Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY 2017 second quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Maude. Good morning, and welcome to BRP's second quarter conference call for fiscal 2017. Joining me on the call this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com under the investor relations section. With that, I'll turn the call over to José.
Thank you, Philippe. Good morning, everyone, and thanks for joining us. As you know, Q2 has always been the smallest quarter of the year in terms of financial result for BRP, and this year was no different. However, the last few months have been big in terms of progress for the company. We have been relentless in our pursuit of offering to consumers the best product in the industry with the introduction of several exciting and game-changing new models at our two clubs this summer. 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 and 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 filled the position with excellent internal candidates who have shown a high level of commitment over the years, have a strong knowledge of the powersport industry, and have demonstrated their capacity to take on new challenges. We have promoted Sandy Scullion as head of our Global Sales and Consumer Experience division. Sandy has over 20 years of experience with BRP and has most recently been in charge of our Western Europe, Middle East, and Africa division, which has been performing extremely well under his leadership.
We also took the opportunity to announce the 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 presence throughout the entire European region and take advantage of synergies arising from the consolidation of activities. Steve Pelletier, 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. Thomas Uhr, 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. Let's have a look at financial performance for the quarter on slide four. As we mentioned during the Q1 call, the industry is still going through a difficult time, but we remain disciplined and have continued delivering on our plan to end the second quarter broadly in line with our expectation. Our quarterly revenue grew by 5% to reach CAD 856 million, driven by the introduction of the Defender, the strong momentum we have with our Can-Am ATV business, the strong retail season of Sea-Doo worldwide, which reduced our sales program cost, and favorable foreign exchange variation. The quarterly normalized EBITDA was down CAD 9 million to CAD 44 million.
For the first half of the year, the normalized EBITDA stand at CAD 102 million, tracking in line with our expectation split between the first and second half of the year as we provided to you last quarter. The normalized diluted earning per share for the quarter was CAD 0.01. 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. This growth was partially offset by a difficult quarter for Spyder, which saw retail slow down in the quarter like the motorcycle industry as a whole.
I will give you more color on retail trend in just a moment, let's go on slide five 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 Evinrude and over 2,300 participants at Club Sea-Doo Can-Am in Florida. In both case, our new product were very well received. We added fun, affordability, power, and fuel efficient to our Sea-Doo lineup, which strengthen our offering and help us maintain our market leadership. The highlight of our Sea-Doo introduction is the Spark Trixx, which allow a rider to do tricks like pros with ease. On the Spyder side, we have reconfigured the base version of the Spyder F3, allowing us to reduce the MSRP to $16,999 in the U.S.
We have also introduced the new Spyder F3 Limited, the ultimate cruiser version of the Spyder F3, which feature a removable top case with integrated passenger backrest that has enough storage for the two 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 two years. 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 one million views, and we made sure to reach a vast powersport audience by having well-known ambassador Ken Block and B.J. Baldwin on stage with us to launch the product. They both have an incredible internet following, with multiple videos counting millions of views. The product has already made an important statement. Just a few days after its introduction, the Maverick X3 won its first race, the prestigious Best In The Desert Vegas to Reno 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 22nd, and deliveries to dealer will start next Monday. Looking at year-on product highlight on slide seven.
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 30th with retail down low single digits. Can-Am ATV had an exceptional season, with retail up high single digits. This success has been driven by the solid momentum of the Outlander mid-cc family, which since its introduction two seasons ago, has seen its market share double. Can-Am ATV now hold the number one position in Canada and Scandinavia, and the number two position in EMEA and APAC. For the side-by-side, the North American industry ended the 2016 season with retail up mid-single digits.
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 digits. 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 two 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 additions we made to our lineup. The agility we now have with the UIS2 facility and with the strong momentum with our dealer network, the future of Can-Am Off-Road looks very promising.
Now turning to Spyder. The last few months have been difficult for the motorcycle industry in general and for Spyder. Now, nine months into the season, the industry retail is down low single digits. The trend is even worse when looking at higher priced motorcycles above $18,000, has declined mid-teens % in the last quarter. Meanwhile, Spyder retail is down high teens season to date. We are disappointed by the retail performance of Spyder 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 Spyder F3-T potential client did not perceive strong value in the addition of integrated saddlebags. We are working on solution to improve the Spyder business.
At the beginning of the season, we have put in place team in two key U.S. markets, California and Florida, to try different regional approach to stimulate the demand for Spyder. While we already have a few in sight, it is too early to comment on our finding, but we are already preparing for season 2017. Turning to seasonal product on slide eight. Seasonal product revenues reached CAD 288 million, 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 two months later than usual, this is expected to push our snowmobile retail sales later in Q4. You can expect weaker retail trends for our snowmobile business in the third quarter. 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. Looking at the retail performance for personal watercraft, 10 months into the season, the North American industry retail is up high single digits. Sea-Doo retail sales were also up high single digits over the same period. The Sea-Doo Spark continued to grow in its third 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.
Sea-Doo is also performing well in international markets, notably in Scandinavia and Western Europe, with over 20% retail growth year to date. We are pleased with the momentum of our two product lines in these metro markets. Turning to propulsion system on slide nine. Revenue grew by 5%, primarily driven by favorable exchange rate. The 2016 season ended on June 30th for outboard engine, with the industry retail up mid-single digits, while Evinrude retail was down mid-single digits. The market share loss is driven by the older generation of engine. Meanwhile, the E-TEC G2 lineup continued to gain traction and, building on that momentum, we introduced the new technology for engine between 150-200 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 parts business ended the quarter at CAD 149 million, down 4% from last year. The decrease is mainly due to lower dealer orders for snowmobile parts, resulting from the poor winter we had in North America. As we always look to improve our parts 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 master market leaders who are well-known for their performance-inspired products. This allows us to benefit from their expertise and to address markets with specific riding needs. Finally, before I turn the call over to Sébastien, I want to update you on some of the initiatives that are key to the achievement of our long-term objectives.
First, our dealer network optimization effort. Things are progressing well on that front. We had over 30 prospect dealers 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 customers 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 two more years, and with the very bold and exciting Maverick X3 launch, which reached millions of people. We are also working on building partnerships with great ambassadors for our product and our brand. This is what we did with Ken Block and B.J. Baldwin for the Maverick X3.
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 Juárez 2 facility. We are now able to rapidly launch products 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 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 Sébastien for an overview of our financial results.
Thank you, José, and good morning, everyone. This morning, we reported revenues of CAD 856 million for the second quarter of FY 2017, an increase of 5% from last year's second quarter. The growth was mainly the result of higher year-round product sales and favorable foreign exchange rate variations. We generated CAD 172 million of gross profits, 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-round products and lower sales program costs. Operating income was down CAD 53 million in the quarter, primarily due to an unfavorable patent litigation. As you are already aware, we are involved in multiple lawsuits with one of our competitors, whereby each party is claiming damages for the alleged infringement of some of its patents.
During the first quarter, 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. For the three-month period ended July 31st, 2016, the company recorded as an expense, total damages and related costs of CAD 43.1 million. Management believes that the verdict and subsequent decisions are unfounded and unsupported by either law or evidence and filed an appeal on August 23rd. Normalizing for these litigation costs and a $38 million loss on a U.S. dollar-denominated debt, normalized EBITDA amounted to CAD 44 million for the quarter and now stands at CAD 102 million for the first six 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.
Let's turn to slide 14 for our revenues by product categories and geographies. Our product revenue mix was similar to last year's second quarter, with 38% of our sales coming from year-round 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 million, with growth coming from higher volume and favorable mix of PWCs, as well as positive currency impact. Those were partly offset by lower Spyder 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 the fourth quarter 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 snowmobiles. Turning to slide 15 for a look at the normalized net income bridge. Our normalized net income stood at CAD 1 million, down by CAD 3 million for the same period last year. Benefiting the normalized net income were volume and mix for CAD 7 million, pricing and sales programs for CAD 6 million, and financing cost and normalized income tax expense for CAD 8 million. These elements were offset by higher production costs for CAD 9 million coming from the opening of the UIS2 facility and higher inventory provisions.
Our operating expenses were also higher by CAD 15 million, driven by higher investments in R&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 seized the opportunity to deleverage our balance sheet and improve financial flexibility. We notably reimbursed CAD 92 million on our term facility, which now stands at $700 million, 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 CAD 75 million for a total availability of CAD 425 million, 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 CAD 38 million to repurchase 1.8 million 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 second quarter. 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. 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. Now finally, slide 18 for an update of our guidance for fiscal 2017.
Overall revenue guidance remains unchanged, 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 BRP Club in August. We are increasing year-round products revenue guidance by 2% to up 8%-12%. Despite lower shipments of Spyder for the second half of the year versus initially planned, we have good momentum in ORV and the strong orders for the Maverick X3 calls for an adjustment of guidance. On the PAC 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%-8%.
We have also adjusted expected net financing costs following the refinancing close in the second quarter, and the share count has also been updated to reflect the progress we made year to date on the NCIB. We are increasing normalized net income from up 2%-8%, to a guidance of up 3%-9%. Our normalized earnings per share guidance is adjusted upwards to CAD 1.82-CAD 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 fourth quarter. We are confident in our plan for the year as the catalyst for strong back half growth are higher volume and a richer product mix driven by initial shipments of the newly introduced products, notably the Maverick 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 fourth quarter. With this, I will turn the call back to José.
Thank you, Sébastien. Once again, I'm pleased with our result 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. powersport 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 plan 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 will maintain our marketing campaign to continue to build awareness. Our manufacturing plants are in full operation. 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 have 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 at UTEP on September 21st and 22nd, and all the material presented will be available on our website. On that note, I will turn the call over to the operator for questions.
Thank you. Please press star one at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Jaime Katz from 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, Jaime. Obviously, 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. 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 $92 million U.S. 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. 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 an annual basis at 10% of the float. That's something that we'll continue investigating and most likely pursue going forward if the stock price was to remain low. Our priority still remains investing in growing the business, and we are a business where we invest approximately $200 million 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. 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.
Yeah. 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. It seems that with the bad snow season we had last winter, the dealer are still stuck with a lot of those, the repeat order were lower than what we were expecting at the beginning. That's why our July, our Q2 PAC were lower, and we lowering the guidance for the end of the year.
Okay. Lastly, can you just talk about R&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&D to get those new off-road vehicle models out every six months, just modestly above maybe where it has been? Eventually, does this sort of R&D level temper off?
Yeah, when you look at the overall R&D expense as a percentage of revenue, for sure, Q2, the percentage of operating expenses goes up. We finished overall total operating expense 18.5% of revenues. Q2 is a low quarter in terms of overall revenue, that's why you see a percentage increase. As we had alluded for earlier in calls, we are investing more in marketing, we are investing more in R&D. We'll see that trend in absolute dollars continue down the road in future quarters. 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&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.
Yeah, 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 the big number last year, tempering off a bit this year. Just wonder if you could give a bit of a comment. Is there any segment or category where the new dealers are having a bigger impact in?
Good morning, Mark. We are on track. Typically, when the dealer take our line, I would say to be up and running, it takes about a year, some a bit less, some a bit more, but I would say average one year. Obviously, the area where we had market opening was mainly in the off-road business and the Spyder business. That would be my take on this.
In terms of the initial reaction on the Maverick X3, same sort of consistent theme in terms of the new dealers jumping on board with the new product?
Yeah, I think definitely the Maverick X3, when you introduce a high-end performance vehicle, it always attract the attention of the customers and the dealers and the media and all this. The X3 is giving us even more credibility to our commitment to add a new side-by-side every six months for the next four years, our commitment for the side-by-side business. This is definitely helping to attract new dealers in those open area.
Okay, thanks. I just wanted to follow up on Spyder. 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. Just wondering if you could talk a bit about your approach to the Spyder. I know you tweaked your marketing campaigns, but I wonder if you could just talk a little bit more about what you think needs to happen in order for performance to improve.
Yeah. Two things. The first one, last year, typically in early August, we launched non-current program. The model year become non-current, and we launch program. Last year, because we wanted to make room for the F3 family because we knew the F3-T was coming, we started to have discount in June, two months earlier than is typical. 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. We came out with those program, in retrospective, probably too early, created an artificial demand. This year we decided not to do it. This year we said we'll stick to normal discount timing period. The 2016 model became non-current in August. 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. We realized that it takes a lot more time than what we had expected to convert them. 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've said in my notes was, we decided early in the year to put two small team, one in Florida and one in California to do regional geographic action.
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. Now we facilitate with the dealers, those customer, 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.
Okay, thanks. Sir, just to follow up, what is the state of the Spyder non-current inventory today versus last year?
It would be similar to what it was last year.
Okay. Thank you very much.
Yep.
Thank you. Our following question is from Robin Farley 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. Then for the full season, today, you talk about your retail being up mid-single digit. 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. 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 nine-month and 12-month mark.
No, good morning, Robin. What happened is, obviously before the Defender, we were participating only in 40% of the industry. Even if we had decent sales or retail in the sport category and the rec-ute 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, first year of the Defender, and we were able to catch up overall and the industry is growing by about low single digit and we growing. We catch up in the first half and now we are in line with the industry.
What was your side-by-side retail then, just in the most recent quarter? Retail growth.
I'm sorry, can you rephrase your question?
Sure. I was just looking for what is the correct sort of, how would you describe your retail % change just for the quarter for your side-by-side business?
Okay. 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 rec-ute category is up mid-teens, and that's where we're strong with the Commander. The utility is up low teens, and we just started the deliveries of the Defender on that category. Overall, we still believe that the side-by-side industry is a good industry with growth in two of the segment. Right now we catch up with the growth with our entry in the utility.
Okay, great. No, that's very helpful. Thank you. Just to follow up to that, where would you say your market share is in utility at this point? 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, we don't have much data on the industry for the side-by-side business. I will not answer to that question, obviously we are low right now to our plan versus our plan because we've been only acting for six months. 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 two in the side-by-side business midterm, which is two to three years.
Okay, great. Just a final question. Your full year EBITDA guidance was unchanged, it looks like FX got a little bit better over the course of the quarter since your last guidance. On a constant currency basis, where would you say is maybe a slight downtick at 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?
Yeah, well, when we issued guidance initially back in March, U.S. dollar was very strong versus the Canadian dollar, 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. How we see currency for the rest of the year versus last year is flat on the top line and marginal on overall profitability. 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.
Yeah. Good morning, gentlemen. Congrats for the quarter. Just coming back on the Spyder. I was wondering what should we expect in the coming quarter. Should we expect an easier compare as opposed to Q2? I was wondering also if you could provide more color on whether there's more attractiveness toward Tri-Kit 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 digits, but the high end of the motorcycle industry is down high single digits. Also, on the Tri-Kit, I still believe that a customer who will 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. This is definitely something that's happening. What we've decided, we 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. Some customer were coming out to trade their unit, but because we had rebate very early in the season, they were mad at us.
That's why this year we said, "Let's go back to the normal cycle." We're reducing our guidance, some shipment in the second half of the year, compensated by the X3. All of this is factoring in our guidance.
Okay, perfect. Could you maybe provide some color around the momentum with the low entry level you just launched at the club, José?
Too early to say, Benoit. Dealer gave us the order for the F3 at club, 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. We had good order at booking, too early to say how popular it will be.
Okay. Second question, when we look at the outboard engine, the industry is up mid-single digits. You were down mid-single digits. Obviously, you sign a lot of boat builder agreement. It takes time. We know the story around the repower also. 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 the repower market, like you said. The fact that G2 today is 150 horsepower and up, which represent, I'm going by memory, about 35% of the industry. G2 is more and more popular. Because of G2, we're able to sign 150 dealer and 35 new boat OEM, we still are in 35% of the mix of the engine. For us, we need to keep implementing the new technology in lower horsepower range, we should be able to gain traction going forward.
Okay. When would you expect to kind of provide or grow mostly in line with the industry or catch up with the industry, I would say?
Difficult to say, Benoit. I will not venture an answer to this question. I believe that the 150 to 300 horsepower just started. We are on plan 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. We should be more in line with the industry trend, definitely in 2017 and 2016.
Okay. 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 I've said, we filed an appeal on August 23rd. The fact that the judge has, I guess, rendered final verdict and treble damages does not change our view on the case. We feel that decision is unfounded and is unsupported by law. 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, Benoit.
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 Turentine for Tim. Channel inventories appear to be in good shape, given, I guess, the dynamics in play. Could you provide some more color on aging overall? Are there any areas of concern in the network? What is your target for year-end?
Good morning, Mark. Overall, yes, as you mentioned, we're happy with the level of inventory. We're managing it diligently. The fact that the inventory is flat year-over-year, despite the challenging snow season that we had, despite the dealers that we're adding and also the new product segments that we're entering into. We're happy with that, and that's an indication as well of 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 Spyder inventory in the field than we would like. That's something that we're going to be addressing over the next 12 months. In terms of overall materiality of the whole, we'll call it the 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. Q3, I'm expecting overall dealer inventory to be flat or even slightly down. 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. Then could you provide a little more color on the promotional environment? Any changes year-over-year or sequentially? Where are you seeing the heaviest promotion?
If I look globally for a 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 have 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 discount, even if it come from the OEM, is not profitable. I think the fact that we monitoring our inventory quite tight, they're making more money with our product, and we are able to turn more and more multi-line dealer to sell more BRP product.
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 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. We're down in revenues almost 20% quarter-over-quarter. It is a material impact. 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 Juárez, when do those subside, or when do they get better absorbed? The second question on the Defender rollout, is Defender now placed where it needs to be placed? In other words, is the channel fill over, or is that still ongoing?
For the absorption of the incremental cost of running the Juárez 2 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 José mentioned and we've mentioned, our plan is to introduce new products every six months, which will be manufactured in that plant. We still got a few months to go. As we launch these new products and start building on that plant, we'll see those costs being absorbed by a higher number of units.
On the Defender side, Derek, obviously, we are in the utility segment now, but we don't fill all the sub-segment of the utility segment. 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, Sébastien, 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&D, R&D percentage should remain relatively flat to where it was a year ago. When I look at the overall pace of investment that we're making on the marketing side, last year we finished as a percentage of revenue, 15% overall OPEX. 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. In your propulsion systems, you make a good point saying that with your new Evinrude E-TEC G2, you don't target a whole lot of the market with, I think you're absent in the zero to 150 horsepower. When do you think you're going to tackle the whole market?
Obviously, Martin, for competitive reason, I cannot delegate our five-year plan. We started with the first G2 200, 300 two years ago. This summer we introduced the 160, 200. The pace will accelerate, going forward because now the plan is very clear and we know that customer like the G2. Obviously for competitive reason, I cannot answer that question.
Okay. That's fair. 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 cc's 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. 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 product 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 to $12,000. 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 two cents.
Okay. That's helpful. Thank you.
Thank you.
Thank you. Our following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Yeah, thanks. Good morning. Just two questions for me. Firstly on the guidance, wondering if you can maybe update us on the visibility that you have there. You've got the snowmobile orders are in at this point, so you've got very good guidance or very good visibility there. 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 the off-road?
Yeah, absolutely. We have five months to go from now to the end of the year. At Club, we took orders for the X3, dealers made firm commitments there. We have excellent visibility on that. Snowmobile, as we've mentioned, we have orders since March from the dealers, a clear pathway there. That's why we're confident despite the fact that second half of the year is going to be a huge six months in terms of overall profitability for the business. I could appreciate that some people could be nervous. As we say internally, the guns are loaded and the production is humming very well. 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 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 PAC business. 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 the snowmobiles that they've ordered, they also have what we call a repeat business. 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. If we were to have a horrible snow season like last year, well, that could create a bit of shortfall on the PAC. If the snow was phenomenal and we'd get two feet of snow early November, well, that would be a great news, and we could see an uptick on the PAC business.
Second question, on the Canadian market, the revenue up 10% year-over-year in Q2. Were you surprised by that? 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. There is a huge difference between the retail industry between Western Canada and Eastern Canada. Just to give you a sense for watercraft, obviously watercraft this year in Canada was very good because of the warm summer. Western Canada, for watercraft, was down low single digits when Eastern was up almost 20%. You can see the discrepancy. In ATV, Western Canada is down by almost 25% when Eastern is up high single digit. Sorry, down a high single digit. You see a discrepancy there. Western is still difficult. That being said, now I think it's stabilizing. It will stabilize in the fall because Western Canada started to de-dealiate last year, but it's still a big discrepancy between Canada and U.S.
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.
Yeah, thanks. Just following up on the capacity commentary just around the new plants in Juárez. Where are you guys in terms of capacity on that? It sounds like there's still a lot of room there to add new lines and new production.
Good morning, Derek. The second shift has started this summer. Right now, the first shift is full operational. The second shift is in ramp up right now. 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. The team is putting additional plan to be able to respond to the demand. Overall, the ramp up is going quite well and we are able even to accelerate the second shift to answer to the X3 demand.
Okay, great. 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 Dley. I didn't follow that. Typically, if I refer to what we've done in the last two years, dealer come at Club. I know that some have signed there because they were excited and quicker you sign, quicker you get deliveries. 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 45, 55 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. Deschênes.
Great. Thank you everyone for joining us this morning and for your interest in BRP. Before we let you go, we want to invite you to join us for our Investor Day presentation that will be held on September 22nd and will be webcasted live on our website. Thanks again, everyone, and have a good day.
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