Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY 2017 fourth quarter and year-end results conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes . Please go ahead, Mr. Deschênes .
Thank you, Maude. Good morning, and welcome to BRP's conference call for the fourth quarter and year-end results for fiscal 2017. Joining me on the call 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. Fiscal year 2017 was a record year marked by flawless execution of our plan across the business. We said we would outperform the industry, and we did. We achieved worldwide record market share in snowmobile and watercraft, two industries we've been leading for many years. We took a leap forward in the off-road business, constantly outpacing the industry in both side-by-side and ATV, and reaching the highest market share we ever had in these two industries. We were relentless with product introduction, delivering multiple market-shaping product that were extremely well-received by the media and our consumer. Our manufacturing team raised their game and rapidly brought these new product to life with an aggressive production ramp-up plan. All of this while improving our health and safety performance to a new record level for our company.
Our marketing campaigns were bold and effective, helping to build our brand awareness across the globe. We have unprecedented momentum with our dealer network, as there has never been a better time to be a BRP dealer. All BRP employees surpassed themselves to deliver an excellent performance, allowing us to realize our aggressive growth ambition. All of this in difficult market condition. I am proud of the work we accomplished and the result we achieved, as we are reporting this morning the best financial result for a fourth quarter and a full year in the company history. Let's have a look at the number with the financial highlight of the year on slide four. We ended the year at the higher end of our guidance with revenue growing 9% to CAD 4.2 billion.
Normalized EBITDA also growing 9% to reach CAD 503 million, and a normalized diluted earnings per share of CAD 1.96, up 15% from fiscal year 2016. The growth for the year was essentially the result of the excellent reception of our newly introduced products and fast production ramp-up. We notably had a strong 14% growth in year-round product revenues, driven by the first full year of the Can-Am Defender utility side-by-side and the introduction of the Maverick X3 sport side-by-side. We also registered an 8% growth in seasonal product revenues, driven by our new Sea-Doo model with the 300 horsepower Rotax engine and the new Ski-Doo platform with the Rotax 850 E-TEC engine. These new products were also very successful with our consumers, as our retail sales for seasonal and year-round products were up 13% in the quarter.
If we exclude snowmobiles, where growth was limited by weak snow conditions, our retail sales were up 27%. Retail was good across our lineup. We continued market share gain in Can-Am ATV, a very good boat show season for Sea-Doo, and a strong performance with the new Ski-Doo platform. The key driver of our solid performance was the Can-Am side-by-side lineup with a 70% retail growth in the quarter as consumer reaction to the Maverick X3 was extremely positive, and we continued to gain traction in the utility segment with the Defender. I will give you more color on our retail performance by product line in a few moments. First, let me go over our key strategic priorities on slide five.
The alignment of all our employees around our key strategic priorities of growth, agility, and lean enterprise was instrumental in the achievement of solid results in fiscal year 2017 and the delivery of multiple projects that will help us achieve our long-term objective. We demonstrated our dedication to accelerate growth with multiple product introductions, representing solid growth potential going forward. We continue to build a Can-Am brand, notably through an industry-leading digital media program, the association with well-known ambassadors, and the renewal of the sponsorship of NASCAR races that is giving us great exposure in the U.S. market. These efforts also drove a significant momentum with our dealer network. The demand for our products is strong, and the engagement of our dealers is exceptional.
In terms of agility and lean enterprise, we demonstrated our manufacturing excellence and our agility with a rapid, yet smooth production ramp-up at the Juárez 2 facility. We continue deploying our modular approach with new product introductions in side-by-side and snowmobiles. These initiatives will be key drivers of margin improvement in the coming years. I am pleased with the execution of our team on our different projects this year, and I'm excited to see these different initiatives come out fruition over the next few years. Another key component of our growth strategy is the optimization of our dealer network. Thanks to the great momentum we have in the market, we were able to attract and sign 70 new Powersports dealers in fiscal year 2017, well ahead of our target of signing 45-55.
This bring the total of dealers signed since the IPO to 289, achieving our goal of 200 to 300 new dealers signed by the end of fiscal year 2017. All in all, our dealer network optimization program is a real success. We achieve our new dealer signing objective, and we significantly improve our network coverage over the last four years, notably increasing the number of side-by-side and Spyder dealers by 33%. At this point, we are satisfied with the number of dealer we have in our network. Going forward, we may make minor adjustment to improve coverage, but our main objective will be to continue to increase the quality of our network and to gain traction with our multi-line dealers by offering the strongest value proposition in the industry. On that, let's review our quarterly performance by product category, starting with year-round product highlights on slide seven.
Revenues were up 9% for the quarter, mainly driven by higher volume and favorable product mix of side-by-side due to the introduction of the Can-Am Defender and Maverick X3. Now in term of retail, our off-road business is performing very well. For ATV, the industry decline has slowed in the past few months, and now seven months into the season, industry retail sales are down mid-single digit. Can-Am ATV continue to outperform the industry with retail up mid-single digit and currently stands with the highest season to date market share in its history for this time of the year. Can-Am ATV also continues to gain momentum in international market. For side-by-side, the North American industry retail is up mid-single digit season to date.
Once again, our new Can-Am Defender and Maverick X3 models are driving a solid performance with retail sales up in the high 30% and with a 70% retail growth in the fourth quarter. The Can-Am Defender keeps gaining traction, and we continue expanding our offering as shipment of the Defender HD5 started in January. As for the Maverick, we are extremely pleased with the consumer reception. The two-seat model is performing very well, we are excited to see our latest introduction, the four-seat Maverick X3 MAX. This is our fourth new side-by-side model introduction in the last two years, shipment will start at the beginning of April.
We have made significant progress with our off-road business in fiscal year 2017 and with our entry in the utility side-by-side market, the introduction of the Maverick X3, and our commitment to introduce a new side-by-side every six months until 2020, things look promising for fiscal year 2018 and beyond. Now looking at Spyder. Early in the season, we are in the slow period of the Spyder retail season. So far, the North American motorcycle industry is up low single digit, while Spyder is down high single digit. I would like to remind you that 10 years ago, when we've launched the Spyder vehicle, the three-wheel industry was virtually nonexistent. Today, we estimate this business to be 30,000 unit in North America with a CAGR of 10% since fiscal year 2015.
We also estimate an additional 10,000 unit in the used market, which mean we went from virtually zero to a 40,000 unit industry in 10 years. That being said, last season was disappointing for Spyder, but it was also a good learning experience. With this in mind, Josée Perreault, our new Senior Vice President for Spyder, and her team, have put together a plan to drive long-term growth, and we have a good strategy for the coming season, as shown on slide eight. If you remember last year, we undertook specific initiative in two state, Florida and California, to see how we could improve our performance. The key learning for these were the purchasing funnel is 3 times longer for this product than for other product lines. Many dealer do not have a sales staff focused on Spyder. Many dealer do not leverage local riding communities.
The riding school are not organized for three-wheel license requirement, making it more difficult for certain consumers, and demo ride are difficult to organize due in part to the licensing requirement. Our key priorities for season 2017 will be to deploy dedicated teams to key U.S. states that will implement local initiative. We move barriers, notably facilitating the access to demo rides, riding school and license, and offering support to ease the purchasing process, focus on the digital message, and leverage Spyder communities on and offline. As we will focus on developing these initiatives to more states and managing our network inventory, fiscal year 2018 will be a transition year for Spyder, but we are convinced that we are heading in the right direction. Before turning to seasonal products, I would like to highlight the 50th anniversary of the Lynx brand.
I had the opportunity last weekend to join 650 dealers from Scandinavia and Eastern Europe for the introduction of new model year 2018 Lynx snowmobiles and the celebration of the 50th anniversary of this storied brand. We introduced several models with the new Lynx Radien platform, equivalent to the Ski-Doo REV Gen 4 platform, which were very well-received by consumer, particularly the Lynx BoonDocker DS with its unique suspension and rear tunnel to maximize deep snow floatability. Few brands in Finland can boast 50 years of market leadership. We are very proud of what we have accomplished with the Lynx brand. Let's turn to seasonal product on slide 10. Seasonal product revenues were up 37% for the quarter, primarily driven by later shipment of snowmobiles compared to last year due to the product ramp-up of the new snowmobile platform.
Looking at retail, North America had weak snow coverage for a second year in a row, and as such, month into the season, the industry is down high single-digit percentage. Meanwhile, Ski-Doo retail sales were down low teen percentage. The retail lag versus the industry was driven by a low level of non-current inventory compared to the competition, limiting our ability to compete in the non-current market, particularly at the beginning of the season. However, the sell-through on the new Ski-Doo platform is excellent, and 10 months into the season, Ski-Doo is holding the highest market share in its history in the current model year market. In Scandinavia, the industry is down mid-single digit season to date. Retail sales of both Ski-Doo and Lynx snowmobiles were up mid-single digit over the same period. And similarly to North America, the sell-through of the current model year units was excellent.
We also achieved a record market share in that segment of the industry. We introduced in February our 2018 lineup for Ski-Doo and last weekend for Lynx, and both were well-received by dealers. The key highlights were the deployment of the new platform to more than half of our Ski-Doo lineup and its introduction on certain Lynx models. On both product lines, we introduced the new SHOT system, an ultra-lightweight engine starting system that is nearly 20 pounds lighter than conventional electric starters, which should be very popular with deep snow riders. Despite operating in difficult industry conditions for two years in a row, we are pleased with the performance of our new lineup, and we are confident that our new platform and innovation will help us maintain industry leadership in the coming season. Now, a quick look at personal watercraft.
We are currently in the low season in North America, but there is very good traction at boat shows with the number of pre-sold units up over 30% versus last year and with overall retail performing well so far. In Australia, the season is ending, and Sea-Doo continued to gain market share, driven by good demand for our watercraft with the 300 horsepower engine and the new Spark Trixx. Now turning to propulsion system on slide 11. Revenues for propulsion system increased 13%, primarily driven by a higher volume of motorcycle engines sold to OEMs and a favorable mix to our outboard engine, as our volume is now shifting toward new E-TEC G2 models. Looking at outboard engine industry, seven months into the season, the industry is up mid-single digit.
For the same period, Evinrude retail is up low single digit, slightly lagging the industry growth that is still driven by new boat sales. We have also made good progress on the dealer and OEM expansion, and we have now added 44 new boat OEMs and 173 new dealers since the introduction of E-TEC G2. This expansion is a crucial part of our strategy that will allow us to grow Evinrude, and we are pleased with the progress we've made so far. Now let's look at parts, accessories, and clothing on slide 12. Revenues were up 4% in the quarter, driven by strong side-by-side PAC sales following the introduction of the Can-Am Maverick X3 and its solid lineup of accessories, including those co-branded with several aftermarket leaders.
As you know, the shorter riding season in the last two years has impacted our sales of wearable parts for snowmobiles. This negative impact has been partially offset by the strength of our accessories offering, for which sales continue to perform well. To make sure we remain competitive in that market, we continue to bolster our lineup, and we have introduced several clever and innovative accessories as part of our model year 18 snowmobile lineups. With that, I will turn the call over to Sébastien, and will return for closing remarks.
Thank you, José, and good morning, everyone. Revenues for the fourth quarter of FY 2017 were up 18%, reaching CAD 1.305 billion, a record quarter at BRP. The increase in revenues was primarily driven by the production and shipment ramp-up of renewed products, notably the new Ski-Doo platform and the Can-Am Maverick X3, driving solid growth in seasonal and year-round products in the fourth quarter. Foreign exchange rate variations had a negative impact of CAD 48 million on our revenues, offsetting revenue growth by about 4%. Gross profit ended at CAD 336 million, resulting in a gross profit margin of 25.7%, about flat compared to last year's fourth quarter. Normalized EBITDA came in at CAD 204 million, up 17% from last year, normalized diluted EPS was CAD 1, up 33% from last year.
We generated CAD 253 million of free cash flow in the quarter, we ended the year with CAD 299 million of cash on the balance sheet. For the full year, our results came in at the higher end of our guidance ranges, with both revenues and normalized EBITDA growing 9% normalized diluted earnings per share ending at CAD 1.96, a growth of 15% versus last year's normalized EPS result. Looking at our quarterly revenues by product categories on slide 15. Revenue growth was very strong for seasonal products as we shipped the sleds later in the year due to the production ramp-up of our new Ski-Doo platform. Going forward, we expect snowmobile shipment timing to be more similar to previous years. For the quarter, 40% of our sales came from year-round products, 38% from seasonal, 8% from propulsion systems, and 14% from parts, accessories, and clothing.
Regionally, our revenues from international markets were up 16% compared to last year, as higher wholesale and favorable product mix of SSV and snowmobiles were partly offset by unfavorable foreign exchange rate variations. For Canada, revenue increased 42%, primarily driven by the production ramp-up of the new snowmobile platform, pushing shipments later in the year and driving a favorable mix of snowmobiles sold in the quarter. Revenues from the U.S. were up 13%, driven by higher volume and favorable product mix of SSV and snowmobiles sold, resulting from the new products introduced over the last year. The increase was partly offset by lower wholesale in Spyder and unfavorable foreign exchange rate variations. Turning to slide 16 for a look at the normalized net income bridge.
Our normalized net income increased by CAD 25 million compared to last year's fourth quarter, driven by a favorable impact from volume, mix, pricing, and sales program for CAD 71 million, which was partly offset by a few elements. Higher production costs and operating expenses for CAD 14 million, driven by our investments in new factories, R&D, and sales and marketing to support growth. A net negative impact of CAD 7 million coming from income tax expense and financing costs, unfavorable foreign exchange rate variations for CAD 25 million. To slide 17 for a look at our North American Powersport dealer inventory. Our network inventory was up 13% from last year's fourth quarter. The increase was primarily driven by a higher inventory of snowmobile due to weak snow conditions.
While the snowmobile inventory level is higher than last year, it is in line with what we have seen in the past following similar season, and it remains manageable. Also contributing to the inventory increase were the introduction of the Can-Am Defender and Maverick X3, with strong demand from dealers and the continuing ramp-up of shipments to new dealers we added over the last few years. The increase was partly offset by an overall lower inventory level across the rest of our product lineup. All in all, despite a higher-than-planned snowmobile inventory level, our network inventory remains very healthy, and we have the right mix of product in the field and a low level of aged inventory, which puts us in a comfortable position heading into fiscal 2018. Now, for our fiscal 2018 guidance.
Our guidance for fiscal 2018 assumes no major change to our current business environment and is based on foreign exchange rates similar to fiscal 2017. Starting with revenues, we are expecting total revenues for the year to be up between 2%-6%. By product category, the revenue growth is expected to be up 6%-10% for year-round products, driven by SSV with the shipment ramp-up of new products, partly offset by the transition year for Spyder, as we will focus on executing the Spyder plan and tightly managing our network inventory. Seasonal products are expected to be down 4% to flat as the continued strength with PWC is expected to be offset by lower shipment volumes for snowmobile as we will be working on reducing network inventory following a shorter riding season in North America due to weak snow conditions.
Propulsion system revenues are expected to be flat to up 5%, coming from the rollout of the Evinrude E-TEC G2, offset in part by reduced motorcycle engine deliveries. Parts is expected to be up between 4%-8%, driven by growth in ORV with a broad selection of accessories for the vehicles. Normalized EBITDA is expected to grow between 7%-10%. Depreciation is forecasted at CAD 150 million, financing cost at CAD 55 million, and the effective tax rate between 28%-29%. Accounting for these elements, our normalized net income is expected to grow between 7%-13%, resulting in a normalized diluted earnings per share between CAD 2.15-CAD 2.27 per share, up between 10%-16% from fiscal 2017.
The EPS is based on a share count we expect to be between 110.5 and 111 million shares following the completion of the normal course issuer bid for the coming year. Finally, CapEx is expected to be between CAD 215 million and CAD 230 million. Before I turn the call over to José, let's have a quick look at our expectation for normalized EBITDA generation throughout the year on slide 19. Once again, fiscal 2018 is expected to be quite back-half loaded with a normalized EBITDA split between the first and second half of the year, similar to what it was two years ago in fiscal 2016, with a stronger H1. Also, for the first half of fiscal 2018, we expect most of the growth compared to last year to be generated in the second quarter. With this, I will now turn the call back to José.
Thank you, Sébastien. Fiscal year 2017 was a record year for BRP. We achieved a record worldwide market share in snowmobile, watercraft, and off-road product. While not exceptional, our Can-Am Spyder and Evinrude outboard engine lineups were solid and still represent a good growth potential for the future. We've delivered on our objective for the year with the launch of several new exciting product, flawlessly executed our project, and generated exceptional momentum with our dealer network. All of this helped us deliver the best financial result in our history. I want to thank all of our employees for their hard work and commitment. Without them, this performance would not have been possible. Fiscal year 2018 promises to be just as exciting with an exceptional year of product introduction and multiple ongoing projects that are expected to deliver growth for BRP in the coming years.
We cannot conclude without commenting on the NAFTA situation. There are concerns about the intention of the U.S. administration towards the NAFTA renegotiation or the potential imposition of additional tariffs and border taxes. While many speculate that this could hurt our business, we remain optimistic. A strong U.S. economy would certainly benefit our industry, and we believe that this is what the new administration is striving for. This is a situation that is constantly evolving, and we are monitoring it very closely to be ready to act swiftly. We have in the past demonstrated our ability to react quickly to difficult market situations and geopolitical realities, and we will be ready to act should the situation change between the U.S., Mexico, and Canada.
To conclude, I firmly believe that our success is largely due to the quality of our team and the diversification of our product offering, geographic sales, and manufacturing footprint. I'm very proud of the BRP team for the excellence of their work, and I remain convinced that our focus on our strategic priorities of growth, agility, and lean enterprise is key to achieving our long-term objective and fiscal year 2018 guidance. On that note, I will turn the call over to the operator for questions.
Thank you. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. Dealer growth has been great, and I think an opportunity for Can-Am Defender was to start selling more lines into existing dealers. Can you comment on how many, or do you have any metrics on how many lines your dealers are taking now compared to, say, last year?
We don't have the metrics right off by hand, Gerrick, obviously, our strategy was to increase not only the number of dealers but the line count per dealers. A big push was done in the South and Southwest of the U.S. We've seen important growth there. One of the primary reasons why we're also seeing growth in the side-by-side retail is also carried by these new dealers that we've added. We could pull that data out for you if you-
I got some numbers, Gerrick. Good morning. I got some numbers. If I look at the addition of the dealers we've done so far, about 45% were in the West, about 32% in the East, and about 20% of those dealers are BRP only, and about two-third are between one and three OEMs.
Okay, one more for me, just on the currency and the impact on gross margin. It looked like a very big impact, and I know there's a lot of confusion out there based on different areas where you produce and where you sell. Can you kind of go through what the impacts were on the gross margin, how that occurred, and how much of it is, say, translation versus gains or losses in hedging, and just help us better understand the impact on gross margin? Thank you.
Yeah. Obviously, Q4 is always a big quarter for sales in the U.S. Last year, we had 53% of our revenues coming from the U.S. This year, we're at 51%. Obviously, our strategy has always been to hedge ourselves on a 12-month basis. When you see fluctuations in currencies like we saw this quarter, but also last year, Q4 also saw a lot of volatility on the FX. If you recall, the U.S. to Canada exchange rate last year was CAD 1.40. When we were shipping last year to the U.S., depleting some of our yard inventory, and we experienced that spike in the U.S., that provided a benefit to the bottom line last year. This year, it was a bit the opposite. Mind you, the currency swing was not as wide as last year, but the currency went down during the quarter.
As we shipped 51% of our revenues to the U.S., we didn't necessarily materialize the same type of lift that we got last year. Most of it is coming from not necessarily translation, but from transactional gains or in losses that you incur when you sell in the various markets. When you look at it in terms of impact on gross margin, and if I bridge you the gross margin versus last year, volume and mix brought a lift of about 140 basis points. We did invest a bit more in sales programs this quarter on snowmobile and also on Spyder for the non-current inventory that we had. That was a headwind of 60 basis points. Currency on a year-over-year basis, fourth quarter was a 90 basis point negative impact. As I mentioned earlier, our strategy has always been to hedge our exposures on an annual basis.
Obviously, we're a global company, and that's part of managing a global company, being exposed to currency movements. Historically, we haven't seen that impacting our ability to achieve guidance, even though we've seen some important swings in currency.
Great. Very thorough. Thank you, Sébastien.
Thank you. Our following question is from Steve Archer from RBC Capital Markets. Please go ahead.
Great. Thank you. Just a couple of follow-up questions. First on CapEx in the fiscal 2018 outlook. It looks like a higher number than we've seen for the last couple of years. Over the last couple of years, you've built some new facilities. Just curious of what's driving the investment higher in the coming year.
Good morning. Well, actually, a few things are driving the investment higher. If you recall last year, we announced important investments for our Quebec facility here in Valcourt, where we were going to modernize the plant. Most of the investments are going to be happening this year for that modernization. The team last year were busy preparing the plans, transitioning, let's say, to the new plant layout. We'll be hitting a lot of the investments this year. We're also increasing a bit for capacity. It's not increasing the square footage of our manufacturing footprint, but it's investing in supplier tooling and some of the manufacturing equipment. The big one, which carries a lot of the CapEx investments we do year-over-year, is our investments we make in product innovation. Last year was a busy year in product innovation.
You saw the great products we came out with. This year also is going to be an extremely busy year. We've made that commitment to the dealers, to our consumers as well, that we'll continue innovating. Fiscal year 2018 is going to be marked with a great year of innovation as well, but that requires CapEx in order to do that.
In a longer-term view, I know you're not going to get into any specifics, obviously, about 2018 or 2019, 2020, 2021 kind of thing, but if we look at longer term, once these facilities are done, any sense of what kind of level of CapEx is required for maintenance CapEx and for the product innovation?
I believe that we'll be continuing investing above CAD 200 million of CapEx. Yes, our plants are going to be modernized, there's always new innovations that require some investment in machining and in equipment that we'll need to invest. You know us, you've known us for four years now, where we won't stop with product introductions. We believe that's what's driving the consumer towards BRP. That's what's driving dealers towards BRP, we'll continue that pace.
Also, Steve, our industry, our discretionary, our product, our discretionary, we firmly believe that we always need to come out with new stuff to continue the growth. If we would be less aggressive on the growth, we could reduce the CapEx, we prefer to be aggressive and spend more CapEx.
Yeah. Don't disagree at all. Just trying to understand. That's great.
Yeah.
Just a different question. Looking at the snowmobile inventory being a little bit higher, in your 2018 outlook and the mix through the year, talking about lower program expectations. Is that really just a function of last year having higher sales programs to move some of the older models? What do you see as the risk that you might need to put in more programs this year, given the inventory levels?
Well, our guidance includes what we believe are adequate programs to move the inventory. Obviously, it's a situation we've seen in the past. This is not the first bad winter that we've ever had in North America, not the first time we have those level of inventories. Today, our guidance reflects what we believe is an appropriate level of programs. Again, the inventory is high, but it's manageable.
Right.
It's a few, let's say, a unit by dealers which need to be addressed, but it's not a disastrous situation.
Just one final one. All the new dealer additions, the almost 300 over the past few years and 70 this year. Just curious of some sense of how many of those might have been brand-new stores dedicated to BRP. I expect the vast majority of them were moving into existing dealerships. In that case, who were you displacing for floor space most frequently, and how have you seen that pattern evolve?
Yeah. Like I just said to Gerrick a few minutes ago, the statistic, and I got my notes close by. We have about 25% of BRP-only dealers. That's basically a store dedicated to our product out of the 289. About 65% are one to three other OEM. I would say, difficult to say if we're displacing any other OEMs. You know, like me, that there is some of our competitor that are weaker, and sometimes we're displacing them. Most of the time, Steve, it's add-on. The dealer will give us a portion of their showroom, and the add-on are aligned to their existing dealership.
Okay, thanks so much.
Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.
Yeah, good morning. I just wanted to ask about the year-round business. Obviously, you guys have had a lot of success with some of your key product introductions and the update of the new X3. I guess I just wanted to ask about your outlook for the balance of the year. You had a solid fiscal 2017 for growth in year round. The guidance implies further growth, and you kind of have filled out, for the most part, the white space that's been available in year round. How do you think about innovation, and what does that look like as we progress through this year and into next year?
Good morning, Mark. Let's start by Spyder. Spyder, like we said, it's a transition year. I think we have a good plan now with the learning of California and Florida, and that's why we're planning Spyder this year to be slightly below last year in term of wholesales. We're planning better retail, but we want to deplete the inventory. On the ATV front, the industry is, let's say, globally flattish, and we always gain some market share. We're planning about a low single-digit gain into a flattish industry. On the side-by-side business, we still have more to go. As you know, we've introduced the Maverick X3 MAX. There will be other announcement in the fall, and we're just starting. The Defender, we're still adding models into the utility segment. We have introduced the platform, but we are not in each subsegment of the industry.
Like the HD5 that started to ship in January. There is more Defender model to be introduced. In the sports side by side with the X3, we are in the two-seater. The four-seater is starting to ship in April, and this is about, we estimate about 40% of the industry. There is more variation of the X3 to come, and there is other segment in the side-by-side that we don't touch yet. I think, as you will see this year and as Seb has said a few minutes ago, it will be another year of many product announcement, and you can expect more from us in the side-by-side business. More white space to fill.
That's really helpful. Thank you. I just wanted to follow up on the manufacturing footprint, and wondering if you could just give us a sense of the overall impact on your margins that further efficiencies in Mexico will have, potentially offset by maybe some excess costs in Quebec. If you could just give us a sense of that, it'd be helpful.
Well, as you saw, our overall revenue guidance calls for an increase of 2%-6%. However, normalized EBITDA outpacing that guidance of 7%-10%. Most of that operating leverage is going to come from improving gross margins. I'm expecting operating expenses to be similar in terms of percentage to fiscal year 2017. Slight small increase in R&D, overall
flat in terms of overall percentage. The margin increase is going to come, obviously, by leveraging our footprint and pushing more volumes through that footprint. Obviously, the mix of products as well coming out is rich, and that's going to give a lift to the overall margin. We are indeed leveraging the footprint, but it's also coming through the modularity approach that we've explained to you guys in the past. Introducing products with better margins coming from better design and greater cost efficiency.
Okay. Thanks a lot.
Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.
Good morning. Thank you for taking my questions. I wanted to follow up on the promotional environment. How would you describe the competitive response, given your momentum in the side-by-side category?
Good morning, Craig. I would say that the competitive environment is higher than last year. There is more product introduction from all the OEMs, there is some competitive pressure there. The promotional activity, there is one OEM that has too much inventory that is discounting more than last year. At the end of the day, we believe we have competitive program. We're not the most aggressive out there, but we have competitive program. We have a very good marketing campaign, we've been to grow 70% in the side-by-side category in Q4. It's a mix of many things. The X3 shipment at the right time into the season. We continually gaining momentum in the Defender category, the utility category. There is more and more dealer engage, new dealers engage, behind the BRP lineup and giving us more space in their dealership.
It's a mix of all this that give us or permit us to achieve significant growth in the quarter despite a more competitive environment.
Thank you. What can you tell us about the demographic and socioeconomic profile of the customers who are buying the Maverick X3 and the Defender? Is this a new customer for you in any way?
The X3, no. The X3, it's the enthusiast consumer, we had many of those with the old Maverick. The X3, because of its spec, its performance, its look, attract more people, we're gaining big market share in that segment. On the Defender, it's a new customer, definitely. There is some cannibalization with the Commander, we gaining a lot of traction with the farmer, which never been a key segment for us. It takes more time because they are a new customer. They are a different customer. Many dealer will tell you that they need to deliver the unit to the farm and let him loan it for a few days to close the sales. It's a new customer. What we are very happy with is the fact that quarter after quarter, Defender is growing, we believe we have a good momentum.
It's definitely a new customer for us.
Thank you. Finally, José, what is your appetite for acquisitions at this point in your company's progress towards your 2020 vision?
Like we said, when we were in Juárez 2 for the analyst day, we believe we still have a few good years of growth within the six product line that we have by gaining market share, also on top of it, filling white space. We started to look what's next. Acquisition is part of our list. We are right now looking at different thing, there is no obvious thing, obviously, we cannot disclose anything at this point. We have the financial flexibility to either develop something else or acquire something.
Great. Thank you.
Thank you.
Thank you. Our following question is from Seth Woolf from North Coast Research. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. Congrats, good quarter. I wanted to start point of clarification. Did you say in the quarter, the side-by-side sales were up 70%? Is this 70, or was it 17?
70.
Cool. That's what I thought. Excellent. I guess, as we think about the retail demand going forward, clearly you cannot sustain that pace, but is there any way you can kind of contextualize what you're seeing in terms of pre-sales, pre-orders, deposits, and how long that may continue with the pent-up demand for both the X3 and now the X3 Max? Speaking of the X3 Max, one of the issues I think that dealers have talked about is products have been great, but maybe it takes a little while to ramp up production. Now that we're on the third significant new platform for side-by-sides, how would you characterize your ability to ramp production quickly?
Yeah. Let me first explain the 70%. Obviously, there is many moving piece here, difficult to weight each of them. We introduced X3 exactly at the right time for the Southwest market, where there is the peak of the season, and the product had been extremely well-received. One of our main competitor, the leader in the sports side-by-side industry, had difficulties. On top of it, we're still growing with the Defender every month. All of this combined end up with the 70% growth into the quarter. That being said, going forward, we introduced the four-seater. Production will be starting in April. The ramp-up will be very fast. April, May, some allocation. It's allocated. April, May production is on allocation. In June, we can open up the valve then, and the dealer know that.
We feel very confident with our side-by-side growth, in the coming years, because we will continue again to have more Defender model and more X3 models, to fill all those sub-segments. There is more to come this fall in the side-by-side business.
Okay. Thank you. That's very helpful. Just to follow up on an earlier point that was made about the competitive environment. It seems like kind of getting into the month of March specifically, I know you don't want to get too granular, have you seen anything with end market demand that has changed meaningfully given the fact that one of your major competitors has really intensified the promotions that are being offered both to dealers on the back end and in the form of rebates to consumers?
Are you speaking off-road here?
Off-road. Yes. I'm sorry.
To be honest, we don't see it yet. Obviously, we are in March, and we don't have industry data, and industry data for side-by-side are more difficult. For ATV, we have it the following 15th of the month. So far, we're happy with our momentum. We don't see a huge impact of those specific program. Obviously, it's a bit a transition period. February, March are months where there is a transition in the snow belt between the snowmobile season and between the spring, the off-road, and the watercraft season. So far, I would say we don't have any indication that things have changed drastically.
Okay. That's great. If I could sneak one more in just on the Spyder. When you look at the year-round products, you said that there's going to be a slight drag on sales due to the transition. I think you referred to it as a transition year with Spyder. I was wondering if you could quantify what impact that transition is going to have. Secondarily, could you remind us what your expectations for Spyder growth would've looked like if we were having this conversation a year ago?
Yeah. Obviously, when you look at the overall year-round products growth, you're looking at a 6%-10% growth for the product category. As José alluded to earlier in the call, most of the growth is going to be carried by side-by-side. Roadster, as he indicated, is going to be flattish, coming from, obviously, the focus that we have on, yes, increasing retail year-over-year, but that retail growth is going to come from depletion of inventory. We are still very optimistic about the Spyder business. That's why we've put in place Josée Perreault as Senior Vice President for Spyder. We've seen growth in that industry for the past four years. We've seen more players enter into the three-wheeled segment. Obviously, when you're creating a new industry, sometimes it takes more time to create that growth.
Best example of this is the side-by-side industry, which took several years before we saw the increase in growth that we've seen in the last five to six years. It's a very good business for us. As we've said, it's over CAD 300 million of revenue. It's our job to spark that industry, as we're the ones who've created that industry. That's what we're focused on. Obviously, we're not happy with a flattish revenue growth. Last year we were conservative as well when we were talking about our expectations for Spyder on a more short-term basis. We are still very much committed to this Spyder business. You'll see more news from us coming in the next years to make sure the right catalysts are there to grow it.
Okay. Thanks for the.
Yeah. Go ahead.
Dave, just going to say thanks for the clarification and the color on the year, and good luck, and congrats again.
Thank you.
Thank you. Our following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Hey, good morning, gentlemen, and congrats for the very strong results. Just to come back on the color on the CapEx expectation for fiscal 2018. Obviously, you mentioned that a good portion would be related to product innovation. Could you mention whether if it's all related to existing product lines?
Hi, good morning, Benoit. I'd love to give you a lot of detail. I know you like our products a lot, you will understand that for confidentiality reasons, I cannot go into that specificity. As usual, we'll continue to surprise the market with great product introductions. Stay tuned.
Okay, perfect. Just on the free cash flow side, Sébastien, obviously a pretty strong quarter. This was also partially driven by a positive contribution of about CAD 100 million, driven by working capital item. Just looking at fiscal 2018, obviously, you look to grow the revenue. How should we be thinking about the working capital variation under the free cash flow line?
We'll still be growing our business next year, as you saw through the guidance. When you're growing, that calls for investments in working capital. We're growing in North America, but we're also growing in international. Personal Watercraft has had good growth and it's going to continue to grow. Because Personal Watercraft is a counter-season product for most of the markets at international, that's why we need to do a bit of heavy lifting on the working cap. We'll continue to see some investments next year on working cap because of that transition year for international markets.
Could you quantify roughly what could be the range on the utilization on the usage?
Oh, you could be in the range of, let's say, between CAD 50 million and CAD 100 million of investment in working cap, Benoit.
Okay. That's pretty good. When we look at your balance sheet, obviously 1.2 debt EBITDA, also strong free cash flow prospect for the year. You've been talking about M&A, also potential new product lines. Obviously, very sensitive information. What could be the timing on that? Also, is there other cash deployment opportunities that it could be used?
Yeah. Obviously, as you said, a good cash flow generation last year. We're going to still continue to generate good cash flow next year. As we've been public for now four years almost, we've been a standalone company for a little over 14 years, our priority is always to maximize shareholder value. We do that, one, through investing a lot of CapEx and coming out with great products, winning market shares and increasing industries. We've also announced the renewal of the NCIB. Our intention is to buy back stock again this year. When I look at the overall P/E ratio, the EBITDA ratios of BRP versus the type of growth we're generating, obviously, I'm disappointed at the multiples that we're getting.
When we're going to look at deploying cash flow is how do we make sure we deliver that strong returns to shareholders. All the options are still out there. These are discussions we're having on a quarterly basis with the boards. For now, nothing is excluded to drive or to continue to drive shareholder value.
Okay. With respect to the SHOT system, 20 pounds seems a lot on a snowmobile. I'm just wondering what type of feedback you've received so far, and could we see the potential implementation of the SHOT system into other product lines, given the weight saving?
You know the stuff very well, Benoit. First, again, very word of mouth, because right now we are into the spring promotion sales for snowmobile, where dealer take pre-order from customers. What we're hearing, it's a higher ratio of customer is buying the SHOT system, which I truly believe it's a big customer benefit for deep snow rider because of the 20 pounds and the facility. You need to understand that SHOT was developed around the E-TEC technology, with very easy to start. To start an E-TEC engine, you need to turn the crankshaft only by one-third. I'm a bit specific here. That's why SHOT can be applied on E-TEC but would not be applicable on four-stroke. We'll expand it definitely on more snowmobile E-TEC engine. I would like, we cannot put it on four-stroke.
That's very good color. Okay. On the snowmobile side, you mentioned good color about the inventory level, obviously, and you're confident that you can reduce the inventory at the retail level in fiscal 2018. Just wondering, what is the % of the inventory increase that could potentially be driven by softer economy, as opposed to snow related?
On snowmobile, managing year-end inventory is very important. Last year, we finished the year very low in inventory. We believe about half of what two of our main competitor in the snowmobile industry had. That's why we've lost market share in the non-current, because they had many to sell early into the season. This year, our non-current inventory will be probably about twice of last year. Bigger number than last year, but manageable, like Sébastien explained.
The only way to reduce it is to have, let's say, attractive program for the consumer and to make sure we reduce shipment of model year 2018. That's why in our guidance, we affected the seasonal product guidance because we're planning to ship less snowmobile in fiscal year 2018 than in 2017, because we're planning first for an average winter, and we want to make sure to deplete that inventory.
Okay. You're basically also facing a tough compare versus last year.
On the snow, yeah.
Yeah. Okay, perfect. Last one for me. Can you make some comments about the transaction we saw with Arctic Cat and Textron? What are the key takeaways and how it could impact the landscape in your view?
No comments, Benoit. Textron is a good company. The question is what will be the focus for Arctic Cat and how they will be like, synergies will be created there. Too early to say, but too many I don't want to speculate on this.
Okay, perfect. Thank you very much for the time.
Thank you.
Thank you. Our following question is from Martin Landry from GMP Securities. Please go ahead.
Hi. Good morning. My question, just want to know if you could paint a picture of your end markets in terms of a geographic breakdown, to see a little bit what trends you're seeing domestically with Western Canada, also in the U.S. and internationally, that'd be very useful.
Yeah. Good morning, Martin. Russia, stable to what we had last year. Slight growth, continued growth in Western Europe, which is where we are quite strong. Brazil, flattish versus last year. Australia, growth, Mexico, quite a good growth in the off-road business. In Canada, if I look to Western, the market, I would say is flattish versus last year. It's significantly down versus what it was before the oil price reduction and the high situation. I would say right now it's flattish versus last year. In the oil state, it's, I would say, all over the place. When you look, there is six states that are dependent of oil. There is some that are up, there is some that are down. It's very difficult to follow the trend there.
Overall, if you look at the U.S. market, the situation is, I would say, stable, if you look at the U.S., I would comment the same for Canada when you look at the overall.
Okay, that's useful. Then what's the state of the U.S. customer right now? Are you seeing good traffic in the stores? Are you seeing an increase in credit usage? What are you seeing right now?
What we're hearing from dealers, the traffic is quite good. Many of our customer are enthusiastic about the U.S. administration. They believe the U.S. economy will be good going forward. They are confident about the economy overall. The traffic is quite good. One thing that is interesting, boat show traffic was up so far, if you accumulate all of this, by about 7%. Our number of leads at boat show is up significantly. There is a lot more. It seems that the traffic is a bit up 7%, but the number of people who are really interested and want to have follow-up with the dealer or with us, it's quite high. It feel quite good to be in the watercraft business, and the outboard business right now.
On the retail financing side, we're seeing approval rates in the range of 60%, similar to last year. The take rates on these are at 29%, which is flat versus a year ago. We're not seeing any modifications in the trends there.
Okay, that's helpful. Thank you very much.
Thank you, Martin.
Thank you. Our following question is from Tim Conder from Wells Fargo. Please go ahead.
Hey, good morning, gentlemen. This is actually John Trentini for Tim. Great execution on the quarter and with the new products. Just wanted to get a little more color on the promotional environment. It seems that promotional dollars were a bit more skewed towards the higher priced year-round products. Across your lineup, where are you seeing the greatest promotions on a percentage basis, and how do you expect this to change going forward? What are you seeing in terms of industry promotions?
Like I said before, on the side-by-side business, more competition because of a lot new product introduction, and some North American OEM are very heavy on discounting because they have too much inventory. On the ATV front, I would say that promotion are similar to last year. With the same type of promotion we had last year, we're continuing to outperform the industry. On snow this year overall, promotion was slightly lower than last year overall, and Watercraft is similar to last year so far. It's very early in the season, similar to last year, and same thing for Spyder.
Okay, great. What are your expectations for the overall promotional environment going forward?
It's tough to call. Obviously, we don't have full visibility as to what our competitors have in inventory. What usually drives the promotional activity is, are you stuck with non-current or units that are not moving or aged? That's going to influence the heightened level of promotions that they have, not as clean inventory. It's been an industry that's always been competitive. The ORV industry is an industry with a lot more non-current inventory that are retailed during a given season, we expect the momentum there to continue. On the seasonal side of the business, well, it depends on weather patterns and the level of inventory that is left at the end of a season. On PWC, we're not expecting any changes versus what we had last year as us and Yamaha have pretty clean inventory.
On snowmobile, as we said, we believe that it's going to be more intensive in terms of promotion because of the tough season we had and the other OEMs had. That's just part of the game, once the inventories are stabilized, it's going to come back to normal.
Okay, great. Just one more. It sounds like you guys are pretty comfortable on channel inventory levels apart from snowmobiles. Just looking forward, what are you sort of targeting on a year-over-year basis throughout the year?
Yeah. Obviously, given that we're going to be starting off the year with more snowmobile inventory, I'm expecting the first half of the year to have more inventory in the network than last year. You're probably looking at mid to high single digit. As the year progresses, we should be seeing some inventory reduction in the network. We're not in the double-digit inventory reduction. You're probably in the mid or more low single-digit inventory reduction. That's all dependent on how retail is going. PWC season is going to be a factor for the second half of the year, obviously snowmobile next year is also going to be a factor.
Okay, great. Thank you.
Thank you. The following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Thanks. Good morning. Just really a couple of quick questions from me. I just want to make sure I understand, I guess, the quarterly progression on EBITDA for what that's in your guidance. If I understand correctly, sort of expecting the Q1 to be maybe similar to last year, but Q2 is where you're going to see all of the H1 increase, I guess, relative to last year. Is that the right way to look at it?
That's fair. Yes. That's the right way to look at it.
Why is Q2 so much better than last year or previous years?
Well, we're going to be shipping some of the new products that we announced. The Maverick X3 MAX is going to be shipping in Q2. The demand for that product is good today, so we're expecting that to lift the second quarter. That's going to be the main driver. Obviously, PWC as well, there's probably going to be some carryover from Q1 into Q2. We're seeing a lift there. That would be the main elements.
Okay. Then maybe just secondly, just on the, I guess, the dealer expansion that it's largely complete at this point. I'm just wondering what the impact of kind of a slowdown on that front has on your overall cost. I assume there would be some costs associated with trying to sign up new dealers that maybe you're not going to have anymore. Is that fair?
No. There was some cost, but we will continue to invest, not on opening new dealers, but helping all those dealers to get better. First, there will be always some adjustment, ups and down in North America, but the focus will be to continue to make sure we're gaining traction in multi-line dealers, being more in their face, and on top of it, continue to help all the dealers that are below average to go to average.
Okay. No, that makes sense. That's all for me. Thanks very much.
Thanks, Cameron.
Thank you. Our last question is from Robin Farley from UBS Securities. Please go ahead.
Great. Thanks. Couple of quick questions. One is, with the 70% increase in side-by-side retail in Q4, where would you say your market share is for Q4? Just to try and get a sense that such a large increase, kind of where that puts you, just ballpark now.
Like we said, Robin, a few times, our market share in the sport side-by-side right now is about double to what it was before the introduction of the X3, but it's quite new. In Q4, we double our market share, but again, it's a quarter. On the side-by-side, on the Defender side, it's a constant increase month or quarter after quarter on the market share increase. In the sport side-by-side, when you come with the right product, you have a spark. A customer knows about it, and they buy right away. In the utility, it takes more time. What I like about the trend is the trend on the Defender is month after month, we see increase.
Like we said, when we started the new side-by-side program, a new side-by-side every six months for the next four years, we said that we intended to double our market share in the midterm. We are halfway there right now, and I believe it's very realistic that we will double our market share in the midterm. We're in the range of 10% globally, the goal is still to become the strong number two in the side-by-side business, we're going there.
I'm sorry, just to understand, if you were saying your goal is to double the market share and you're halfway there now, is that fair to say 15% globally is your market share right now?
Well, we don't disclose market share, Robin. As José said, our objective is to become a solid number two player. It's not something which it's going to happen overnight. We've got great results in Q4. We're making sure that we sustain that market share growth quarter after quarter. We prefer not to comment market shares.
Sure. Let me ask it this way, because I guess all I was trying to clarify was the comment that you did say about the 10% global market share. That was the starting point for your-
Yeah.
-side-by-side market share goal.
Yeah.
Okay. No, great. I just wanted to clarify that. Thanks. I'm curious, your parts and accessories growth was not up as much as your year-round or seasonal product growth. I'm just wondering if there's anything to sort of understand about that.
Nothing too specific to understand. Obviously, our parts business, a lot of it or a significant part of it comes from the snowmobile industry. Given that the riding season was short last year and this year, obviously that impacted demand for parts accessories during Q4, and that's why the growth hasn't necessarily been at the pace it was versus the units.
Okay, great. Just my final question. Do you have a dealer growth target for the year ahead? I know it sounds like you've hit the target you set out, kind of your three-year goal. Just wondering if there's a one-year or two-year target now from here forward.
No. As José mentioned, we're comfortable with the number of dealers we have today. The objective is leveraging that dealer base and making them more and more performant. That's where the focus is going to be, and that we're going to be working with our dealers to bring in more tools, better tools, in order to make them more efficient at selling BRP products.
Okay, great. Thank you very much.
Thank you.
Thank you.
Thank you. Back to you, Mr. Deschênes.
Thank you, Maude. Thanks, everyone, for your time this morning and for your interest in BRP. We look forward to speaking with you again for our first quarter of fiscal 2018 results on June 1st. Thanks again, everyone, and have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.