Morning, ladies and gentlemen. Welcome to the BRP Inc. FY 2017 Second Quarter 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 2nd quarter conference call for fiscal 2017. Joining me on the call this morning are Jose Borgeli, President and Chief Executive Officer and Sebastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD and A for listing of these.
Also during the call, reference will be made to supporting slides and you can find the presentation on our Web site atbrp.com under the Investor Relations section. So with that, I'll turn
the call over to Jose.
Thank you, Philippe. Good morning, everyone, and thanks for joining us. As you know, Q2 has always been the smallest quarter of the year in term of financial results for BRP and this year was no different. However, the last few months have been big in term of progress for the company. We have been relentless in our pursuit of offering to consumer the best product in the industry with the introduction of several exciting and game changing new model at our 2 clubs this summer.
And we have been flawless in our execution and we demonstrated our agility as we have rapidly started the production as per plan. We have also made some important changes that will help us deliver our long term objective. We announced early in the summer the renewal of an extension of our credit facility that will provide us with the financial flexibility to seize opportunities and deliver our plan, while maintaining very favorable terms. We also recently announced changes in our marketing structure and have filed the position with excellent internal candidates who have shown a high level of commitment over the years, have a strong knowledge of the power support industry and have demonstrated their capacity to take on new challenges. We have promoted Sande Scullion as Head of our Global Sales and Consumer Experience division.
Sandeep has over 20 years of experience with BRT and has most recently been in charge of our Western Europe, Middle East and Africa division, which has been performing extremely well under its leadership. We also took the opportunity to announce a new organizational structure for the management of our activity in Europe, where we decided to merge Scandinavia and Eastern Europe with Western Europe, Middle East and Africa. This structure is intended to strengthen BRP present throughout the entire European region and take advantage of synergies arising from the consolidation of activities. Steve Pelci, former Vice President of Finance and who led the Global Sales and Consumer Experience division on an interim basis, become our Vice President and General Manager of the New Europe, Middle East and Africa region. And Thomas Heur, Vice President and General Manager, BRP Rotax, will now oversee all manufacturing and engineering operation for Europe, including LYNX snowmobile production in Rovaniemi, Finland.
I am proud of how our team has stepped up and delivered last year, and I'm confident that we have the right people in place to achieve our objective. Now let's have a look at financial performance for the quarter on Slide 4. As we mentioned during the Q1 call, the industry is still going to a difficult time, but we remain disciplined and have continued delivering on our plan to end the Q2 broadly in line with our expectation. Our quarterly revenue grew by 5% to reach $856,000,000 driven by the introduction of the Defender, the strong momentum we have with our Can Ami TV ETV business the strong retail season of SEDAR Worldwide, which reduced our sales program cost and favorable foreign exchange variation. The quarterly normalized EBITDA was down $9,000,000 to $44,000,000 For the first half of the year, the normalized EBITDA stands at $102,000,000 tracking in line with our expectations split between the first and second half of the year as we provided to you last quarter.
The normalized diluted earnings per share for the quarter was 0 point 0 $1 Looking at retail, our powersport retail for the quarter was up 4% compared to an industry that we estimate was down low single digit. Our retail growth was driven by the strong momentum we have with our Can Am Off Road product and by another very good season for personal watercraft. However, this growth was partially offset by a difficult quarter for Spider, which saw retail slowdown in the quarter like the motorcycle industry as a whole. I will give you more color on retail trend in just a moment. But for now, let's go on Slide 5 for an overview of our most recent club that we held last month in Orlando.
Once again, this year, we had strong showing from all over the world at the clubs with over 1,000 participants in Milwaukee at Club Ivenrud and over 2,300 participants at Club C Du Can Am in Florida. In both case, our new product were very well received. We added fun, affordability, power and fuel efficient to our Sidu lineup, which trend in our offering and help us maintain our market leadership. The highlight of our Sidu introduction is the Spark Tricks, which allow rider to do tricks like pros with ease. On the Spider side, we have reconfigured the base version of the Spider F3, allowing us to redo the MSRP $16,999 in the U.
S. We have also introduced the new Spider F3 Limited, the ultimate cruiser version of the Spider F3, which feature a removable top case with integrated passenger backrest that has enough storage for the 2 full face helmets. Another important announcement is the renewal of the Can Am NASCAR sponsorship, which brought us great exposure so far and we are pleased to continue this association for another 2 years. But the biggest news of the club was certainly the introduction of the Can Am Maverick X3. It is setting the standard in performance side by side with more power, more suspension travel and better handling than any other sports side by side in the industry.
The reach of the Maverick X3 is also unprecedented. We started off with a teaser campaign, which generated over 1,000,000 views and we made sure to reach a vast sports audience by having well known ambassador Ken Block and BJ Borrowing on stage with us to launch the product. They both have an incredible Internet following with multiple videos counting 1,000,000 of views. The product has already made an important statement. Just a few days after its introduction, the Maverick X3 won its 1st race, the prestigious Best in the Desert Vegas Torino race, driven by the Murray racing team.
It is truly a very impressive vehicle and we made sure the world hears about it. Production of the X3 has already started on August 20 2 and deliveries to dealer will start next Monday. Now looking at year round product highlight on Slide 7. Revenue were up 9% for the quarter, mainly driven by shipment of the Can Am Defender and the continued good momentum of our Can Am ATV business. Looking at ATV retail trend, the North American industry ended its 2016 season on June 30, with retail down low single digit.
Can Ami TV had an exceptional season with retail up high single digit. This success has been driven by the solid momentum of the Outlander Mid CC family, which since its introduction 2 season ago, has seen its market share double. Can Ami TV now hold the number one position in Canada and Scandinavia and the number 2 position in WeMEA and APAC. For the side by side, the North American industry ended this 2016 season with retail up mid single digit. With high teen retail growth since the beginning of the fiscal year, Can Am side by side closed the gap with the industry and also ended the season up mid single digit.
This growth has essentially been fueled by the Can Am Defender, which has been the highest selling model of our side by side lineup at the retail level over the last 2 months. The Defender is also performing very well in other regions of the world, notably in Australia and New Zealand, where our side by side business reached the number one market position in July and in Western Europe, where retail is up over 20% year to date. We have made tremendous progress over the last season with Can Am Off Road and with all the addition we made to our lineup. The agility we now have with the URS 2 facility and with the strong momentum with our dealer network, the future of Can Am Off Road looks very promising. Now turning to Spider.
The last few months have been difficult for the motorcycle industry in general and for Spider. Now 9 months into the season, the industry retail is down low single digit. The trend is even worse when looking at higher price motorcycle above $18,000 has declined mid teens percentage in the last quarter. Meanwhile, Spider Retail is down high teens season to date. We are disappointed by the retail performance of Spider this season.
While the industry trend is certainly not favorable, there are a few other elements that are driving that shortfall. Notably, our decision to hold back on discounting this season compared to previous year to better maintain value for the product and the fact that Spider F3T potential client did not perceive strong value in the addition of integrated saddle bags. We are working on solution to improve the Spider business. At the beginning of the season, we have put in place team in 2 key U. S.
Market, California and Florida, to try different regional approach to stimulate the demand for Spider. While we are already have a few insight, it is too early to comment on our finding, but we are already preparing for season 2017. Turning to seasonal product on Slide 8. Seasonal product revenues reached $288,000,000 up 6% from last year, driven by higher volume and stronger mix of personal watercraft sold, but partially offset by lower volume and unfavorable mix of snowmobiles sold compared to last year. As we mentioned earlier this year, snowmobile shipments are expected to come on the back end of the second half of the year compared to last year due to a later start of production resulting from the introduction of the new snowmobile platform.
As the spring break shipment will occur up to 2 months later than usual, This is expected to push our snowmobile retail sales later in Q4. So you can expect weaker retail trend for our snowmobile business in the Q3. A production pilot run for the new platform has been done mid August and we are ready to start mass production at the end of the month. Now looking at the retail performance for Personal Watercraft. 10 months into the season, the North American industry retail is up high single digit.
Cedar retail sales were also up high single digit over the same period. The Sidus part continued to grow in its 3rd season on the market And we've made significant market share gain in the muscle and luxury performance segment with the introduction of the 300 horsepower engine. Sidu is also performing well in international market, notably in Scandinavia and Western Europe with over 20% retail growth year to date. We are pleased with the momentum of our 2 product lines in these mature markets. Now turning to Propulsion Systems on Slide 9.
Revenue grew by 5%, primarily driven by favorable exchange rate. The 2016 season ended on June 30 for outboard engine with the industry retail up mid single digit, while Even Road retail was down mid single digit. The market share loss is driven by the older generation of engine. Meanwhile, the Etech G2 lineup continued to gain traction and building on that momentum. We introduced the new technology for engine between 1 150 to 200 horsepower at our most recent Evinrude Club in June.
We are pleased with the G2 performance in the market, and we intend to extend the technology to lower power range. Parts, accessories and clothing on Slide 10. Sales from our pack business ended the quarter at $149,000,000 down 4% from last year. The decrease is mainly due to lower dealer order for snowmobile pack, resulting from the poor winter we had in North America. Now as we always look to improve our pack offering and generate growth for that business, we did something new with the launch of the Maverick X3.
We are offering over 70 accessories right from the launch, many of which have been developed in association with several and to address market with specific riding needs. Finally, before I turn the call over to Sebastien, I want to update you on some of the initiatives that are key to the achievement of our long term objective. First, our dealer network optimization effort. Things are progressing well on that front. We had over 30 prospect dealer at this club this year at the club this year and we are on track to achieve our target of adding 45 to 55 new dealers in this year.
We are also making great strides in our effort to reach more customer by focusing on a few different initiatives, notably by working at building the Can Am brand and we are continuing to progress on that front, especially with the renewal of the Can Am NASCAR sponsorship for 2 more years and with the very bold and exciting Maverick X3 launch, which reach millions of people. We are also working on building partnership with great ambassador for our product and our brand. This is what we did with Ken Block and BJ Baldwin for the Maverick Extreme. And we are putting a great deal of effort in enhancing our digital presence to reach more customers. This is a field in which we are rapidly becoming a reference in the industry by improving the customer experience through the technology.
Another key element of our long term objective is our manufacturing plan and we took a leap forward in that project with the opening of the URS 2 facility. We are now able to rapidly launch product into production and have full model mix on the product line. This was just a quick glimpse into some of the projects we are working on at the moment. I am proud of the progress of our team are making on these different initiatives and the early impact we are seeing on our business are very promising. On that note, I will turn the call to Sebastien for an overview of our financial results.
Thank you, Jose, and good morning, everyone. This morning, we reported revenues of $856,000,000 for the Q2 of fiscal 2017, an increase of 5% from last year's Q2. The growth was mainly the result of higher year round product sales and favorable foreign exchange rate variations. We generated $172,000,000 of gross profit resulting in a gross profit margin of 20.1%, an 80 basis point decline from last year due to higher production costs and unfavorable currency, partly offset by a favorable product mix in year on products and lower sales program costs. Operating income was down $53,000,000 in the quarter, primarily due to an unfavorable patent litigation.
As you are already aware, we are involved in multiple lawsuits with 1 of our competitors, whereby each party is claiming damages through the alleged infringement of some of its patents. During the Q1, we had recorded compensatory damages related to the verdict in one of these lawsuits. Since then, the trial judge formalized the verdict and awarded additional damages in favor of the plaintiff. So for the 3 month period ended July 31, 2016, the company recorded as an expense total damages and related costs of $43,100,000 Management believes that the verdict and subsequent decisions are unfounded and unsupported by either law or evidence and filed an appeal on August 23. Now normalizing for these litigation costs and a $38,000,000 loss on a U.
S. Dollar denominated debt, normalized EBITDA amounted to $44,000,000 for the quarter and now stands at $102,000,000 for the 1st 6 months of the year. This is broadly in line with our expectations for the normalized EBITDA generation split between the first and the second half of the year. Now let's turn to Slide 14 for our revenues by product categories and geographies. 33% from seasonal products, 33% from seasonal products, 12% from propulsion systems and 17% from parts, accessories and clothing.
From a regional perspective, international revenues were up 9% in the quarter driven by higher PWC and ATV wholesale in Western Europe, higher PWC and SSV wholesale in Asia Pacific, and to a lesser extent, favorable FX impact. For the U. S, revenues were up 1% to $406,000,000 with growth coming from higher volume and favorable mix of PWCs as well as positive currency impact, but those were partly offset by lower spider shipments and by lower shipments and unfavorable mix of snowmobile. With the introduction of our new snowmobile platform, shipments have started later this year compared to last year and they are expected to extend later in Q4 compared to previous years. Finally, Canada was up 10% driven by higher year round product shipments, which were also partly offset by the lower shipments and unfavorable mix of snow.
Turning to Slide 15 for a look at the normalized net income bridge. Our normalized net income stood at $1,000,000 down by $3,000,000 for the same period last year. Benefiting the normalized net income were volume and mix for $7,000,000 pricing and sales programs for 6,000,000 dollars and financing costs and normalized income tax expense for $8,000,000 These elements were offset by higher production costs for $9,000,000 coming from the opening of the Juarez II facility and higher inventory provisions. Our operating expenses were also higher by $15,000,000 driven by higher investments in R and D and marketing as we continue investing in growth. Slide 16 for balance sheet and cash flow update.
During the quarter, we amended and restated our credit facilities as we seize the opportunity to deleverage our balance sheet and improve financial flexibility. We notably reimbursed US92 $1,000,000 on our term facility, which now stands at $700,000,000 and we extended its maturity from January 2019 to June 2023, while maintaining favorable terms. We also amended and restated our revolving credit facility to increase the availability by $75,000,000 for a total availability of 425,000,000 dollars extended the maturity from May 2018 to June 2021 and reduced the cost of borrowing by 25 basis points. In addition, in the quarter, we used $38,000,000 to repurchase 1,800,000 shares. Now a look at BRP's powersport dealer inventory for North America on Slide 17.
Our network inventory level is healthy as it is slightly down from last year's Q2. We saw some increases driven by the introduction of the Can Am Defender, the continuing ramp up of snowmobile shipments to the new dealers we added over the last few years and higher inventory level of non current snowmobiles mainly in Canada due to the poor snow conditions last winter and the economic slowdown in Western Canada. But these increases were more than offset by a decrease in network inventory in the rest of the lineup, most notably for the Can Am Commander and Can Am Maverick side by side, current model year snowmobiles as we started shipments later this year compared to last year. And now finally Slide 18 for an update of our guidance for fiscal 2017. Overall revenue guidance remains unchanged, but with half of the year behind us, we are updating our product category revenue guidance to reflect the results of the latest seasons and also the positive reception and strong orders from dealers at the last VRP Club in August.
Therefore, we are increasing year round products revenue guidance by 2% to up 8% to 12%. Despite lower shipments of Spider for the second half of the year versus initially planned, we have good momentum in ORV and the strong orders for the Mavic X3 calls for an adjustment of guidance. On the pack side, soft consumer demand for snow business in the first half of the year and dealers needing less replenishment of inventory results in an adjustment of guidance downward by 2% for an updated guidance of up 3% to up 8%. We have also adjusted expected net financing costs following the refinancing closed in the Q2 and the share count has also been updated to reflect the progress we made year to date on the NCIB. So we are increasing normalized net income from up 2% to up 8% to a guidance of up 3% to up 9%.
Our normalized earnings per share guidance is therefore adjusted upwards to $1.82 to 1.92 As we have already alluded in previous quarters, our guidance implies for robust EBITDA growth in the back half of the year and more importantly in the Q4. We are confident in our plan for the year as the catalyst for strong back half growth are higher volume and richer product mix driven by initial shipments of the newly introduced products, notably the Mavriq X3 and the new snowmobile platform. The reception for these new products has been exceptional and we already have orders on hand. Production for most of them has already started and we are expecting shipments to impact the back half of the third quarter and all of the 4th quarter.
With this, I will turn the call back to Jose. Thank you, Sebastien. Once again, I'm pleased with our results and where we stand at this point in the year. Looking at the second half of the year, the global environment remained volatile. The U.
S. Powersports industry remained weak in certain regions affected by oil and ag economy and very competitive in other regions. While the risk of interest rate increase and the presidential election coming up, we do not anticipate things to improve short term. In Canada, the situation seems to be improving as we are lapping difficult quarter last year. Still, we do not expect significant growth shortly.
We are confident that market in Europe and Asia Pacific will continue to grow and provide us with several opportunities. However, we are closely monitoring the situation in Russia and Brazil, where economic and political instability has hurt our business. Despite a challenging global context, we are confident in our plans for the second half of the year. We have several exciting new products hitting the market. We are pleased with the continued momentum gain for the Can Am Defender in our ATV business and we'll maintain our marketing campaign to continue to build awareness.
Our manufacturing plants are in full operation. And finally, our worldwide distribution network is committed and stand with the right inventory level that position us well for the back half of the year. As I've said many times, the uniqueness of BRP and a key differentiator versus our competitor is in its product diversification, its geographic market diversification and its manufacturing diversification. In closing, I would like to remind you that we will hold our Investor Day in El Paso and Juarez on September 21 22, and all the material presented will be available on our website. And on that note, I will turn the call over to the operator for questions.
Thank you. Our first question is from Jamie Katz from the Morningstar. Please go ahead.
Hi, good morning guys. Nice quarter. My first question is actually surrounding the refinancing that you did. I'm just curious, with the lower leverage, if you guys are thinking about capital allocation a little bit different and how you think about either paying down debt or buying back shares going forward?
Good morning, Jamie. The market was good for refinancing and that's why we decided to proceed extending the maturity by several years up to 2023 was a good alternative for us. And as part of our overall capital allocation strategy, one part of it is deleveraging and we did take that opportunity back in July to reduce our debt by US92 million dollars Obviously, it is our objective to continue deleveraging the business and we'll be doing it operationally by growth in the business and growth in EBITDA. So we'll get the natural deleveraging there. But in terms of capital allocation priorities for us, when we look at the share price where we're trading, the NCIB is still very attractive and a good way to return capital to shareholders and give them good returns with the trend.
Obviously, we're limited by the number of shares we can purchase on annual basis to 10% of the flow. And so that's something that we'll continue investigating and most likely pursue going forward if the stock price was to remain low. But our priority still remains investing and growing the business and we are a business where we invest approximately $200,000,000 of CapEx on an annual basis and we'll want to make sure that we're able to continue that going forward.
That would
be in a nutshell how we think of capital allocation.
Okay. And then can you talk about the quality of the parts and accessories that are left in the channel now? It seems like there was some overhang from the snowmobile season and you guys obviously took guidance down just a bit. I'm curious if there's still some inventory that you're working through or if it's just sort of a timing delay?
Yes. Good morning. Typically in July, we start delivering what we call parts and accessories that dealer repeat, things like oil, belt, runners for the ski. And it seems that with the bad snow season we had last winter, the dealers are still stuck with a lot of those and repeat order were lower than what we were expecting at the beginning. And that's why our July our Q2 back were lower and we're lowering the guidance for the end of the year.
Okay. And then lastly, can you just talk about R and D spend, it's tracking a little bit higher as a percentage of sales. Can we think about maybe a little bit of a higher run rate going forward than in the past as you guys spend more on R and D to get those new off road vehicle models out every 6 months, just modestly above maybe where it has been or eventually just this sort of R and D level temper off?
Yes. When you look at the overall R and D expense as a percentage of revenue, for sure Q2, the percentage operating expenses goes up. We finished overall total operating expense, 18.5 percent of revenues. Q2 is a low quarter in terms of overall revenue and that's why you see a percentage increase. But as we had alluded for earlier in calls, we are investing more in marketing, we are investing more in R and D.
And we'll see that trend in absolute dollars continue down the road in future quarters. And despite the growth in revenue, we should be ending in pretty much at the same percentage as to where we were last year in terms of overall R and D expenses in terms of percentages.
Great.
Thanks. I'll jump back in the queue.
Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.
Hey, good morning. I wonder if you could just give a comment on the performance of the dealers that you guys have added in the last year. Obviously, that was a big number last year and tempering off a bit this year. But just wondering if you could give a bit of a comment. And is there any segment or category where the new dealers are having a bigger impact in?
Good morning, Mark. I mean, we are on track. Typically, when the dealer take our line, I would say, to be up and running, it takes about a year or some a bit less, some a bit more, but I would say average 1 year. And obviously, the Alio where we had market opening was mainly in the off road business and the Spider business. Then that would be my take on this.
And in terms of the initial reaction on the Maverick X3, sort of the same sort of consistent theme in terms of the new dealers jumping on board with the new product?
Yes. I think definitely the Maverick X3 and when you introduce a high end performance vehicle, it's always attract the attention the customers and the dealers and the media and all this. Then the X3 is giving us even more credibility to our commitment to add a new side by side every 6 months for the next 4 years, our commitment for the side by side business. And this is definitely helping to attract new dealers in those open area.
Okay. Thanks. And then I just wanted to follow-up on Spider. Obviously, some disappointing numbers as you said. You've obviously taken action in terms of the regular price on the F3 on the new reconfigured model.
But just wondering if you could talk a bit about your approach to the spider. I know you tweaked your marketing campaigns, but wonder if you could just talk a little bit more about what you think needs to happen in order for performance to improve?
Yes. Two things. The first one, last year, we typically in early August, we launched non current program. We the model year become non current and we launched program. Last year, because we wanted to make room for the F3 family because we knew the F3T was coming, we started to have discount in June, 2 months earlier than is typical.
And it was quite aggressive program because at the time we had RS and ST still in the pipeline, and we had a lot of RT. Then we came out with those program in retrospective probably to Hurley, created like a demand an artificial demand. And this year, we decided not to do it. This year, we said we'll stick to normal discount timing period and the 16 model became non current in August. Then this definitely we didn't have the lift that we had last year in June, July for the retail performance.
The other thing is the new marketing campaign is addressing a broader type of customer, not only the motorcyclist, but a broader type of customer. It generated a lot of lead, very, very successful campaign in term of lead, in term of interest. We had a lot of lead to the dealers, but those customers don't know about motorcycle. They are new to the industry. And we realize that it takes a lot more time than what we had expected to convert them.
Then we are convinced it's the right way to go. We are convinced we need to continue to talk to them, but it takes more time to convert them. One interesting thing that I said in my notes was we decided early in the year to put 2 small team, 1 in Florida and 1 in California to do regional geographic action. And like in Florida, the motorcycle license for a powersport customer is no problem. But for someone who never been in the powersport business, this is a bigger obstacle than what we thought.
And now we facilitate with the dealers those customers, but all of this take time. And we believe there is a lot of learning, plus the repricing of the F3 that we can apply to more state and province next year and we'll work on our plan for 2017.
And sir, just a follow-up, what is the state of the Spider non current inventory today versus last year?
It would be similar to what it was last year.
Okay. Thank you very much.
Thank
you. Our following question is from Robin Farney from UBS. Please go ahead.
Great. Thanks. I just wanted to clarify, when you talked about your retail in the side by side, in April, at that point through the season, it was up mid single digit. And then for the full season, today, you talk about your retail being up mid single digit. But I thought that I maybe heard you during the call say something about your side by side sales being up high teens in the quarter.
I just it just didn't seem and I may have misheard or maybe we're talking about one specific market, but it just didn't seem to square with the up mid single digit at the 9 month 12 month mark. No.
What happened Robin. What happened is, obviously, the before the Defender, we're participating only in 40 percent of the industry. And even if we had decent sales or retail in the sport category and recuit category, we're absent in the utility. What happened with the introduction of the Defender we had and the Defender momentum is growing month by month, we had a pretty good retail in H1, 1st year of the Defender, and we were able to catch up overall. And the industry is growing by about low single digit and we're growing we catch up in the first half and now we are in line with the industry.
So what was your side by side retail than just in the most recent quarter, the retail growth?
I'm sorry, can you rephrase your question?
Sure. I was just looking for then what is the correct sort of how would you describe your retail percent change just for the quarter for your side by side business?
Okay. Then if I give you some colors, the sports side by side industry in the first half of the year H1, the sports side by side segment is down low teens. Obviously, one of our competitor, the leader of the industry is having some difficulty. The recruit category is up mid teens, and that's where we're strong with the commander. And the utility is up low teens.
And we just started the deliveries of the Defender on that category. Then overall, we still believe that the side by side industry is a good industry with growth in 2 of the segments. And right now, we catch up with the growth with our entry in the utility.
Okay, great. That's very helpful. Thank you. And just a follow-up to that, where would you say your market share is in utility at this point? And I understand that it's still likely to move up, but just kind of wondering where you think that's tracking?
Obviously, for competitive reason, and we don't have much data on the industry for the side by side business. I will not answer to that question. But obviously, we are low right now to our plan versus our plan because we've been only acting for the 1st 4 or 6 months. But we intend, again, like I said, with all the new product commitment that we've made with our entry in the side by side utility segment, our intention is to become a strong number 2 in the side by side business midterm, which is 2 to 3 years.
Okay, great. And then just a final question. Your full year EBITDA guidance was unchanged, but it looks like FX got a little bit better over the course of the quarter since your last guidance. So on a constant currency basis, where would you say the is maybe a slight downtick? Just trying to think about is that just the parts and accessories business being down a little bit more than the year round business is up?
Is that the best way to think about that change on a constant currency basis?
Yes. Well, when we issued guidance initially back in March, we U. S. Dollar was very strong versus the Canadian dollar. And we had a uptick on the currency of about 2% in our guidance with about a 50 basis point negative on margin.
The currency hasn't fluctuated that much since Q1. U. S. To Canadian is hovering at about 130. And so how will we see currency for the rest of the year versus last year is flat on the top line and marginal on overall profitability.
And so no impact on overall normalized EBITDA coming from that currency change.
Okay, great. Thank you very much.
Thank you. Our following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Yes. Good morning, gentlemen. Congrats for the quarter. Just coming back on the Spider, I was wondering what should we expect in the coming quarter? Would it be should we expect an easier compare as opposed to Q2?
And I was wondering also if you could provide more color on whether there is more attractiveness toward TRIKIT conversion these days and if customers are potentially awaiting new products or new technology?
Good morning, Benoit. First, just as a reminder, the motorcycle industry is down low single digit, but the high end of the I still believe that a customer who buy a motorcycle and buy a tri kit, it's a very expensive purchase. On top of it, the performance, in my point of view, are not as good as if you buy it from an OEM. And this is definitely something that's happening. Then what we've decided, we've decided last year when we came out with non current program early in the season, we somewhat disturbed the normal cycle of trading, it affected the value of the used model.
Then some customer were coming out to trade their unit, but because we had rebate very early in the season, they were mad at us. Then that's why this year, we said, let's go back to the normal cycle. We reduced in our guidance some shipment in the second half of the year compensated by DX3. Then all of this is factoring in our guidance.
Okay, perfect. And could you maybe provide some color around the momentum with the low entry level you just launched at the club, Jose?
Too early to say Benoit. Dealer gave us the order for the F3 at club, but they can adjust their model mix along the years. Typically, they don't do much adjustment. In the fall, they do the adjustment in Q1 when they see the trend in retail. But we had good order at booking, but too early to say how popular it will be.
Okay. And second question, when we look at the outboard engine, the industry is up mid single digits. You were down mid single digits. Obviously, you signed a lot of boat builder agreement. It takes time.
We know the story around the repower also. But I was just wondering if you've been also impacted by some engine issues or it's again the story is all around the repower market?
No, it's more around repower market like you said. The fact that G2 today is in 2 it's 150 horsepower and up, which is represent I'm going by memory, but about 35% of the industry then G2 is getting is more and more popular. Because of G2, we're able to sign 150 dealer and 35 new boat OEM, but we still are in 30% of 35% of the mix of the engine. Then for us, we need to keep implementing the new technology in lower horsepower range, and we should be able to gain traction going forward.
Okay. So when would you expect to kind of provide or grow mostly in line with the industry or catch up with the or catch up with the industry, I would say?
Difficult to say, Benoit. I will not venture an answer to this question. Again, I believe that the 150 to 300 horsepower just started I mean, we are unplanned for production, but we're just filling up the pipeline now. I think we will see more and more at the retail level next year starting in 2017. And it should be we should be more in line with the industry trend definitely in 2017 'sixteen.
Okay. And last question for me. You gave some color about the lawsuits and the patent litigation. Just wondering what is the next milestone for you guys?
Well, the next milestone, as you've as I've said, we filed an appeal on August 23. The fact that the judge has, I guess, rendered final verdict in trouble damages does not change our view on the case. We feel that the decision is unfounded and is unsupported by law. So we strongly feel that an appeal is justified, and that's going to be the next step for us.
Okay, perfect. Thanks for the time.
Thank you.
Thank you. Our following question is from Tim Conder from Wells Fargo Securities. Please go ahead.
Hey, good morning. This is actually Mark Torrente on for Tim. Channel inventories appear to be in good shape and then I guess the dynamics in play. Could you provide some more color on aging overall? Are there any areas of concern in the network?
And then what is your target for year end?
Yes. Good morning, Mark. Overall, yes, as you mentioned, we're happy with the level of inventory. We're managing it diligently. And the fact that the inventory is flat year over year despite the challenging snow season that we have, despite the dealers that we're adding and also the new product segment that we're entering into.
So we're happy with that and that's an indication as well as the good retail that we've got over the last few quarters. In terms of aging, overall inventory above 18 months is less than 5%. So there's no big preoccupation there. However, as we indicated a bit earlier, there is more spider inventory in the field than we would like. And that's something that we're going to be addressing over the next 12 months.
But in terms of overall materiality of the whole, we'll call it inventory portfolio, it's not a significant portion. In terms of outlook for the rest of the year, obviously, we're going to be shipping a lot of snowmobiles in Q4. So Q3, I'm expecting overall dealer inventory to be flat or even slightly down. And for the end of the year with the shipments on Maverick and again conditional on a good snowmobile season, we should be flat to slightly up versus a year ago.
Okay, great. And then could you provide a little more color on the promotional environment? Any changes year over year or sequentially? And where are you seeing the heaviest promotion?
I mean, if I look at the globally for snowmobile, watercraft, outboard engine, I would say the competitive environment is similar to what we saw in the last few quarters. Obviously, on the ORV front, some of our competitor has a lot of inventory and there is a lot of a rebate right now going on, then the competitive environment is definitely higher. That being said, I think there is more and more dealers who realize that selling an ATV or a side by side with heavy I think the fact that we're monitoring our inventory quite tight, they're making more money with our product, and we are able to turn more and more multiline dealer to sell more BRP product, then we keep our plan. We try to manage inventory well. And I think the dealers start to realize that they can make more money with our product.
Okay, great. Thank you.
Thank you. Our following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. I have a couple of questions, please. First, how much did the snowmobile shipment shift impact sales in the quarter?
Well, actually it was a big impact. When I look at overall revenue growth quarter over quarter, snowmobile is the one with the highest reduction in overall revenue. So we're down in revenues almost 20% quarter over quarter. So it is a material impact. And when I look at overall inventory position, the fact that we've shipped less current snowmobiles, that's a reason why the inventory is also down versus a year ago.
Okay. Two more, please. First, higher production costs associated with Juarez, when do those subside or when do they get better absorbed? And then the second question on the Defender rollout, is the Defender now placed where it needs to be placed? In other words, is the channel still over or is that still ongoing?
For the absorption of the incremental cost of running the Juarez II plant, I see second half of next year as being a period where production will be sufficient in order to offset some of these incremental costs. We're still, as Jose mentioned and we've mentioned, our plan is to introduce new products every 6 months, which will be manufactured in that plan. So we still got a few months to go. And as we launch these new products and start building them in that plant, we'll see those costs being absorbed by a higher number of units.
On the Defender side, Gerrick, obviously, we are in the utility segment now, but we don't feel all the sub segment of the utility segment. Then you can expect from us in the next few months more utility Defender models that will fill up every sub segment of the whole utility segment.
Okay. I see. Thank you.
Thank you.
Thank you. Our following question is from Martin Landry from GMP Securities. Please go ahead.
Hi, good morning. On your OpEx, I think Sebastien you mentioned that you expect OpEx to be around 15% of sales for the full year. That would imply according to my calculation anyways that your OpEx would not increase much in the second half of the year. Is that a fair assumption?
No. What I said is that in terms of R and D, R and D percentage should remain relatively flat to where it was a year ago. But when I look at the overall pace of investments that we're making on the marketing side, year, we finished as a percentage of revenue 15%, overall OpEx. And then this year, my expectation is that we'll finish above that from the range of 50 to 60 basis point increase, Martin year over
year. Okay. All right. And then in your propulsion systems, I mean, you make a good point saying that you with your new Evianrude Etex G2, you don't target a whole lot of the market with I think you're absent in the 0 to 150 horsepower. When do you think you're going to tackle the whole market?
Obviously, Martin for competitive reason, I cannot delegate our 5 year plan. But we started with the 1st G200, 300, 2 years ago. This summer, we introduced the 150, 200. Then the pace will accelerate going forward because now the plan is very clear and we know that customer like the G2. But obviously, for competitive reason, I cannot answer that question.
Okay. That's fair. And then just lastly on the motorcycle industry, you're saying that I think in your opening remarks, you were talking about the industry being down high teens, I think for high CCs or up at least mid teens for high ticket items. What's in your view driving that decline in the motorcycle industry?
What I said just to make sure we're clear, I said for motorcycle above $18,000 retail in U. S, the industry was down high single digit. Now difficult to point out. I think it's more than one element. Obviously, there is a trend right now in the industry where entry level products are very popular and we're not in the motorcycle industry, but we see a lot of OEM introducing very attractive and competitive product, anywhere between $8,000 till $12,000 And I think this is the focus of many of them.
And they don't maybe focus as much on the high end. And that would be my $0.02
Okay. Okay. That's helpful. Thank you.
Thank you.
Thank you. Our following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Yes, thanks. Good morning. Just two questions for me. Just firstly on the guidance, just wondering if you can maybe update us on the visibility that you have there. I mean, I know you've got the snowmobile orders are in at this point, so you've got very good guidance or very good visibility there.
And if I sort of read your comments correctly, it sounds like you've got some pretty good visibility on the off road as well. Is that the right way to look at it that you've got pretty good visibility in off road?
Yes, absolutely. I mean, we have 5 months to go from now to the end of the year. At Club, we took orders for the X3, and so dealers made firm commitments there. So we have excellent visibility on that. Snowmobile, as we've mentioned, we have orders since March from the dealers and so a clear pathway there.
So that's why we're confident despite the fact that second half of the year is going to be a huge 6 months in terms of overall profitability for the business. And I could appreciate that some people could be nervous. But as we say internally, the guns are loaded and the production is humming very well. And so that's why we're confident in our delivery for the second half of the year.
Is there one particular segment or market that you maybe are have less visibility on? Is there anything you can highlight there that maybe is a little bit more variable?
One area that could be a bit more variable is the business. There is we have some initial orders that we've delivered to the dealers for the upcoming season. They've placed in orders for accessories as well for snowmobiles that they've ordered. But they also have what we call a repeat business. So once the snow starts falling, people start riding on the trails, go into the shop for repairs or add accessories, there is some variability there.
So if we were to have a horrible snow season like last year, well, that could create a bit of shortfall on the pack. And if the snow was phenomenal and we get 2 feet of snow early November, well, then that would be a great news and we could see an uptick on the pack business.
Okay, good. Just second question, just on the Canadian market, the revenue up 10% year over year in Q2, Were you surprised by that? And maybe you can just talk more generally about what you're seeing in the Canadian market, especially in parts of Western Canada, have things sort of stabilized there?
Let's say that Western Canada is still down and there is a huge difference between the retail industry, between Western Canada and Eastern Canada. And just to give you a sense for watercraft, obviously, watercraft this year in Canada was very good because of the warm summer, but Western Canada for watercraft was down low single digits when Eastern was up almost 20%. And you can see the discrepancy. In ETV, Western Canada is down by almost 25%, when Eastern is up high single digit sorry, down high single digit. And you see a discrepancy there.
Then Western is still difficult. That being said, now I think it's stabilizing. It will stabilize in the fall because Western Canada started to deteriorate it last year, but it's still a big discrepancy between Canada and U. S.
Okay. So if I think about the overall Canadian market, it sounds to me like the sort of primary driver of the year over year growth was on the PWC side?
Exactly.
Okay. Very good. That's all for me. Thanks very much.
Thanks a lot.
Thank you. Our following question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yes, thanks. Just following up on the capacity commentary just around the new plants in Juarez. Where are you guys in terms of capacity on that? I mean, it sounds like there's still a lot of room there to add new lines and new production.
Good morning, Derek. The 2nd shift has started this summer. Then right now, we are the full the first shift is full operational. The second shift is in ramp up right now. Then we are exactly on plan.
We have additional order for the X3 versus what we had planned between now and the end of the year, but the team is putting additional plan to be able to respond to the demand. Then overall, the ramp up is going quite well, and we are able even to accelerate the 2nd shift to answer to the X3 demand.
Okay, great. And just in terms of the new dealers that were at the club event, I think you said it was around 33 or 32 dealers, 30 dealers at the club event. I know it's early days still, but how is the penetration of signing up some of those dealers going?
I don't know, Derek. I didn't follow that. Typically, and if I refer to what we've done in the last few years, dealer come at club, I know that some have signed there because they were excited and quicker you sign, quicker you get deliveries. And I know that a few have signed over there, but the process could take another few months for the one who are earlier in the process. That's why with the 30 dealer prospect, we're very confident with our 40 five-fifty 5 target for the year.
Okay, that's great. Thank you very much.
Thanks a lot.
Thank you. We have no further questions registered at this time. Back to you, Mr. Deschenes.
Great. Thank you, everyone, for joining us this morning and for your interest in BRP. Before we let you go, I want to invite you to join us for our Investor Day presentation that will be held on September 22 and will be webcasted live on our website. Thanks again everyone and have a good day.
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