Morning, ladies and gentlemen. Welcome to the BRP Inc. FY 2017 Fourth Quarter and Year End Results Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschenes.
Please go ahead, Mr. Deschenes.
Thank you, Maude. Good morning, and welcome to BRP's conference call for the Q4 and year end results for fiscal 2017. Joining me on the call this morning are Jose Boisjeli, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD and A for listing of these.
Also during the call, reference will be made to supporting slides and you can find the presentation on our website at brp.com under the Investor Relations section. So with that, I'll turn the
call over to Jose. Thank you, Philippe. Good morning, everyone, and thank you for joining us. 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 the watercraft to 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 ETV and reaching the highest market share we ever had in these two industries. We were relentless with product introduction, delivering multiple market shipping product that were extremely well received by the media and our consumer. Our manufacturing team raised their game and rapidly brought this 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 and 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 our Q4 and the full year in the company history. Let's have a look at the number with the financial highlights of the year on Slide 4. We ended the year at the higher end of our guidance with revenue growing 9% to $4,200,000,000 normalized EBITDA also growing 9% to reach $503,000,000 and a normalized diluted earnings per share of $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 product and fast production ramp up.
We notably had a strong 14% growth in year round product revenues, driven by the 1st full year of the Can Am Defender Utility side by side and the introduction of the Mavic X3 Sport side by side. We also registered an 8% growth in seasonal product revenues, driven by our new Sea Doo model with the 200 horsepower Rotax engine and the new Ski Doo platform with the Rotax 850 eTech engine. These new products were also very successful with our consumer as our retail sales for seasonal and year round product were up 13% in the quarter. If we exclude snowmobile, where growth was limited by weak snow condition, our retail sales were up 27%. Retail was good across our lineup.
We continued market share gain in Kaname TV, a very good boat show season for performance with the new Ski Doo platform. But 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 Mavriq 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. But first, let me go over our key strategic priorities on Slide 5. 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 introduction, representing solid growth potential going forward. We continue to build the Can Am brand notably through an industry leading digital media program, the association with well known ambassador 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 product is strong and the engagement of our dealer is exceptional. And in terms of agility and in enterprise, we demonstrated our manufacturing excellence and our agility with a rapid yet smooth production ramp up at the Juarez 2 facility. And we continue deploying our modular approach with new product I am pleased with the execution of our team on our different project 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 powers for dealers in fiscal year 2017, well ahead of our target of signing 45 to 55.
This brings 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 achieved our new dealer signing objective and we significantly improved our network coverage over the last 4 years, notably increasing the number of side by side and spider dealers by 33%. At this point, we are satisfied with the number of dealer we have in our network. Going forward, we may have 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 7. 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 terms of retail, our off road business is performing very well. For ATV, the industry decline has slowed in the past few months. And now 7 months into the season, industry retail sales are down mid single digit.
Can Am ATV continued 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 Ami TV 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 4th quarter. The Cannon 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 2 seat model is performing very well and we are excited to see our latest introduction, the 4 seat Mavic Xtreme Max. And this is our 4th new side by side model introduction in the last 2 years and 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 Mavriq X3 and our commitment to introduce a new side by side every 6 months until 2020, things look promising for fiscal year 2018 beyond. Now looking at Spider.
Early in the season, we are in the slow period of the Spider retail season. So far, the North American Motorcycle Industry is up low single digit, while Spider is down high single digit. I would like to remind you that 10 years ago, when we've launched the Spider vehicle, the three wheel industry was virtually non existent. Today, we estimate this business to be 30,000 units in North America with a CAGR of 10% since fiscal year 2015. We also estimate an additional 10,000 units in the used market, which means we went from virtually 0 to a 40,000 unit industry in 10 years.
That being said, last season was disappointing for Spider, but it was also a good learning experience. With this in mind, Jose Perro, our new Senior Vice President for Spider 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 8. If you remember last year, we undertook specific initiative in 2 states, 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 Spider.
Many dealer do not leverage local riding communities. The riding school are not organized for 3 wheel license requirement, making it more difficult for certain consumers and demo rides are difficult to organize due in part to the licensing requirement. Our key priorities for season 17 will be to deploy dedicated teams to key U. S. States that will implement local initiative, remove 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 Spider Communities on and offline.
As we will focus on developing these initiatives to more state and managing our network inventory, fiscal year 2018 will be a transition year for Spider, 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 models of new model year 2018 Lynx snowmobiles and the celebration of the 50th anniversary of this storied brand. We introduced several model with the new Linx Radian platform equivalent to the Ski Doo Rev Gen 4 platform, which were very well received by consumer, particularly the Lynx Boondocker DS, which is unique suspension and rear tunnel to maximize deep snowflatability. Few brands in Finland can boast 50 years of market leadership.
We are very proud of what we have accomplished with the Linx 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 2nd year in a row. And as such, then 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 Skidoo and Link 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 highlight were the deployment of the new platform to more than half of our Ski Doo lineup and its introduction on certain Lynx models. And on both product lines, we introduced the new SHUT system, an ultra lightweight engine starting system that is nearly 20 pound lighter than conventional electric starters, which should be very popular with deep snow riders.
Despite operating in difficult industry condition for 2 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 unit 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 Trix. Now turning to Propulsion Systems on Slide 11.
Revenues for Propulsion Systems increased 13%, primarily driven by a higher volume of motorcycle engine sold to OEMs and a favorable mix to our outboard engine as our volume is now shifting toward new Etech G2 models. Looking at outboard engine industry, 7 months into the season, the industry is up mid single digit. For the same period, Even Road 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 had 44 new boat OEMs and 170 3 new dealers since the introduction of Etech's 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.
And now let's look at parts, accessories and clothing on Slide 12. Revenue were up 4% in the quarter driven by strong side by side pack sales following the introduction of the Can Am Mavic Xtreme and its solid lineup of accessories including those co branded with several aftermarket leaders. As you know, the shorter riding season in the last 2 years has impacted our sales of wearable parts for snowmobile, but this negative impact has been partially offset by the strength 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 2018 snowmobile lineups. And with that, I will turn the call over to Sebastien and will return for closing remarks.
Thank you, Jose, and good morning, everyone. Revenues for the Q4 of fiscal 2017 were up 18% reaching $1,305,000,000 a record quarter at DRP. The increase in revenues was primarily driven by the production and shipment ramp up of our new products notably the new Ski Doo platform and the Can Am Maverick X3 driving solid growth in seasonal and year round products in the Q4. However, foreign exchange rate variations had a negative impact of $48,000,000 on our revenues offsetting revenue growth by about 4%. Gross profit ended at $336,000,000 resulting in a gross profit margin of 25.7 percent, about flat compared to last year's Q4.
Normalized EBITDA came in at $204,000,000 up 17% from last year and normalized diluted EPS was $1 up 33 percent from last year. We generated $253,000,000 of free cash flow in the quarter and we ended the year with $299,000,000 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% and normalized diluted earnings per share ending at $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 ship 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. So 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. Finally, revenues from the United States 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 and spider 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 $25,000,000 compared to last year's Q4, driven by a favorable impact from volume, mix, pricing and sales program for $71,000,000 which was partly offset by a few elements: Higher production costs and operating expenses for $14,000,000 driven by our investments in new factories, R and D and sales and marketing to support growth, a net negative impact of $7,000,000 coming from income tax expense and financing costs and unfavorable foreign exchange rate variations for 25 $1,000,000,000 Now to Slide 17 for a look at our North American powersport dealer inventory. Our network inventory was up 13% from last year's Q4. 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 have 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. And 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. So 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% to 10% for year round products driven by SSV with the shipment ramp up of new products, partly offset by the transition year for Spider as we will focus on executing the Spider 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 Etech G2 Austin and Park by reduced motorcycle engine Normalized EBITDA is expected to grow between 7% 10%.
Depreciation is forecasted at 150,000,000 dollars financing cost at 55,000,000 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 $2.15 $2.27 per share, up between 10% 16% from fiscal 2017. The EPS is based on a share count we expect to be will be between 110,500,000 and 111,000,000 shares following the completion of the normal course issuer bid for the coming year. Finally, CapEx is expected to be between $230,000,000 Before I turn the call over to Jose, 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 2 years ago in fiscal 2016 with a stronger H1.
Also for the first half of fiscal twenty eighteen, we expect most of the growth compared to last year to be generated in the Q2. With this, I will now turn the call back to Jose.
Thank you, Sebastien. Fiscal year 2017 was a record year for BRP. We achieved record worldwide market share in snowmobile, watercraft and off road product. While not exceptional, our Can Am Spyder and Evenro Dot Board 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 products, 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.
They are concerned 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 fluctuations 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. And on that note, I will turn the call over to the operator for questions.
Thank Our Our first question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. So dealer growth has been great and I think an opportunity for Defender was to start selling more lines into existing dealers. So 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?
I don't we don't have our metrics write off by hand, Garik, but obviously our strategy was to increase not only the number of dealers, but the line count per dealers. The big push was done in the south and southwest of the U. S. And we've seen important growth there. And 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.
But we could pull that data out for the Q2.
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 2 thirds are between 1 3 OEMs.
Okay. And 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 there based on different areas where you produce and where you sell. So 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.
Yes. Obviously, Q4 is always a big quarter for sales in the U. S. Last year, we had 53% of revenues coming from the U. S.
This year, we're at 51%. And obviously, our strategy has always been to hedge ourselves on a 12 month basis. But when you see fluctuations in currencies like we saw this quarter, but also last year Q4 also saw a lot of volatility on FX. If you recall, the U. S.
To Canada exchange rate last year was $1.40 So when we were shipping last year to the U. S, depleting some of our yard inventory, and we experienced that spike in 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 weren't we didn't necessarily materialize the same type of lift that we got last year. So most of it is coming from not necessarily translation, but from transactional gains or 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 Spider for the non current inventory that we had.
That was a headwind of 60 basis points. And currency on a year over year basis, Q4 was a 90 basis point negative impact. And 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. But 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, Sebastian.
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, looks like a higher number than we've seen for the last couple of years. And over the last couple of years, you've built some new facilities.
So just curious of what's driving the investment higher in the coming year?
Yes. 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.
So the team last year were busy preparing the plans, transitioning, let's say to the new plant layout. So 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. But the big one which carries a lot of the CapEx investments we do year over year is our investments we do 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 commitments to the dealers, to our consumers as well that we'll continue innovating. And 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, 2019 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 to for maintenance CapEx and for the product innovation?
I believe that we'll be continuing investing above $200,000,000 of CapEx. There's always, yes, our plants are going to be modernized, but there's always new innovations that require some investments in machining and equipment that we'll need to invest. And you know us, you've known us for 4 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 and we'll continue that pace.
Steve,
are discretionary and 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, but we prefer to be aggressive and spend more CapEx.
Don't disagree at all. Just trying to understand. That's great. Looking at the just a different question. Looking at the snowmobile inventory being a little bit higher, but 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?
And 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 and not the first time we have those level of inventories. And so today, our guidance reflects what we believe is an appropriate level of programs. Again, the inventory is high, but it's manageable.
And 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. And in that case, who were you displacing for floor space most frequently? And how have you seen that pattern evolve?
Yes. Like I just said to Gerrick a few minutes ago, the statistic and I got my notes close by, we have about 25 percent of BRP only dealers. That's basically a store dedicated to our product out of the 289. Percent. And about 65% are 1 to 3 other OEM.
And I would say, difficult to say if we're displacing any other OEMs. You know like me that there is some of our competitors that are weaker and sometimes we're displacing them. But most of the time, Steve, it's had on. The dealer will give us a portion of their showroom and they had on our line to their existing dealership.
Our following question is from Mark Petrie from CIBC.
Hey, good morning. I just wanted to ask about the year round business. And obviously, you guys are have had a lot of success with some of your key product introductions and the update of the new X3. And 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. So how do you think about innovation? And what does that look like as we progress through this year and into next year?
Yes. Good morning, Mark. Let's start by Spider. Spider, 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 Spider this year 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 low single digit gain into a flattish industry. But on the side by side business, we still have more to go. As you know, we will introduce we've introduced the Mavriq Extreme 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 a platform, but we are not in each sub segment of the industry like HD 5 that started to ship in January. Then there is more Defender model to be introduced. In the sport side by side with these 3, we are in the 2 seater.
The 4 seater is starting to ship in April and this is about we estimate about 40% of the industry. There is more variation of these 3 to come. And there is other segment in the side by side that we don't touch yet. Then I think as you will see this year and as Seb has said a few minutes ago, it will be another year of many, many product announcement and you can expect more from us in the side by side business, more wide space to fill.
Okay. That's really helpful. Thank you. And then I just wanted to follow-up on the manufacturing footprint. I'm 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.
Just if you could just give us a sense of that would be helpful.
Yes. Well, as you saw, our overall revenue guidance calls for an increase of 2% to 6% and however normalized EBITDA outpacing that guidance of 7% to 10%. And most of that operating leverage is going to come from improving gross margins. We're expecting I'm expecting operating expenses to be similar in terms of percentage to fiscal year 2017, slight small increase in R and D, but overall flat in terms of overall percentage. Therefore, 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 margins. So 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 and 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?
Yes. Good morning, Craig. I would say that the competitive environment is higher than last year. Obviously, there is more product introduction from all the OEMs than 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.
But at the end of the day, we have we believe we have competitive program. We're not the most aggressive out there, but we have competitive program. We have very good marketing campaign. And we've been to grow 70% in the side by side category in Q4. Obviously, it's a mix of many things.
The X3 shipment at the right time into the season. We're continually gaining momentum of the in the Defender category, the Utility category. Plus there is more and more dealer engage new dealers engage behind the BRP lineup and giving us more space in their dealership. Then 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. And then, 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 and we had many of those with the old Maverick. Obviously, the X3 because of its spec, its performance and its look attract more people and we're gaining big share big market share in that segment. On the Defender, it's a new customer. Definitely, there is some cannibalization with the Commander, but we're gaining a lot of traction because they are new customer, they are different customer.
Many dealers would tell you that they are because they are new customer, they are different customer. Many dealers would tell you that they need to deliver the unit to the farm and let them run let it loan it for a few days to close the sales. It's a new customer. What is what I'm what we are very happy with is the fact that quarter after quarter Defender is growing and we believe we have a good momentum. But it's definitely a new customer for us.
Thank you. And finally, Jose, what is your appetite for acquisitions at this point in your company's progress towards your 2020 vision?
I mean, like we said, when we were in URS 2 for the Analyst Day, we believe we still have a few good years of growth within the 6 product line that we have by gaining market share, but also on top of it filling white space. And we started to look what's next. And acquisition is part of our list. We are right now looking at different thing, but there is no obvious thing. And obviously, we cannot disclose anything at this point, but we have the financial flexibility to either develop something else or acquire something.
Great. Thank you.
Thank you.
Thank you. The following question is from Seth Wolf from Northcoast Research. Please go ahead.
Good morning, gentlemen. Thanks for taking my question. Congrats, good quarter. I just I wanted to start point of clarification, did you say in the quarter the side by side sales were up 70%? Is it 70% or was it 17%?
7 0.
Cool. That's what I thought. Excellent. And then 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 presales, preorders, deposits and how long that may continue with the pent up demand for both the X3 and then now the X3 Max.
And then 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 production. So now that we're on the 3rd significant new platform for side by sides, how would you characterize your ability to ramp production quickly?
Yes. Let me first explain the 70%. Obviously, there is many, many moving piece here, difficult to weight each of them. But we introduced X3 exactly at the right time for the Southwest market, where there is the peak of the season and the product have been extremely well received. The one of our main competitor, the leader in the sports side by side industry had difficult days.
And on top of it, we're still growing with the Defender every month. Then all of this combined end up with the 70, 70 growth into the quarter. That being said, going forward, we introduced the 4 seater in production will be starting in April. The ramp up will be very, very fast. April, May some allocation it's allocated April, May production is on allocation.
But in June, we can open up the valve then and the dealer know that. Then we feel very, very confident with our side by side growth in the coming years, because we will continue again to have more Defender model and more Extreme models to fill all those sub segments and there is more to come this fall in the side by side
business. Okay. Thank you. That's very helpful. And then just to kind of follow-up on an earlier point that was made about the competitive environment.
It seems like just kind of getting into the month of March specifically, and I know you don't want to get too granular, but 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 then any on the form of rebates to consumers.
Are you speaking off road here?
Off road, yes. I'm sorry.
Yes. 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 15 of the month. Then so far, I mean, we're happy with our momentum.
We don't see huge impact of those specific program. Obviously, it's a bit a transition period. February, March are months where there is in the snowmobile season and between the spring, the off road and the watercraft season. But so far, I would say we don't have any indication that things have changed drastically.
Okay. That's great. And if I could sneak one more in just on the Spider. 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 Spider.
I was wondering if you could quantify what impact that transition is going to have? And then secondarily, could you remind us what your expectations for Spider growth would have looked like if we were having this conversation a year ago?
Yes. Obviously, when you look at the overall year round products growth, you're looking at a 6% to 10% growth for the product category. As Jose 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 is going to come from the depletion. That retail growth is going to come from depletion of inventory.
We are still very optimistic about the Spider business and that's why we've put in place, Diego as Senior VP for Spider. We've seen growth in that industry for the past 4 years. We've seen more players enter into the 3 wheeled segment. And obviously, when you're creating a new industry, it's sometimes it takes more time to create that growth. And 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 5 to 6 years.
So it's a very good business for us. As we've said, it's over $300,000,000 of revenue. And it's our job to spark that industry as we're the ones who've created that industry and 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 Spider on a more short term basis.
But we are still very much committed to this Spider business and you'll see more news from us coming in the next years to make sure the right catalysts are there to grow it.
Okay. Do I know
Yes. Go ahead. Dave, just going to say thanks for the clarification and the color on the year and good luck in 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. So could you mention whether it's if it's all related to existing product lines?
Hi. Good morning, Benoit. Obviously, I'd love to give you a lot of detail. I know you like our products a lot, but you will understand that for confidentiality reasons, I cannot go into that specificity. But as usual, we'll continue to surprise the market with great product introductions.
So stay tuned.
Okay. Perfect. And just on the free cash flow side, Sebastien, obviously, a pretty strong quarter, but this was also partially driven by a positive contribution of about $100,000,000 driven by working capital item. So just looking at fiscal 2018, obviously, you look to grow the revenue. So how should we be thinking about the working capital variation under the free cash flow line?
Yes. We will still be growing our business next year as you saw through the guidance. And when you're growing, that calls for investments in working capital. And we're growing in North America, but we're also growing in international. Personal watercraft has had good growth and is going to continue to grow.
And because personal watercraft is a counter seasoned product for most of the markets and international, that's why we need to do a bit of heavy lifting on the working cap. And 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?
You could be in the range of, let's say, between $50,000,000 $100,000,000 of investment in working cap, Benoit.
Okay. Okay. That's pretty good. And when we look at your balance sheet, obviously, 1.2 percent debt to EBITDA, also strong free cash flow prospect for the year. You've been talking about M and A and also potential new product lines.
Obviously, very sensitive information, but what could be the timing on that and also is there other cash deployment opportunities that it could be used?
Yes. Obviously, as you said, a good cash flow generation last year, we're going still continue to generate good cash flow next year. And as we've been public for now 4 years almost, we've been a standalone company for a little over 14 years. And our priority is always to maximize shareholder value. We do that, 1, through investing a lot of CapEx and coming out with great products and winning market shares and increasing industries.
As you we've also announced renewal of the NCIB. So our intention is to buy back stock again this year. When I look at the overall PE 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. And so when we're going to look at deploying cash flow is how do we make sure we deliver that strong returns to shareholders. So all the options are still out there.
These are discussions we're having on a quarterly basis with the boards. And for now, nothing is excluded to drive or to continue to drive shareholder value.
Okay. And with respect to the shot system, £20 seems a lot on the snowmobile. So 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, very word-of-mouth because right now we are into the spring promotion sales for snowmobile, where dealer take preorder from customers. And what we're hearing is a high 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 and the facility. Now you need to understand that SHOT was developed around the Etech technology with very easy to start. To start an Etech engine, you need to turn the crankshaft only by 1 third.
I'm a bit specific here. And that's why shut can be applied on Etech, but would not be applicable on 4th stroke. Then we'll expand it definitely on more snowmobile e tech engine, but you cannot I would like, but we cannot put it on 4 stroke.
That's very, very good color. Okay. And on the snowmobile side, you mentioned good color about the inventory level, obviously, and your confidence that you can reduce the inventory at the retail level in fiscal 2018. But just wondering what is the percentage of the inventory increase that could potentially be driven by software economy as opposed to snow related?
We on snowmobile, managing year end inventory is very important. Last year, we finished the year very, very low in inventory. We believe about half of what 2 of our main competitor in the snowmobile industry had. And that's why we've lost market share in the non current because they had many to sell into the early into the season. This year, our noncurrent inventory will be probably about twice of last year, bigger number than last year, but manageable like Sebastien explained.
And the only way to reduce it is to have, let's say, to have programs, attractive program for the consumer and to make sure we reduce shipment of model year 2018. Then That's why in our guidance, we affected the seasonal product guidance, because we're planning to ship less snowmobile fiscal year 2018 than in 2017 because we want to make we're planning first for an average winter and want to make sure to deplete that inventory.
Okay. Okay. So you're basically also facing a tough compare versus last year?
On the snow, yes.
Yes. Okay, perfect. Perfect. And 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. I mean, Textron is a good company. The question is what will be the focus for Articat 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 brush 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.
Yes. 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 and 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 in the HAG situation. But 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 some state there is 6 states that are dependent of oil. There is some that are up. There is some that are down. It's very, very difficult to follow the trend there. But overall, if you look at the U.
S. Market, the market are the situation is, I would say, stable if you look at the U. S. And I would comment the same for Canada when you look at the overall.
Okay. That's useful. And 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. Our customers, they are many of our customer are enthusiasts about the U. S. Administration and they believe the U. S.
Economy will be good going forward and they are confident about the economy overall and 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%, but 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. Then it feels quite good to be in the watercraft business and the outboard business right now.
And on the retail financing side, we're seeing approval rates in the range of 60%, similar to last year and the take rates on these are in the at 29%, which is flat versus a year ago. So 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 Mark Terenti on for Tim. It seems that promotional dollars were a bit more skewed towards the higher price year round products. But across your lineup, where are you seeing the greatest promotions on a percentage basis? And how do you expect this to change going forward?
And what are you seeing in terms of industry promotions?
Yes. Like I said before, on the side by side business, more competition because of a lot new product introduction And some OEMs, some North America OEMs 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. And 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 Spider.
Okay, great. And then what are your expectations for the overall promotional environment going forward?
Well, it's tough to call. Obviously, we don't have full visibility as to what our competitors have inventory. And what usually drives the promotional activity is, are you stuck with noncurrents or units that are not moving or aged? And 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 than our retail during a given season. And so we expect the momentum there to continue. And 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 the season. So on PWC, we're not expecting any changes versus what we had last year as us and Yamaha have at least pretty clean inventory. And 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.
But that's just part of the game. And once the inventories are stabilized, then it's going to come back to normal.
Okay, great. And then 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?
Yes. Obviously given that we're going to be starting off with the year with more snowmobile inventory, I'm expecting to 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. And as the year progresses, we should be seeing some inventory reduction in the network, but we're not in the high we're not in the double digit inventory reduction. You're probably in the mid or more low single digit inventory reduction.
But that's all dependent on how retail is going. PWC season is going to be a factor for the second half of the year and 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 for me. I just want to make sure I understand, I guess, the quarterly progression on EBITDA for 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.
And 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 MAX X3 is going to be shipping in Q2. And the demand for that product is good today. So we're expecting that to lift the 2nd quarter. And that's going to be the main driver.
Obviously, PWC as well, there's probably going to be some carryover from Q1 into Q2. So we're seeing a lift there. So that would be the main elements.
Okay. And then maybe just secondly, just on the I guess the dealer expansion that it's I guess largely complete at this point. I'm just wondering what the impact of kind of a slowdown on that front has on your overall costs. 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. We will I mean, there was some costs, but we will continue to invest not on opening new dealers, but helping all those dealers to get better. Then we're shifting the first, we will 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 multiline dealers being more in their face and on top of it continue to have all the dealers that are below average to go to average.
Okay. That makes sense. That's all for me. Thanks very much.
Thanks, Cameron.
Thank you. Our last question is from Robin Farney from UBS Securities. Please go ahead.
Great, thanks. A 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? And I know it's just I was just trying to get a sense of 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 sports 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 doubled our market share and 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. And it's 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. But what I like about the trend is the trend on the Defender is month after month we see increase then. And like we said, when we started the new side by side program, a new side by side every 6 months for the next 4 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 mid term.
We were in the range of 10% globally and the goal is still to become the strong number 2 in the side by side business and we're going there.
And I'm sorry, so just to understand if you were saying your goal is to double the market share and you're halfway there now. So is that fair to say 15 percent globally is your market share right now?
Well, we don't disclose market share, Robin. And as Jose said, our objective is to become a solid number 2 player. It's not something which is 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, but we prefer not to comment market shares.
Sure. So just to 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 side by side market. Okay, great. I just wanted to clarify that. And then, I'm just 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. And given that the riding season was shorter last year and this year, obviously, that impacted demand for our parts accessories during Q4. And that's why the growth hasn't necessarily been at the pace that it was versus the units.
Okay, great. And then just my final think there's a 1 year or 2 year target now from here forward?
No. As Jose mentioned, we're comfortable with the number of dealers we have today. Now the objective is leveraging that dealer base and making them more and more performant. And that's where the focus is going to be, and 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. Deschenes.
Thank you, Mao. And thanks everyone for your time this morning and for your interest in BRP. We look forward speaking with you again for our Q1 of fiscal 2018 results on June 1. Thanks again everyone and have a good day.
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