcoming season, which came in above our expectation. As a result, we have increased our seasonal product revenue guidance for the year. The snowmobile business has always been driven by innovation and our new Gen 4 platform is allowing us to perform well despite coming off an overall difficult season for the industry.
Now a quick look at personal watercraft. The main retail period has not yet started in North America, but the industry is already performing well with an increase of mid-teen percentage season to date. Consistent with prior years, Sea-Doo growth for the quarter is slightly behind the industry trend early in the season, with retail up low teen percentage. Interest in the lineup is very strong, and we had good momentum in boat show orders. Overall, despite a late spring, the watercraft season is looking promising. I would also add that we are also investing CapEx in additional manufacturing equipment for watercraft that will be operational in summer 2018. Sébastien will provide more detail on our overall CapEx in a few minutes. Now looking at propulsion system on slide nine. Revenue of propulsion system decreased 5%, primarily driven by the lower volume of aircraft engines sold.
This market remained weak, but we expect sales to increase as production of the new 915 iS engine starts in the second half of the year. Looking at the outboard engine industry now 10 months into the season, the industry is up mid-single digits. For the same period, BRP retail is up low single digits, slightly lagging the industry growth that continued to be driven by new boat sales. Now turning to Parts, Accessories, and Clothing. Our PAC team was busy last year. We delivered a record 428 new accessories for model year 2017 and made sure that these accessories were available at the launch of the vehicle, which had a noticeable impact on sales. This performance contributed to a strong revenue growth of 17% in the quarter and was primarily driven by an increase in Side-by-Side accessories sales, notably coming from the Can-Am Maverick X3 and Defender models.
Also, late snowstorm in North America and Scandinavia positively impacted snowmobile parts sales. With that, I will turn the call over to Sébastien, who will return for closing remarks.
Thank you, José, and good morning, everyone. This morning we reported revenues of CAD 956 million for the first quarter of fiscal 2018, an increase of 3% from the same period last year, mainly driven by higher wholesale of side-by-sides, PWC, and PACs. Regionally, the increase was generated in the U.S. and in international markets where revenues were up 4%, while Canada saw its revenues decline by 3%. The gross profit amounted to CAD 207 million, resulting in a gross profit margin of 21.7%, an increase of 80 basis points from last year as a positive impact coming from a favorable product mix in SSV and a favorable foreign exchange rate variation was partly offset by a lower volume of Spyder vehicles and by higher production costs. Our normalized EBITDA was up 41%, reaching CAD 81 million.
Our normalized net income came in at CAD 28 million, resulting in a normalized diluted earnings per share of CAD 0.25, up CAD 0.21 over last year's first quarter. Turning to slide 12 for the normalized net income bridge. Our normalized net income was up CAD 23 million with a strong net contribution from volume and mix for CAD 15 million. Supporting the growth were lower financing costs and normalized income tax expense for CAD 4 million, while favorable foreign exchange rate variations contributed for CAD 11 million. These favorable elements were partly offset by higher production costs and operating expenses for CAD 7 million. Let's switch to slide 13 for a look at our network inventory, which ended the quarter up 12% from last year's level. Our network inventory is healthy across most of our lineup.
Excluding the inventory growth for snowmobile, our network inventory is up 5% with a good portion of the growth coming from the over 250 new dealers we have signed since the IPO. For off-road, the growth in inventory is coming from our new products recently added to the Can-Am SSV lineup, the Defender and the Maverick X3. As planned, we are reducing the inventory for the rest of the side-by-side lineup. For other product lines, Spyder is down mid-teens in line with our expectations as we are working on reducing the inventory in our dealer network. For PWC, we have the appropriate inventory level to be well positioned for the start of the main retail season. The only area where we have more inventory than we would like is snowmobile, given the weak riding season we just had.
We have lived through these cycles many times before, and we have a plan in place with our dealers to manage that inventory. Given the good traction we had with spring units pre-booking, we are comfortable with where we stand heading into the next season. This brings us to our reviewed guidance for fiscal 2018 on slide 14. As José mentioned earlier, we ended the first quarter ahead of our expectation, driven by the combination of our side-by-side business continuing to experience robust growth. Our snowmobile PAC sales coming in higher than anticipated due to a few late season snowfalls and the continued tight management of operating expenses. Additionally, we closed our snowmobile spring orders ahead of plan, improving our outlook for next season.
Given these elements, we are reviewing upward our revenue guidance for year-round products, seasonal products, and PACs, resulting in a total company revenue growth of 4%-8%, up from a growth of 2%-6%. Based on this lift in revenues and the anticipation of a more favorable product mix due to the strong demand for the Maverick X3, we are increasing our normalized EBITDA growth guidance by three percentage points, and the guidance is up 10%-13%. Note that compared to previous guidance, most of the incremental normalized EBITDA growth is coming from a stronger first quarter and a better second half of the year. Therefore, our expectation for the second quarter has not changed since the initial guidance. Overall, our normalized EBITDA generation profile is now expected to be slightly more skewed towards the second half of the year compared to our initial outlook.
Drilling down the P&L, excluding any impact from the substantial issuer bid, which I will cover later, the normalized net income growth guidance has been reviewed upward to up 10%-16%, and the normalized EPS guidance is up CAD 0.05 to a range of CAD 2.20-CAD 2.32, representing an increase of 12%-18% compared to last year. Finally, we have approved additional investment in machinery and equipment to increase production capacity for both SSV and PWC in order to meet strong demand for our products. These investments require CAD 25 million in additional CapEx, and so our CapEx guidance is now CAD 240 million-CAD 255 million, and it will impact depreciation expense, which is now expected to be at around CAD 155 million. These investments will be made throughout the year and will benefit the production capacity next year.
Finally, as you are well aware, our business has significantly evolved since we became public around this time four years ago. Our product portfolio is stronger and more balanced with year-round products now reaching CAD 1.6 billion in revenue in fiscal 2017, up 57% from pre-IPO. Our normalized EBITDA is also up 50% from pre-IPO, reaching CAD 500 million last year. Our manufacturing footprint is also well-diversified, and we are better established in markets around the globe with an even greater presence in the biggest powersport market in the world, the U.S.
Over the last four years, we have generated over CAD 1.4 billion of cash from operations, of which we have invested over CAD 700 million in the business through CapEx and returned CAD 168 million to our shareholders through share buybacks while de-leveraging the business, going from a pre-IPO leverage of 2.9 times to a ratio of 1.4 times at the end of Q1. So given the strength of our balance sheet and the positive outlook we have for the business, we are pleased to announce the introduction of a quarterly dividend of CAD 0.08 per share and the launch of a CAD 350 million substantial issuer bid to repurchase and cancel some of our shares outstanding. We anticipate that the proposed SIB will commence during the next two weeks and will be completed before the end of July 2017.
Our major shareholders have announced their intention of participating in the SIB on a proportionate basis. We believe that this capital allocation plan will enhance the return we provide to all our shareholders while preserving our financial flexibility to deliver on our growth plan. With that, I'll turn the call back to José.
Thank you, Sébastien. Over the last several years, we have invested considerably in our product and in our manufacturing footprint. These investments are now paying off on all fronts as we continue to outpace the industry around the world. The team remains completely aligned on our strategic objective, and its solid execution is a clear contributor to our success. Our strategy of diversifying our product portfolio, our geographic sales, and our manufacturing footprint has proven itself again and again over the years and will continue to do so in the future. While we remain vigilant to ensure external factors do not disturb our current momentum, I am very proud of the first quarter results, I'm confident for the year to come. On that, I will turn the call over to the operator for questions.
Thank you, Mr. Boisjoli. Please press star one at this time if you have a question. Please limit yourself to one question and one follow-up question. There will be a brief pause while the participants register their questions. Thank you for your patience. Our first question is from Craig Kennison with Baird. Go ahead.
Thanks. Good morning. I guess first, José, you mentioned better awareness for the Defender product in some farming and agricultural communities. Do you have a feel for whether your demand there is entirely BRP product division with the Defender, or might there be some signs?
That the market itself is improving in those markets.
Good morning, Craig Kennison. I'm just looking for my notes. The market is still quite solid on what we call the utility segment. You need to understand that with the Commander and the Maverick, we're playing in the rec-ute and the sport. The difference when you introduce a sport machine versus a more utility machine is totally different. When we introduced the X3 because of the Maverick, it was replacing the old Maverick. The notoriety of the product became known right away, and we had a very good momentum from the start. The situation with the Defender is different. We're talking to farmer, to rancher, which were not buying any Commander and Maverick. What we like right now is the quarter after quarter, our sales of Defender is improving, and the reorder pattern from the dealer is very well, coming every quarter.
Overall, we are quite happy with the situation. If you look year-to-date, the utility segment is about up high, let's say about 10%. The overall industry is up mid-single digit, and the utility segment is up about 10%. Sport is about flat-ish. Us, because we are a newcomer, because we have a good product, and because also we have improved our dealer network footprint, we continue to grow at a good pace in the utility segment.
Thank you. As the follow-up question, in your annual report, you reiterated the 2021 plan, which includes CAD 6 billion in revenue, and I think CAD 350 in earnings. First, do you need M&A to achieve that goal, any acquisitions? Second, how does the buyback influence that EPS target? Thank you.
Okay. First, depending how the global market will evolve, we believe that with the six product line that we have, we could reach the CAD 6 billion. It would be a tight run for the last mile, but we could reach the CAD 6 billion. That being said, as we explained to you, I think when we launched the 2020, we have now a dedicated team that is looking what's next. Again, is it something we do from internal? Is it acquisitions? We have a dedicated team looking at this. On the EPS, when we've launched our goal of 350 by 2020, it was coming from the operation. We will do the SIB. We'll see how many share we'll buy back, and we'll restate the 350, probably when we have our result in Q2.
Yeah. For upcoming investor meeting.
Yeah.
Thank you.
Thank you. Our next question is from Mark Petrie with CIBC. Please go ahead.
Hey, good morning. I wanted to ask about the capacity growth in Juarez II. How much capacity growth does that CAD 25 million investment actually imply? I guess related to that, you call out production cost as a headwind in Q1. How should we think about that as being a tailwind as we progress through the year?
Well, the capacity increase for Juarez II and in Querétaro is for the side-by-side business and for the PWC business. Obviously, with the strong demand that we're seeing from the market for both side-by-sides and PWC, our outlook for next year, which we'll be sharing with everyone early next year. We looked at our production requirements, some of the bottlenecks we had and the anticipated demand we have for some of the products that we felt it was the right thing to do to invest in that added capacity. Obviously, the margins are good as well in our products, as you know, therefore the payback on these investments is quite rapid. So that's why the board was more than happy to support management in increasing capacity. That comes in line with the guidance increase that we did as well today, Mark.
In terms of headwinds, obviously, as you're ramping up production capacity and you're seeing demand, you need to increase your overhead in your manufacturing plants. Once that stabilizes, it should be a tailwind for us, in terms of margin driver on the long term.
Maybe to add some color, Mark, there is a lot of moving part which make our forecasting for our side-by-side more difficult. The industry is very dynamic, even if the industry is growing mid-single digit, utility is growing at a faster pace. We're underrepresented in the ATV segment. The industry is very dynamic. On top of it, the strength of our product, the Defender family and the Maverick X3 family is very well received by the dealer. There is the dealer network by itself. More and more, we are able to engage multi-line dealer in region where we're weaker. All of this, when you add all the region around the world, it's very difficult to plan what's next. That's why we're reaching right now the limit of our capacity with what we had.
Those investments are longer lead time, like we released the investment about a month and a half ago, and it will be operational in the spring. The capacity increase is in the range of 20%.
Okay, that's helpful. Just to follow up on the expense side, selling and marketing expenses bounce around quite a bit just sort of quarter-to-quarter. It was down a reasonable amount in Q1. How should we think about sort of the year-over-year fluctuation for that line, Q2, Q3, Q4?
Yeah. If I look at the full year expectation for selling and marketing as a percentage of sales, we should expect the same percentage as we had last year. Obviously, as we have multiple product lines, different product launches as well on these product lines, we can have different timing and marketing expenses. We're going to go heavy up on some periods, if we're launching a new product. Example, watercraft, if you were launching something, you'd go heavy up on the spring. ATV, off-road is going to be much more in the fall. Last year, we had a big program with the Spyder, which this year we focused more on boots on the ground approach versus media approach, and that's why we're seeing some decline in marketing spend this quarter.
Okay, that's helpful. Thanks a lot.
Thank you. Our next question is from Martin Landry with GMP Securities. Please go ahead.
Hi, good morning. Maybe just to follow up on the capacity expansion, can you share with us right now what is your capacity utilization in Mexico? With regard to your capacity expansion, are you adding a shift or a production line? Just some more color on that would be great.
Good morning, Martin. First, right now, in Juarez Two, we're running the operation. There is some equipment that are running three shifts, 7/24. Equipment, not the full factory. The assembly line is running two full shifts and with extra weekends, I mean, a few Saturday here and there. We are reaching the limit. We could add more volume this year if the demand this fall is increasing, but it would be a bit costly because when you do a third shift in Mexico, the efficiency go down. It's a possibility, and that's why right now we're reaching our limit of our existing capacity, and we decided to invest for next year.
Are you adding a production line?
Sorry. No, we're adding equipment. The assembly line that you saw when we were in Juarez II has plenty of capacity. Basically, we're adding manufacturing equipment to manufacture the chassis.
Okay. Then my second question is on the Spyder. You mentioned that your Spyder inventory is down 15%, I think it was on a year-over-year basis. Correct? Is that a North America number or a global number? Just wondering, are you still working to bring down your inventory levels of Spyder, or are you comfortable where it is right now?
Well, obviously, at the end of April, we're still early in the retail season. We're happy because year-over-year, the increase was material, and that's what we're working towards. Obviously, the second quarter is the peak retail season for the Spyder product line, and so we're anticipating further reduction of inventory in the second quarter. We looked at the trend, and we look at our actual retail versus our targets. We're in line with what we were expecting. A bit softer in Canada because of the horrible weather we're having here, but overall, in line with our plan.
Okay. What's the mix current versus non-current?
Well, we had a lot of non-current in Spyder, and that's why we decided to reduce production. The anticipated retail mix, let's say, of current non-current in the current year is expected to be almost 50/50.
Okay. Thank you.
Thank you. Our next question is from Derek Dley with Canaccord Genuity. Please go ahead.
Yeah, guys. Congrats on strong start to the year. Can you just give us an update on your new dealer additions and the response to the Performance dealer bonus program?
Good morning. Of course, this year, as we said at the beginning of the year, we're shifting people from expanding the dealer network to improving the dealer network. Right now, we slowed down a bit the signature of new dealers. There will be some addition, but not massively during the year. We're shifting our effort to make the dealer better. I don't have any number. It's very qualitative. I would say one thing, more and more dealers are talking about our value proposition. When you consider the quality of our product, the margin opportunity on the product, now the accessories, we're becoming a lot better to design accessories well integrated with the vehicle that we ship At the same time of a new unit.
When you consider the whole value proposition that we're offering to the dealers between all product line, we're gaining a lot of traction. This is a bit difficult to quantify. It's very qualitative what I'm telling you, if you talk to dealer, particularly to multi-line dealer, they're pretty happy with BRP nowadays.
Okay, geographically, can you just give us some color on where were some areas of strength and weakness during the quarter?
For sure, the West is more difficult than the East. For us, it's a bit different dynamic between U.S. and Canada. We're quite new in the Southwest of the United States than even some of our competitor say that their sales is soft in the West. For us, we don't see it as much because we have a lot of new dealer. We're entering with the Defender, the West is pretty strong for us. In Canada, that's another story. We've all been quite strong in Canada, I will give you some colors. Like the motorcycle industry in the West of Canada is down almost 10%. The East is flattish, average Canada is minus mid-single digit, you see a big difference between East and West. UTV, the West is equal to East, UTV is different.
Watercraft is down mid-single digit to mid-double digit, -18% so far this year. The East is flattish. You can see that Canada is lagging. The West of Canada is lagging versus the East. That has affected our retail at Q1. As I said, the industry was down -5% overall, and we're down -4%. In the U.S., it's a different dynamic.
Okay. Thank you very much.
Thank you. Our next question is from Benoit Poirier Desjardins, Capital Markets. Please go ahead.
Yeah. Good morning, gentlemen, congrats for the good quarter. Can you talk a little bit about your dividend policy? Any objective in terms of payout or yield?
Good morning, Benoit. As you saw, it's a first for BRP to announce a quarterly dividend. The whole discussion of capital allocation has been a recurring topic for the board and actually a very positive topic for the board. We decided to launch this dividend with a yield of approximately 1%. As the business will be growing and as our profitability will be growing, our objective is going to be to continue to provide good returns to shareholder, and we will be adjusting the dividend payout in line with the results that we will be delivering. For now, there's no clear guidance as to how we're going to be creeping up the dividend on a quarterly or annual basis.
Okay. My follow-up question, if we look at the Spyder retail sales were down mid-single digit in Q1, mainly due to weather in Canada, but can you talk about the progress you are making with your growth strategy and penetration in the U.S. now that you have Josée Thériault on board?
Good morning, Benoit. First, the three-wheel industry was down by about 15%. We're down low single digit, and we're quite happy. We're doing better than the three-wheel industry, and we're quite happy with our performance. If you look the performance on the seven state, and obviously for competitive reason, we do not disclose those seven state. If you look at the momentum we have in the seven state is significantly higher than the rest of U.S. I think the thing we've discovered that is complicated to resolve, but at the same time, from my seeing, it's all about the motorcycle license permit. For many motorsport person, to get your motorcycle license, it's quite easy. Everyone has a mindset to do it, but for someone who is a [non-non], to get a motorcycle license, the product is intimidating to start with.
The class are not well adapted, this is probably one of the thing that we're discovering, we accelerating the pace to open schools in many state. Just to give you a sense, we have 26 dealer in Florida. Only a few school were giving course on Spyder. We have 23 out of our 26 dealer are team up with the school. That's the type of thing we're doing, we're showing good result. It's a bit early to disclose more information, but we're quite happy with those indicative resources.
Okay. That's my two. Thank you very much for the time.
Thanks.
Thank you. Our next question is from Cameron Doerksen with National Bank Financial. Please go ahead.
Thanks. Good morning. A couple questions for me on the Substantial Issuer Bid. First I want to ask you about your comfort level with leverage. Your leverage will go up, a bit with line back in stock, still pretty comfortable level, but if you were to consider doing acquisitions at some point in the future, what is your comfort level with leverage now?
Good morning, Cameron. We finished the end of the quarter with a leverage ratio of 1.4x net debt. The SIB should increase leverage by 0.6x, so it should bring us in the range of 2. That's on a pro forma basis at the end of Q1. Obviously, this year, our expectation is for growth in EBITDA and cash generations. Leverage at the end of the year will be down. If you recall, when we did the IPO, we had a leverage of almost 3x, 2.9x, and that's a level where we were comfortable running the business. Our credit facilities and our Term B loan is linked to BRP with a covenant light structure and a maturity that is out several years to 2023. Under these conditions, we're comfortable operating and increasing leverage even further if need be to crystallize an acquisition.
Okay. Just related to the SIB, obviously you've got a real confidence here in your cash flow generating ability with the introduction of the [dividend] and then also the SIB. I'm just wondering if you can maybe talk about directionally what your CapEx starts to look like after this year, after a fairly heavy year of investment. Is this a signal that the biggest part of your investment to support the growth is behind you here, and that maybe investments just in new products and CapEx in production is going to start to trend a little bit lower in the years following this year?
Absolutely not. If there's one thing that's made us successful and we believe that it's going to continue to make us successful, is continued investing in our organic growth. If there's one thing that we're not planning to do is slow down on that strategic pillar of ours. We're a business that's generating significant cash flow every year, and what we're going to be paying or what we've done in terms of normal course issue or did in the past is using that excess cash flow after CapEx. Our expectation is not to reduce that pace. Even this year, as you saw, despite that we're launching a dividend, launching the SIB, we've also increased CapEx in our guidance. That's the strategy, and we're going to continue working that way.
Okay. That's great. Thanks very much.
Thank you. Our next question is from Jamie Katz with Morningstar Good morning, sir. Please go ahead.
Hi. Good morning. Thank you for taking my question. I'm curious about your finished product inventory that's on the balance sheet. It's up pretty significantly, and I wanted to know if there were any different timing differences we should be thinking about, or whether it's similar to what's increasing the dealer inventory levels.
Well, actually, when you look at the inventory year-over-year, it's up 10%. One of the biggest drivers of the inventory growth is currency versus a year ago. The rates are higher, both the euro and USD versus the Canadian. That brings about a CAD 30 million increase. Last year, we produced snowmobiles much later in the year. This year, we're producing them as we normally do earlier in the year, that calls for more raw material and work in process inventory. That's about another CAD 25 million. SSV, with the growth that we're experiencing, is also requiring investment in working cap, around another CAD 20 million there. The PWC business. Strong growth in PWC this year is driving finished good inventory in international markets and also raw material inventory for about CAD 15 million.
If you take these four elements, you're bridging almost the CAD 100 million increase that we have in inventory for the year.
Okay. Thanks. I know it's a small component of the business, but I saw you guys had said that the propulsion systems suffered from lower volume of aircraft engines sold. Was that something that was planned, or was it a function of some other industry factor that could be ongoing?
The industry is a bit slow for the aircraft engine. The main thing is we introduced the 915 iS about a year ago, and all the OEM right now are working to prepare their plane to fit this new engine, and we'll start shipping in the second half. The market is soft for aircraft engine, but on top of it, many people are planning to buy the new one because it's a better power to weight ratio, longer range, and that's why we believe there is some delay in the regular engine to wait for the new one.
Okay. Thank you very much.
Thank you.
Thank you. Our next question is from Seth Weiss, North Coast Research. Please go ahead.
Thank you. Good morning, everyone.
Morning.
Just a couple of things. First, I wanted to dive into the capacity. Wondering if you could, one, quantify it, and then just as we think about it, you said you continue to expect to make more investments to support growth going forward. If you're already running multiple shifts, what made you decide that it was right to tweak the existing facility versus adding a new facility? Just piggybacking off of that, I believe at the investor day, you said that eventually you need to go into Juarez I and you can make that more efficient. I was just wondering if you could remind us of the timeline on that and maybe what kind of benefit you get there.
Okay. Good morning. You visit Juarez II, our facility have capacity on the assembly line. The bottleneck, and you saw yourself the facility, where you have more investment is on the manufacturing of the chassis and the painting of the chassis, and that's where right now we're reaching capacity. Right now, the best return on investment is to improve, adding some equipment into the existing wall. We're adding some equipment to increase our capacity on the manufacturing and the painting of the chassis. At one point, we could reach the limit. As you said, today the old Maverick and the Commander are done in Juarez I. Those volume are going down, and in time when Juarez II is totally full, we could consider to move some assembly to Juarez I, but we're not there yet.
We still have room to grow, and the building itself was planned to have more equipment. We enlarging a bit the dock, but it's a very minor enlargement. The manufacturing area that you visited, we're not enlarging the building, we're just adding more equipment into the space to continue to support the growth.
Okay. That's helpful. This is enough to get you to your long-term market share goal, correct?
We hope to pass. Right now, we will definitely with what we're adding, it's helping. We'll see how things go. Like I said, how high is high into the side-by-side industry. We were quite good in the Commander segment, which is a small segment. We were doing okay in the sport. Now we're doing a lot better in the sport. The Defender for us, which is a big segment, is growing at a fast pace. Again, it's about the industry dynamic, the quality and innovation of our product, and the dealer network expansion. Right now, everything is pointing in the right direction. We feel we are okay with what we have had for the next 18 months, and we'll monitor accordingly.
Okay. Excellent. Just lastly, just big picture on the market. I was wondering if you look at the off-road vehicle market in North America specifically, has the dynamics of the overall market changed since the last time we had one of these calls after the fiscal year was reported? The environment had been very promotional. Have you been forced to match some of the aggressive rebates on the Maverick X3, or have those sharper promotions been limited to the legacy Maverick?
I'd say that the UTV is a bit different than side-by-side. On UTV, there is less new model coming into the market. Except for two OEM that are very aggressive with rebate, I would say it's quite stable and it's quite the same dynamic than when we had our call in March. On the side-by-side, the dynamic is different. It's a big market. Now the market is bigger than UTV, and everyone is introducing new model at a fast pace, and there is more competitive investment in term of product. There is two OEM who are very aggressive with programs because they probably have excess inventory. The dynamic, competitiveness is quite high on the side-by-side market. The beauty of our situation is the X3 Sport UTV is playing into a segment where performance is very good, very important, and we have a good product.
On the Defender side, for us, it's a wide space that we're trying to fill fast. Again, our product is well-received. We are right now, benefiting off investment that has been done and moves that we decided a few years ago, we believe we will continue this momentum of outpacing the industry in the years to come.
Okay. Thank you very much. It sounds like the X3 category, you're kind of immune to some of the discounting that's going on.
Yeah, X3, right now the inventory in the network of X3 is very low.
Okay. Excellent. Congrats on an excellent quarter. I look forward to hearing more.
Thank you.
Thank you. Our next question is from Anthony Zicha with Scotiabank. Please go ahead.
Yes, hi. José, could you give us a bit more color about the new dealers that entered your network that have been operating for at least a year, and are they performing to your expectations and their expectations, and are they selling a greater proportion of SSVs?
Good morning, Anthony. I don't have any quantitative numbers, but I'll give you a feel. It's not black and white. Some are doing extremely well. It's more difficult than what we planned. Overall, I would say that we are on plan. There is one thing that is sure right now. We're gaining space in multi-line showroom store. Since we introduced the Defender, it was a statement. If you remember, I committed So a new side-by-side every six months, and it was part of the commitment about the industry. We introduced the Defender. We're launching a new product every six months, and the dealers see our new product, they see our value proposition, and we're gaining, right now, space into multi-line dealership. This is part of the momentum that we have right now, and that's one of the elements why we are outpacing the industry.
I don't have any more quantitative data that I can share with you.
Okay. The second question. Over the next three years, José, what are the two or more catalysts that you see driving future growth, and how important is going to be the success of the Spyder in your plans? I think you've mentioned in the past that you would expect eventually to double the sales of the Spyder in a five-year period. That's my question. Thank you.
Okay. Like we said, when we met, we believe, and I answered a question this morning about that. We believe with the six product line that we have, if the industry continue like this and we continue to outpace the industry, we believe we could be very close of the CAD 6 billion that we have put as a target in 2020. That being said, Spyder is part of the growth. We still believe that Spyder has a good potential. What we doing right now in the seventh phase is really promising, but it's a bit early to try to quantify it. At the end of the day, the two big vector for growth right now is side-by-side and Watercraft. Watercraft, the industry is doing extremely well. There is not too many OEM in that business, and we have a strong market share.
This is the two main vector. Other than that, Outboard engine is positioned to grow. ATV, we're gaining momentum. There is two business which we believe high potential. There is ATVs, Snowmobile, and Outboard engine, where we still can continue to grow, but at a lower pace. There is Spyder that we believe could, if we find a silver bullet, could make a big difference, but we're not counting on it in our planning. This is, in a nutshell, how we view the situation.
Okay. Well, thank you very much, José.
Thank you. Our next question is Derek Johnson with BMO Capital Markets. Please go ahead.
Hey, good morning. I was just curious about your comments on snowmobile. If inventory is elevated on prior year stuff, yet your spring sales were stronger than expected, why is that? Why are people not buying the 2017s and pre-ordering the 2018s early? Is it an expansion of the 850? Is it the SHOT? What's the difference between the two?
Good morning, Derek. It's lineup. If you remember last year, we came out with the REV Gen4 first year with good model offering. This year, we extended the model offering, there is more REV Gen for all the 800 have been replaced, and the SHOT was very popular. To be honest, SHOT was more popular than what we had planned. We had bet internally, and I lost my bet, and it's a good thing. At the end of the day, I believe that the strength of our lineup made a big difference. Basically, we met dealer in February at the dealer meeting. They gave us a booking. The spring order came out stronger than they readjusted their order, and that's why we're increasing our guidance.
Okay. Thank you.
Thank you, Derek.
Thank you. Our next question is from Tim Conder with Wells Fargo. Please go ahead.
Thank you. Gentlemen, just wanted to follow up on the capacity commentary. José, you mentioned that part of that is being driven by, of course, the success you've had with expanding the dealer network and that currently you're sort of slowing down that expansion to focus on enhancing the existing dealers. Two parts to that. One, what exactly are you doing? Is it more enhancing the just-in- time? Is it enhancing the data analytics CRM that the dealers utilize, that you share and work with them? Is that the focus of enhancing the network? The second question is: to get to your 2020 goals, after you enhance the current dealer base, will you then hit another second stage of dealer base re-accelerated growth?
Okay. To your first question, we're working very hard to generate leads. All our marketing campaign is about lead generation, then sending names to our dealers, and trying to help them to close the sales. Some dealers are doing extremely well, taking those leads and convert it in trial and closing the sales, and other are not doing a good job. We have all the data. We know all the data of how many leads we transferred to the dealers from our website and what's the end result of those dealers. That's why we believe right now that we are, probably for the next two years, in the There is more advantage to have a lower performing dealer to become better. We believe there is a better return on investment and time doing this, and it's all around efficiency at the dealership than this is the situation.
To be honest, we're quite happy with the number of dealers we have right now in North America. There will be always some tweaking, adding 25, losing 25, but we are quite happy. If we continue to outpace the industry, it could happen probably in two years from now that we'll be adding more dealers in the remote area to help our coverage. We do not factor that in at this point in our plan. It's more about the number of dealers we have and making them better.
Okay. Along that line, José, is there anything related to, again, your just-in-time inventory system? How is that being enhanced, and how is that part of the equation with the, say, CRM enhancements also?
Yeah. This we're quite happy with our system. On ATV and side-by-side, the dealer order on the monthly. What we do right now, we recommend an order to the dealers, and if they follow the recommended order or pass the recommended order, that is the trigger for their Performex bonus. Every month, we give them a recommended order for ATV side-by-side, and that's for deliveries in two months. This is working extremely well. What we like about that system, it's adjusting up or down depending of the retail. There is no big bottleneck of a certain model into the system. Our inventory is quite clean. We believe we are quite efficient into the industry with the system that we have. We'll continue to improve it, but no major change plan short-term.
Okay. Thank you.
Thank you.
Thank you. Our last question is from Robin Farley with UBS. Go ahead.
Great. Thanks. I just wonder if you could quantify how much of the EBITDA revenue raise for the year was driven by FX, and then I have a couple other questions.
Yeah. When you look at the FX rates, despite that we did get a lift in Q1, when I compare the rates when we issued guidance in March and when we look at the rates today, there's not a lot of variation in the rates. So there's actually no FX built into our guidance raise, Robin.
Okay, great. I think it was your September Analyst Day, you talked about one of the things that might get you to your 2020 goals would be acquisitions and maybe perhaps in the all-purpose motorcycle market. Is announcing the share repurchase today and the dividend announcement, it looks like you still have free cash flow available to do acquisitions, but are those uses of your free cash flow? Should we think of that as making an acquisition less likely in your strategy now?
No, absolutely not. For us, it's optimization of the balance sheet. That's why we're looking at doing the SIB and returning capital to the shareholders. We have CAD 255 million of cash at the end of Q1. Obviously, we want to put that cash to work for the shareholders, and that SIB was the best way to put it to work for them. As I mentioned, when I look at the balance sheet, we do have that flexibility to add additional debt if need be, if we were to do a material acquisition. So that doesn't reduce our ability to execute on material M&A going forward.
Okay. No, great. That's helpful. When you present Spyder retail versus the industry, I think in previous quarters to this, you would show it kind of versus North American motorcycle industry overall. I think this quarter now you're showing it kind of versus the three-wheel market. I wonder if you could just give us a little context in the way you sort of typically have about the change versus the North American motorcycle market overall.
Good morning, Robin. Since the beginning of this year, we're following internally the three-wheel market. Obviously, we follow both as we believe that the three-wheel market is a lot more relevant for what we're doing than the motorcycle market where you have a lot of entry-level product. If you look at the industry overall season to date, if you take the whole motorcycle market, it's down mid-single digit, where the three-wheel market is down almost 16%. We right now are down minus single digit. We're doing as good or as bad as the motorcycle industry, but better than the three-wheel market.
Okay. No, great. That's helpful. My last question is, can you quantify where your side-by-side market share is now and kind of versus your goal? I think you had given like a two or three-year goal. If you could help us think about where your market share is now.
Yeah. Like we said before the launch of the Defender, we said that we were about 10%. We said at the time that with all the new product that we're introducing, that the goal was to become a strong number 2. We are halfway. We said midterm. We are halfway into this timeframe. Right now, we are growing at a good pace. We are about 15% of the industry, and we believe that we are growing at a good pace to be able to meet our goal, but there is, I would say, another two years to go.
Okay, great. Thank you very much.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to you, Sébastien.
Thank you, Valerie. Thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our second quarter conference call on September 1st. Thanks again, everyone, and have a good day.
Thank you, Sébastien. This conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.