Good morning, ladies and gentlemen, welcome to BRP Inc.'s FY 2017 first quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.
Thank you, Maude. Good morning, welcome to BRP's first 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, which you can find 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. Fiscal year 2017 is off to a good start. Our team's efforts are paying off as we experience significant success with all our product line, posting strong retail growth and market share gain around the globe. Despite a volatile currency environment that negatively affected our bottom line, we executed on our plan and delivered results right in line with our expectation and the outlook we gave last quarter. As we are heading into the summer, we like where we stand and we are reaffirming our guidance with some minor adjustments. Sébastien will provide additional comments in a few minutes, for now, let's go through the highlights of the quarter, starting with the financial results on slide four. As I mentioned, our quarterly results were essentially in line with the outlook we gave last quarter.
Our revenues reached CAD 930 million, a growth of 4% from last year's first quarter, driven by favorable foreign exchange rate variation. As we were planning, the normalized EBITDA for Q1 was down 38% to CAD 57 million. The decline is the result of our sales programs for snowmobiles, as we wanted to mitigate the impact of the poor snow conditions in some regions of North America and the weak economy in Western Canada. Our programs were successful, and we ended the season with a comfortable network inventory position, making room for the new Ski-Doo platform, which bodes well for the next season. Another contributor to the normalized EBITDA decline was higher operating costs, notably as we continue to invest in R&D and maintain our tradition of delivering product innovation. This resulted in a normalized diluted earnings per share of CAD 0.04.
To give you a better appreciation of our worldwide retail momentum, we are giving you more colors on regional retail trends for this quarter on slide five. Over the last few years, we have been focusing on developing our product portfolio, our brand, and our dealer network. We are starting to see our momentum accelerating. During the first quarter, thanks to the solid work of our team, our marketing campaign, effective sales program, and the dedication of our dealers, we were able to drive strong retail demand for our products, notably in North America, where our powersport retail grew by 14% compared to a 3% growth for the industry. The strong increase was driven by a good end of season for snowmobile, the continued success of the Outlander Mid-CC, and the early retail of the Can-Am Defender.
Outside North America, while retail has been softer in Latin America due to the difficult economic environment, our retail sales in the rest of the world was solid. We had mid-teen growth in the Europe, Middle East, and Africa region, with good early-season sales of personal watercraft and Spyder, as well as market share gain in off-road. We've delivered 26% retail growth in Australia and New Zealand as we had good success with the 300 horsepower personal watercraft and gained market share with our Can-Am off-road lineup. We are pleased with our overall performance. The team is focusing on our plan to continue our momentum going forward. Looking at year-round product highlights on slide six. Revenue for the quarter was up 1%.
For our ATV business, now 10 months into the season, the North American industry is down low single digits. Our Can-Am retail is up high single digits. We are pleased with the performance of our lineup, which is gaining market share worldwide, especially in the large Mid-CC segment with the Outlander. Turning to the side-by-sides. The North American industry is up high single digits season to date. After lagging the industry for most of the season, Can-Am side-by-sides had a good quarter of over 20% retail growth, driven by our entry into the utility segment with the Defender. For the season-to-date period, Can-Am side-by-side retail is now up mid single digits. We are pleased with the Defender performance, which is off to a good start despite competing with non-current models and discounted competitor products.
As we announced at the end of March, we have made the second product introduction in our commitment to launch a new side-by-side every six months for the next four years With the introduction of the Defender MAX, six passengers side-by-side. Production will start as planned next week. Turning to Spyder. Still early into the season, the motorcycle industry is about flat compared to last year. Can-Am Spyder retail is down high single digits over the same period. We still see the industry growth being driven by lower price motorcycle, while model with an MSRP of CAD 20,000 and more, a better comparable for the Spyder, are also declining season to date. Our North American marketing campaign is ongoing. We continue to invest in product and brand awareness.
Meanwhile, in Europe, the Spyder F3 continue its good momentum and is driving our Spyder retail sales up in the 20% season to date. Now on to slide seven for an update on our new off-road lineup that we introduced last week. For the season 2017, we have optimized our offering and added new packages to offer the most complete lineup in Can-Am history. Notably, we reinforce our industry-leading offering for hunters with the introduction of the new Mossy Oak hunting edition for the Defender and the Outlander 1000. We are strengthening our dealership leadership position in the mud segment for the new Maverick MAX and the Renegade X mr 570. We rename our Outlander L Mid-CC ATVs to the Outlander 450 and Outlander 570.
Our Can-Am off-road business has been performing very well for the last few seasons. We believe that we have the right lineup to continue on that momentum for 2017. Getting back to our product category highlight with seasonal product on slide eight. Revenues for seasonal product were up 6%, driven by higher volume and stronger mix of personal watercrafts sold as a result of the introduction of the 300 horsepower. Partially offset by the higher snowmobile sales program costs that were set to mitigate the impact of the poor snow condition in some parts of North America and the economic slowdown in Western Canada. As I said, our programs were quite successful. We ended the 2016 season with a comfortable network inventory position only slightly higher than last year. Our dealer orders for the next season are firm with the booking level as expected.
Looking at the snowmobile retail, the North American 2016 snowmobile season ended with industry retail down mid-single digit percentage. Because of our strong lineup and the quick reaction of our team in launching our sales program early in the season, Ski-Doo ended the season gaining three percentage points of market share and achieving its highest market share since the industry began recording. On top of that, we are pleased with the customer reaction toward our new snowmobile platform, which position well Ski-Doo to continue to be successful in the coming season. In Scandinavia, season to date, the industry is down low single digits. BRP retail is in line with the industry. As for our personal watercraft business, still early in the season, the North American industry is up mid-single digit. Sea-Doo is also up mid-single digit.
Looking at counter-season market share market in Australia and New Zealand, the industry ended their 2016 season with its retail up in the low teens percentage, while Sea-Doo retail grew in the high teens, gaining two percentage points of market share. Now looking at propulsion system on slide nine. Our revenue grew by 8% to reach CAD 111 million, primarily driven by higher volume of aircraft engine sold and favorable exchange rates. In the outboard engine business, the industry season to date retail was up high single digits, while Evinrude retail was down low single digits. We continue to gain market share in the 200 horsepower plus category with the G2 engine. We keep on progressing in our network development effort for Evinrude as we added 15 new dealers and two OEM partners in the first quarter of 2017.
Later this month, we will be holding our second Evinrude dealers event in three years. We are expecting, once again, a strong participation with over 800 invitees who will attend our new product introduction scheduled for June 26th. Turning to slide 10 for parts, accessories, and clothing. Revenues for the PAC business were up 4% for the quarter, despite lower snowmobile parts sales due to the poor snow condition in many North American region that shortened the riding season. The growth in revenue was primarily driven by the good momentum we have in our Can-Am off-road accessories business as we continue to grow our vehicle installed base and develop our accessories offering.
Part of our model year 2017 ORV lineup announcement, we also introduced over 30 new accessories for the Can-Am Defender. You know, utility side-by-side customer tend to accessorize their vehicle, this represent a good growth opportunity for our parts business going forward. I will turn the call over to Sébastien for an overview of our financial result.
Thank you, José, good morning, everyone. This morning, we reported revenues of CAD 930 million for the first quarter, an increase of 4% from the same period last year, mainly driven by favorable foreign exchange. Our gross profit amounted to CAD 194 million, resulting in a gross profit margin of 20.9%, a decline of 280 basis points from last year, as the positive impact coming from a favorable product mix was more than offset by higher sales programs for snowmobile and unfavorable foreign exchange, which alone resulted in a 220 basis points negative impact. Operating income was down CAD 38 million in the quarter. We are involved in multiple different lawsuits with one of our competitors, whereby each party is claiming damages for the alleged infringement of some of its patents.
Subsequent to quarter end, a verdict was rendered in one of those lawsuits against the company for an amount of $15.5 million US. For the three-month period ended April 30th, 2016, the company recorded as an expense the preliminary compensatory damages of $15.5 million US, or CAD 19.5 million in equivalent Canadian dollars, which we excluded from our normalized results. Management believes that the verdict is unfounded, we intend to file an appeal. Our normalized EBITDA ended in line with the outlook we gave last quarter at CAD 57 million, we generated a normalized net income of CAD 4.8 million and normalized EPS of CAD 0.04. Let's turn to our revenues by product categories and geographies on slide 13.
Our product category mix for the first quarter was quite similar to last year, with 43% of our sales coming from year-round products, 31% from seasonal, 12% from propulsion systems, and 14% from parts, accessories, and clothing. From a regional perspective, international markets drove most of the growth, being up 17%, driven by higher shipments of PWC and ATVs in Scandinavia, Western Europe, and Asia Pacific. U.S. reached $498 million, up 1%, as a positive impact from currencies was partly offset by lower volume of Spyder sold and higher snowmobile sales programs. Canada was down 9%, also impacted by additional sales programs and lower volume of Spyder. Looking at the normalized net income bridge on Slide 14, our normalized net income stood at CAD 5 million, down by CAD 32 million from the same period last year.
Benefiting the normalized net income were volume and mix for CAD 5 million and financing cost and normalized income tax expense for CAD 7 million. These elements were offset by pricing and additional sales programs, mostly coming from snowmobile, for a net negative impact of CAD 10 million, higher production costs and depreciation expense for CAD 5 million, higher operating expenses for CAD 15 million, driven by higher investments in R&D and increased administrative expenses, mostly related to legal costs, and unfavorable foreign exchange rate variations for CAD 15 million. Turning to the balance sheet and cash flow update. We used CAD 40 million of free cash flow in the first quarter compared to a generation of CAD 6 million for the same period last year. The main reason for the decrease in cash generation was the decline in normalized EBITDA and higher cash taxes paid. We also used CAD 11.5 million to repurchase approximately 650,000 shares in the quarter.
Accounting for these elements, we ended the quarter with CAD 183 million of cash on the balance sheet. Now to Slide 16 for a look at BRP's Powersport dealer inventory for North America at the end of April. We ended the quarter with network inventory down 1% from last year's first quarter. Our network inventory is up in certain areas of the business, primarily driven by a slightly higher level of snowmobile inventory in Canada due to the poor snow conditions last winter and also due to shipment ramp-ups of Can-Am Defender and increased dealer count. These were more than offset by a decrease in network inventory in the rest of the lineup. Finally, Slide 17 for a quick update of guidance for fiscal 2017.
Our guidance remains essentially untouched, except that we reviewed our expected depreciation expense to CAD 145 million, down from CAD 150 million, and we adjusted our share count to reflect the progress made year-to-date on the NCIB. The reviewed depreciation expense impacted our normalized net income guidance, which we adjusted upward to up 2%-8%, increase from flat to up 7%. Both the reduced depreciation expense and the reviewed share count improved our normalized diluted EPS guidance of CAD 1.79-CAD 1.89, up from the previous range of CAD 1.75-CAD 1.85. In terms of EBITDA generation through the year, our plan remains the same. We are still expecting the majority of the normalized EBITDA to be generated in the second half of the year.
We mentioned during last quarter's conference call, Q2 should once again be our smallest quarter, especially given that we received strong orders for the new Ski-Doo platform, which will be produced in the second half of the year. This is expected to decrease our snowmobile deliveries in the second quarter, but increase them in the fourth quarter compared to last year. We are also planning for higher operating expenses in Q2 compared to last year, and we are expecting the normalized EBITDA to be similar to what it was in fiscal year 2015 second quarter. On that, I'll turn the call back to José.
Thank you, Sébastien. Once again, I am pleased with our result and where we stand at this point in the year. We are confident that markets in the U.S., Europe, and Asia Pacific will keep providing us with good opportunities going forward. We are, however, closely monitoring the situation in Canada, Russia, and Brazil. On the product side, we are pleased with the great reception they get worldwide. For example, our Can-Am brand is well recognized, and consumer awareness level is rising. Our different lineup enjoy great momentum led by our new side-by-side, the Defender. As I said before, we'll keep adding new model in that segment every six months for the next four years. On the snowmobile side, we are pleased with the new platform and our booking for H2 is firm.
We are also excited because we now stand with the greatest North American market share ever achieved since the beginning of Ski-Doo. For personal watercraft, we are pleased with the success of the Spark and the good early performance of the 300 horsepower models at the retail level. Our global marketing campaign is ongoing, and we are pleased with our NASCAR sponsorship that is helping us building the Can-Am brand. On the distribution side, we continue our dealer network optimization program, and we are still targeting to add 45-55 new dealers this year. We are also focusing on integrating and bringing up to speed the 105 new dealers we added last year. Our global network continue to be highly committed in growing the business.
Finally, the BRP team remain engaged and focused on our strategic priorities of growth, agility, and lean enterprise to deliver on our objective both for the year and for the long term. 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 Mark Petrie from CIBC. Please go ahead.
Hi, good morning.
Morning, Mark.
Wondering if you could just give us a bit of an update in terms of your performance and the pace of orders and inventory levels in some of your more challenging markets, so Western Canada, Russia, and Brazil.
Let's start by Western Canada. In Western Canada right now, the industry is down low single digits. The first quarter where the rest of Canada was up 20%. Canada is up mid double digits, but you can see the Western is affected. In Russia, last year, if you remember, we had planned to be 50% of FY 2014. We ended up at 40%. This year we're planning 30%, and this is all included in our guidance of FY 2014 level. For Brazil, the Brazil market is down by about half right now, but Mexico, Argentina, and Venezuela is up by 30%, and the whole together Latin America is down by about 30%. All of this is a factor in our guidance.
Okay, that's helpful. Thank you. Wondering if you could please just update us on some of your various manufacturing initiatives. I know there's a lot going on. Maybe just an update in terms of the ramp-up in Mexico, how that's progressing. More broadly, I guess, the push to lean manufacturing in some of your other facilities in other geographies. What savings are you realizing today, and how should we think about that in the coming 18 months or so?
Let's start with the Mexico. The ramp-up in Juarez 2 is done. We are right now running at the hourly rate that we were planning at the beginning of the program, and everything is running well. The Defender MAX will go on the line next week as planned, and we are ready to have the second shift when the volume will dictate it. Mexico, everything is ongoing in Juarez 2, Juarez 1, and Querétaro. In Gunskirchen, you saw last year the progress we were doing into the factory. No change there. We are on plan. Right now in Valcourt, the Valcourt 2020 plan is divided in three phases. Phase One is ongoing right now. We are about halfway on it. We'll start Phase Two on the back end of this year. Everything is as planned.
On the improvement on the financial impact, everything is included in our guidance going forward. Definitely, the goal, and you see here our guidance for this year, is to increase at a higher rate the bottom line versus the top line.
Yeah. As we talked last call, Mark, the margins for this year is expected to be flat as we're benefiting from procurement, HR, and IT initiatives with PWC that is now fully ramped up. We're getting a bit of headwind from Juarez 2 plant starting up. Next year, we should be seeing a lift on the margin coming from Juarez 2 being at full production.
Okay. That's great. Thanks very much.
Thanks.
Thank you. Our following question is from Martin Landry from GMP Securities. Please go ahead.
Good morning. Wondering if you could give us some color in the U.S., on how demand for power sports is going right now. I don't know if you can talk a little bit about traffic at dealers during the spring and what's expected during the summer.
As you saw in my review of the industry, the industry in the U.S., ATV is about flat-ish. Side-by-side is growing, but at a lower pace. Snowmobile, we had a good end of the season, but it was because of the program. Watercraft, it's still early into the season, but looking good, and we had good watercraft result outside North America. Motorcycle is flat-ish, derived by the low-end motorcycle, and the high-end motorcycle is a bit down. The industry is not growing at the fast pace, but I would say it's quite stable. What I'm very happy with is our momentum with all our product line. It's, again, multifaceted. There is the marketing campaign that is very well focused, the NASCAR sponsorship to build the Can-Am awareness, the dealer network improvement. Dealer make more money with our product than some of our competitor.
There is that momentum, and I believe that we're well positioned for the future.
Okay. On slide three or, sorry, slide five, you talk about your retail performance in the quarter in North America. Is it your sales, or are those units that are up 14%?
Those are units, Martin, that are up 14%.
Yeah. Units. Okay. What would that be in sales?
Oh, it's retail level, so.
Okay. Right
it's tough to quantify, but, obviously, you can look at our wholesale at a dealer margin and extrapolate what that could represent.
Okay. Then just wondering, what drove that increase? Was there one product line that boosted it materially?
For sure the Defender, we entering in an industry where you have 60% of the industry. If you would remove the Defender from those numbers, the rest of the product would grow 8%, which we're still very happy with all the other lineup.
Okay. That's helpful. Then lastly, just on acquisitions, is this something that's on your mind? Are you looking at making acquisitions, expanding your product lines, or is it pretty quiet on that front?
As we've discussed a few time, we still believe that with the six product line that we have and entering a new segment and gaining market share, we can continue to grow for the next few years. That's all factor in in our plan. In our plan, there is no acquisition factor in, but it's something that we're looking at more actively.
Okay. Thank you very much.
Thank you. Our following question is from Jaime Katz from Morningstar. Please go ahead.
Good morning, guys. Thanks for taking my questions. First, I have a question actually on outboard engines, and it looks like in that segment, there might have been a little bit of share loss. I'm, I guess, curious what's working for competitors and how you guys might be able to adjust to capture more of that market, because I know that's been an opportunity for faster growth for you.
Yeah. If I recall the history, we acquired the bankruptcy of OMC. We end up being very successful in the power, but that segment is going down, and the OEM is going up. The strategy with the G2 introduction was to create the pull from the consumer, and so far, very happy because Since the introduction of the G2, we've been able to sign about 150 dealers and 30 new boat builders. We can definitely see a momentum of outboard, even with the engine, with the G2 introduction. This takes time, because when you deal with an OEM, it's longer than directly with the dealer, and you have also the boat builder in there.
We're quite pleased with our momentum so far, and we will announce more product on June 26. Overall, the strategy is on track, and we're happy with our progress so far.
Okay. It looks like there's very little leverage in operating expenses this year as you guys invest in the manufacturing side of the business. Do you have a feel of what top-line growth you might need to see in the future, just sort of a rough estimate to really start levering those expenses? Or will the efficiencies just sort of naturally lever starting in 2017, pending that the promotional environment doesn't get more competitive?
We will be seeing some efficiencies, and we've talked about our lean and agile manufacturing strategy, the way we design products. As we are introducing these products with the new design methodology, we will be seeing a benefit to the margin. In terms of operating expenses, what we look at is about 15% of revenue is an area where we feel we're comfortable in terms of operating expense, making sure we sustain investments in R&D, give an appropriate support on the marketing side to make sure our brands are being promoted out there. That's the level we're seeing. Yes, obviously, when we get some revenue growth, we are going to get some operating leverage from the admin expenses and other areas of the business, especially on the manufacturing side. In order to achieve profitability growth, we don't necessarily need to grow revenue tremendously.
Okay. Lastly, personal watercraft. Can you tell us what your estimate for industry growth might be this year, just to think about share shifts?
Yeah. Well, the industry has grown quite considerably over the last two, three years since we've introduced the Spark, and Spark actually carried all of the industry growth.
Our expectation for Spark this year is to continue to grow, but not necessarily at the same pace that we saw in the previous year. I would say, let's say low single-digit industry growth would be a fair assumption for this year.
Thank you.
Thank you. Our following question is from Robin Farley from UBS. Please go ahead.
Great. I wonder if you could give us a little bit of color on your average selling price per unit, and then maybe how much that was impacted by the sales programs. I guess I'm specifically thinking about ORV, if you have ORV and snow separately, but just to get some color on that. Thanks.
Yeah, the ASP was up about 3% this quarter. That includes also the currency impact, and as you saw, currency was about 4%. When you strip it out, you're probably a negative, you're a 1%, 2% ASP. The impact of sales program is what brought the average selling price down. If you look at it by product line, most of the discounting, as you can appreciate, happened in the snowmobile side, which brought down the ASP there. In terms of ORV, we're seeing, let's say, a flat average selling price year-over-year.
Would there have been mixed benefit that is offsetting that? In other words, if the average selling price in constant currency is down 1% or 2%, does that mean the sales program impact is 1% or 2%, or is it like mix actually made ASPs go up some %, and so the sales programs, the drag is actually great?
Mix did bring it down about 1%, Robin. We sold less Spyder, and the average selling price for Spyder is high, and that would have brought the overall mix of the ASP down.
Just in ORV as well, would the ASP have been flat?
As we're shipping the Defender 1000, it's a unit which has a good wholesale price compared to the Commander or the Maverick. The average price would have been flat there.
Okay. Great. Just looking at your commentary on retail sales for the off-road business. You give the season to date at the end of January and then the season to date at the end of April. It looks like there was quite a big swing in there. When we compare that to other manufacturers' comments about the March quarter industry sales being mid-to-high single digits, I guess I'm thinking, does that imply I don't know if you can give us some color on the cadence throughout the quarter, but it seems to imply, if I combine all the commentary out there, that the month of April was up at a double-digit rate, or possibly that there's just different definitions of what industry means when you talk about industry sales and others do.
Maybe you could give us a little bit of commentary on sort of the cadence through the quarter.
If we talk about the ATV, the trend is still flattish. We continue our good momentum, mainly driven by the Outlander Mid-CC family. On the side-by-side side, there is some growth happening. First, very limited data on side-by-side industry. We don't have much. The side-by-side is still growing. For us, the Maverick and the Commander, there is some cannibalization with the Commander, with the Defender, but the Maverick, Commander are doing okay, and we're doing quite well on the Defender, and the lineup is expanding. Just to give you a sense, on the Defender, we started to ship the HD10 in December 2015, the HD10 Cab in January, the HD8 and HD8 Cab in March, and we're starting shipping next week, the six-passenger. On top of ramping up production in our tags we're ramping up the model, that's what is creating the momentum for us.
Okay. Okay, great. That's helpful.
Thank you.
Then maybe just last thing, it's just a quick clarification.
All right.
On your slides, when you talk about what makes things between the first half and second half be more weighted towards the second half, it's slide 18. You mentioned shipments of the Defender, and I was just wondering why that would and maybe you just sort of answered it. In other words, it sounds like you're not really fully ramped in the first half for Defender ships. I know you've been shipping it for a number of months. That's why I didn't know why it would've been more of a second half impact versus first half.
Well, it's both a first and a second half. We started shipment late last Q4, and so this quarter, we shipped the HD10, the HD8, and the cab version. We're going to be introducing more models, as you saw, the six-passenger Defender, and so that's going to be starting to ship now, and we're going to be shipping as well in the second half of the year. As we introduce a more complete lineup of products, you'll be seeing positive shipments throughout the year.
Okay. Thank you.
Thank you. Our following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Good morning, gentlemen. Just to come back on the significant outperformance of BRP versus the industry, especially in Latin America and Asia Pacific. You mentioned good color about Argentina and Mexico, but I was just wondering what drove this significant outperformance, if it was some products in particular that drove this outperformance.
Good morning, Benoit. If you take Brazil is a market where people like the high-performance product, watercraft, and there is also a market for entry level, the Spark. The mid-range has never been a great business. Right now, we're outpacing the industry because of the 300 horsepower watercraft in Brazil, because it's a market that is fueled by the performance. Mexico is really, really going well for our RV and watercraft and also Spyder. With Mexico, we have a great momentum, and the dealers are getting more engaged and success brings success. They invest more in their business. Mexico is great. Argentina, you know that the country was blocking to manage their currency. They were blocking product that we could export there. Right now, with the new government that is now in place, there is more units that we can ship in that country.
I think at the end of the day, it's the strength of our lineup, we're well positioned in all segments in each product line, we're benefiting of the strength of the lineup and also the dealer network that is well established that make the difference.
Okay. Very good. On the SSV side, you've done a very good job of growing revenue in a challenging market. The industry, looking specifically at the industry, José, it's down low single digits. Obviously, you're capturing some market share, just wondering, any thoughts on what is driving the decrease for the industry? Would you expect further deceleration for the industry going forward? I'm just wondering if it's more related to the utility recreational, or it's kind of the used market that's starting to put some pressure on the new sales.
Just to make sure, Benoit, do you talk ATV or side by side on this?
Side by side. Sorry.
Okay. The way we see things, I said it a few times, we believe the utility vehicle, the Defender category, the vehicle are getting more sophisticated. I said a few times the example of the Ford F-150, where the vehicle are getting more luxurious, better suspension. I believe that that's why the utility segment is still doing well. Us entering with the Defender in that product category with a very good product is giving us an edge. Also one of the competitor introduced the recently, the Commander category, a good product, and that is also giving a spark in this segment. The dynamic is changing quite fast in the side-by-side industry. The trend is very good for us, and we're benefiting again of the lineup that is getting better, the momentum with the dealer network, and the marketing campaign, and the NASCAR sponsorship.
Just for the Spyder, obviously, you've made a significant sponsorship for NASCAR, which has garnered a pretty strong interest. Looking at the retail sales down high single digits, obviously, you made some comments about the momentum around the kind of low end. Just wondering if there's an opportunity here for kind of introduce a low entry level or maybe adjust the price like you've done with the RS model in the past.
First, this year, there is a few things. The F3 awareness is still below what we would like to be. To be honest, it's taking more time that we would like to create the awareness of the F3. That being said, it's growing at a good pace, but we're expecting a faster pace. The other thing that we didn't mention so far is the marketing campaign. We delayed the marketing campaign by about a month in Canada and in the U.S. This could have some impact. Also we cannot ignore the trend of the high-end motorcycle that is down. The motorcycle industry is flattish, but it's because of the low-end motorcycle that is up. All of this is the Spyder situation. That being said, we still believe that Spyder is an area where we can grow, and it will remain a priority.
It's taking more time than we would like to build the awareness.
Okay. Last question, just on the propulsion system, José, the industry is up high single digits. Evinrude retail down low single digits. Is it still, again, the same thesis around the repowered market, or was there some impact from the weather or kind of people waiting for the G2 or the further announcement on June 26th?
The growth is coming a lot from the saltwater, where we are weak, and also, like I said before, the repower business, where we are strong, this segment is going down. Right now, we trying to continue our momentum with the G2. What I'm happy with is since the G2 introduction is the momentum we have with new dealers and new boat builder. Just to give you a sense, we've done a training tour about a month ago. We visit 40 city in 40 days. We train about 1,800 technician about the G2 advantage and how to rig a G2 on a boat. This is starting to gain momentum, definitely. So far, we are disadvantaged because of the trend of the saltwater growth, where we're weak, and the repower that is going down.
On the other hand, I'm happy because we have good traction with the G2. We are really creating the pull from the consumer.
Okay. What would be the lag because you signed up a lot of dealers in the last few years on the propulsion side. What is the lag before seeing the impact on the retail sales side, José?
I think the lag on the dealer side is not too long. It's the boat builder. When you sign the boat builder-
Yeah
it takes time because.
Yeah
A boat builder will do the perfect rigging of the engine on the boat. He will introduce our engine in their boat with the new lineup. Sometimes they start with a few models, and they grow in time, depending of the success. I would say the delay between when you sign a boat builder and when you see the real growth is longer than the dealers. That being said, we're still planning a good growth in our guidance for propulsion system this year, and I think we'll continue the momentum.
Okay. Thank you very much for the time.
Thank you.
Thank you. Our following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. On your 12% North American retail growth, how much of that was driven by promotions, and how much of that would've been price sales?
It was 14% in North America. Obviously, promotion was a big factor this quarter. However, as José mentioned, the Defender did carry a lot of the retail growth, and that was not influenced by promotional activity. Snowmobile probably has an impact of 2% on the overall retail increase year-over-year. That, as you are aware of, was subject to heavy promotions as we wanted to make sure we finish the year with clean inventory, as we knew we were launching a new model for the next season.
Okay. Is the 12% number that's in the MD&A, does that include outboard engine? Is that why that's lower?
Yes. That includes the outboard engine part of the business.
My second and last question. Your dealer inventory's 1% down but includes Defender and new incremental dealers. Obviously strip those out, it would be a little bit lower. Do you have a number, an exact number what that would be without Defender and new dealers?
Yeah. Defender new dealer is 9% up. If you strip that 9%, you'd be significantly lower.
All right. Great. Thanks, Sébastien.
Thanks.
Thank you. Following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Good morning. Just wanted to touch on, I guess, fully your guidance and your visibility into the second half of the year. Obviously, a pretty back-end loaded year. It sounds to me like you are very comfortable with where you are on the snowmobile side and your visibility into the second half of the year. What about for the rest of the business? I guess maybe the question is, do you feel more confident about the second half of the year today versus three months ago?
For sure, Cameron, because we have now firm order for snowmobile, and there is a lot of snowmobile that will be shipped in H2, we are more comfortable with this business for the back end of the year. When you look at the big picture, there is always more risk in the first half of the year. We have just introduced, last week, our new off-road lineup. Dealer we know will-- and our retail is going well, then dealer will reorder on a monthly basis, ATVs and side by side. Right now, watercraft is going well, and we will introduce our new watercraft at our club in August. There will always be demand for watercraft, which is the second half of our fiscal year, but the first half for the retail season.
For us, there is always more risk in the first half of the year than the second half, and that is why we confidently are affirming our guidance.
Okay. Very good. Just second question on the litigation. I know this is sort of part of the industry. Maybe if you can just talk a bit about the timeline, if you're going to appeal this decision. What is the timeline to when cash might go out the door if you were to lose that appeal? I would assume this is going to take a fair bit of time.
We will appeal the verdict. Again, it can vary a bit from state to state, we're talking maybe a year before to get the verdict or the result of the appeal.
Okay. That's all for me. Thanks very much.
Thank you.
Thank you. Once again, do not hesitate to press star one at this time for any questions or comments. Our following question is from Anthony Zicha from Scotiabank. Please go ahead.
Yes. Good morning. José, what is it going to take to push the Spyder sales higher? Like you mentioned, build more awareness. Is it also a pricing issue? Could we eventually see a lower priced product? My second part to the question is, when we look at dealer recruitment, could you give us an idea how important the Spyder is in terms of recruitment and overall product portfolio when a dealer wants to join?
Yep. Good morning, Anthony. For the Spyder question, I said it a few times, I'm happy about the business overall, on the other hand, frustrated because we have some dealer who are extremely successful with the Spyder, others that are not as successful. The first priority right now is to make sure that every dealer has the success as Spyder deserve. For sure, if we would introduce a lower price point Spyder, you could see some volume there. Right now, the priority is to make sure that all our dealers are doing the right thing to generate the success that the Spyder deserve. That's a priority that we're focusing. Your second point was about?
Well, in terms of dealer recruitment and how important is it to attract.
Yeah. For sure, when we recruit dealers, we try to sign a dealer who carry as many product line as we can. So far, since we started the signing of new dealers, we have increased our dealer coverage for Spyder by about 30%. We're planning again to add 45 to 55 this year, and we'll try as much as we can to sign Spyder dealer. That being said, I still believe there is more upward if we can engage every dealers to do the right thing than signing more dealers. That's the priority for now.
Okay, great. One question for Sébastien. Could you please give us some more color that's tied to the increased cost to the Juarez 2 plant? Was this a surprise there and
Well, there was actually no surprise there, Anthony, in line with our plan. When you look at the margin decrease year-over-year, a decrease of about 280 basis points. What drove the majority of the margin decrease was currency for about 220 points, the other one was pricing and sales program for about 80 basis points.
Overall, no surprises on Juarez 2 opening.
Okay, great. Well, thank you.
Thank you. Our following question is from Tim Conder from Wells Fargo Securities. Please go ahead.
Thank you. Gentlemen, I just wanted to maybe continue on a little bit there on the Spyder. You expanded the dealer base and brought out lower, more entry-level product. Could part of it be there's some, I guess, competitive clearance of inventory out there? How do you see that part maybe being part of the equation here and impacting, drawing customers in at a price point? As that maybe winds down, in your opinion on that, do you see the Spyder picking up or again, as it's maybe been alluded to, is it where you need to kind of adjust the price points on the Spyder more on a permanent basis?
Good morning, Tim. As we said when we ended the season last year, we end up the season last year with too much inventory, that more inventory that we'd like to. Definitely right now there is a promotion on the non-current, for a model where you don't have much change, the non-current sell faster than the current model. When you create those situation, there is customer who stay on the fence, who will wait for the current model to become non-current and get that rebate, that sales program. Right now our strategy is to as fast as possible, but we cannot go too fast to bring the inventory of non-current to the right level like we have in other industry. We believe that will stabilize the appetite for customers for non-current product.
Coming back to the low price Spyder, for sure, if we would bring a lower price Spyder, it could generate some volume. I still believe that there is more opportunities if we can do a better job in market the product, build the awareness faster, and engage faster our dealer network. At the same time, I still believe that Spyder is one of the growth opportunity that we have going forward.
Okay. José, I guess shifting to the competitive outlook here in ORVs, just your view of You had an announcement from Yamaha yesterday with some additional tweaks on their YXZ product, and your Defender's going well. How do you view where it appears some of the new products are targeting more in the sport rec side of the side-by-side market?
To be honest, Tim, yesterday was a board meeting. I didn't see the Yamaha introduction in the detail. We knew it was coming because there was some video teaser out there. So far our Maverick is performing well. People recognize more and more the performance of the Maverick versus some of the competition. The durability is very good. We're well positioned with the Maverick. We're well positioned with the Defender. There is more cannibalization that we had planned originally between the Commander and the Defender. It seem in the last two months where we've took orders that the ratio is coming back to what we had planned.
At the end of the day, there is definitely more product introduction from all OEM in the last few years, but we believe that we have a strong lineup, and this lineup will get even stronger because we are on plan to introduce another model in the fall. That's the plan.
Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.
Good morning. Thanks for taking my questions. The first is regarding dealer inventory. It finished lower this quarter. What would be the expectation for the full year?
Well, what I could give you, I could give you a bit of color what we're expecting for the next quarter. Expecting the inventory to be higher at the end of Q2, probably up high mid to high single digits coming from SSV inventory. As we've said, we're shipping the Defender in all of the current versions. I'm also expecting a bit more snowmobile inventory from where we ended the season and probably a bit of more PWC. As we did finish the year with more inventory last year, and that's going to be retailed in the later months of the year.
Thanks. José, it's early, but based on early Defender sales, what does the demographic profile of that buyer look like relative to your expectations? Thank you.
It's a bit early. Obviously we've targeted our usual customer, but we've done quite a lot of advertising in farming magazine and website. Also, we've done a lot more hunting promotion and magazine. I would say at this point, it's too early to say, but we focusing on those three, our typical customers, hunters, and the farmer, and so far too early to give you a good answer. This is our focus, but I cannot give you colors if we're successful or in which category we're more successful.
Thanks for taking the questions.
Thank you.
Thank you. We have no further questions registered at this time. Back to you, Mr. Deschênes.
Great. Thank you, Maude. Thanks, everyone, for joining us this morning and for your interest in BRP. I also want to invite you to our annual shareholder meeting that will be held this morning at 10:30 A.M. and will be accessible on the web at brp.com. Thanks again, everyone, and have a good day.
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