Hello, ladies and gentlemen. Welcome to the BRP Inc.'s FY 2016 third quarter results conference call. The call is about to begin. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead.
Thank you, Maude. Good morning, and welcome to BRP's third quarter conference call for fiscal year 2016. 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. 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. Let me say at the outset that the last few months have been positive for BRP, even though the global economic environment remains challenging. As you can see, our financial results are solid due to our geographic manufacturing and product portfolio diversification and to our capacity to innovate. From a market point of view, the U.S. remained the strongest, with Western Europe, Scandinavia, and Asia Pacific improving markedly. However, Russia is still challenging and difficult to predict. Closer to us, Western Canada is underperforming compared to the last few years because of the economic slowdown caused by lower oil prices. All our products are well-received globally, and we have a good momentum worldwide. The manufacturing ramp-up for the Defender is on plan in Juárez, and our performance in the personal watercraft business has been very good, as well as in the ATV business.
Let's have a look at the financial highlight of the quarter on slide four. Revenues in the quarter grew 10% to just over CAD 1 billion. The growth was primarily driven by strong sales to the U.S., which benefited from favorable foreign exchange valuation. The revenue increase was also helped by a richer product mix across the portfolio. Looking at the bottom line, and despite a currency headwind of CAD 10 million, our normalized EBITDA reached CAD 142 million, an increase of seven million. This translated in a normalized diluted earnings per share of CAD 0.62, a 3% increase over last year. Looking at our retail performance for the quarter. Our North American retail sales for both seasonal and year-round product increased by 7%. If we exclude snowmobile, the increase is 11%.
We had very good momentum in the U.S. with low double-digit growth in the quarter, driven by good off-road retail and a strong end of season for personal watercraft. The situation in Canada was much different. Although Western Canada has always been a good market for BRP, the difficult economic environment stemming from the low oil price has significantly impacted our industries, resulting in a decline of mid-single digit for our Canadian retail sales in the third quarter, including a 30% drop in Western Canada. As we advance to the snowmobile retail season, we are closely monitoring the situation. Despite the market volatility, I am pleased with our result. From an operation point of view, everything is running smoothly, and all our program are on plan. Sébastien will give you more details about our financial performance in a few minutes.
Let me walk you through some of the key event of the quarter, starting on slide five. As you may remember, I ended the Q2 call by mentioning that we were just about to have one of our best dealer club in history. In retrospect, it may have been an understatement. Our products were well-received, and since the club, we have signed 34 new dealers, from which 25 are already operational. We are tracking to reach our objective of signing 75-85 new dealer this year. This club product launch was one of the strongest we ever had, and our team did an incredible job delivering innovative products that will help us driving growth going forward. We introduced the Spyder F3-T that extend the Spyder reach by appealing to a group of bikers similar to that of the cruiser/bagger, one of the largest motorcycle crowds.
We also unveiled the new Sea-Doo Rotax 1630 ACE engine, a new, more efficient 300 horsepower engine that is 16% more powerful than the previous generation. We believe this will make us an even stronger competitor in the high-end personal watercraft market, which represents a large portion of the industry in dollar term. Another nice addition to our lineup is the Renegade X mr, the most powerful mud ATV in the industry. This confirms our position as the biggest player in the off-road mud market. The most important news of the club was certainly the Can-Am Defender. With the Defender, Can-Am is entering the utility side-by-side segment, the largest segment of the industry that enjoyed a fast growth pace over the past few seasons. We are determined to become a strong player in this segment.
Our team of designer and engineers went directly in the field to work with the daily users of these vehicle to make sure that we understand what they need, and we have come up with a vehicle that is tough with its class-leading torque and power at low RPM, capable with its best-in-class towing, hauling, and payload capabilities, and clever with its intuitive and roomy cockpit. The vehicle has been tested and reviewed by the media, not only from the side-by-side industry, but from hunting and farming publication. The reviews are very positive and all agree that Defender will be a strong competitor. Let's speak about the plan where the Defender is manufactured, the Juárez 2 plant. This project has had quite an impressive journey. It took 10 months from the groundbreaking ceremony to the first vehicle out of the production line.
This state-of-the-art facility was designed and built based on lean manufacturing principle for the next generation of side-by-side vehicles. We have completed the construction on time and on budget. The Defender production ramp-up is ongoing, and the first unit has been shipped at the end of November. Steady state of production is expected to be reached at the end of February. I am very proud of what our team has accomplished, and I believe that this factory will be a key enabler to allow us to achieve our growth objectives, which include a new side-by-side model every six months for the next four years. On that, let's move to the product category review, starting with year-round product on slide nine. Year-round product revenue reached CAD 260 million, a 14% increase driven by favorable currency variation and improved mix of ATVs and side-by-sides sold. Looking at the off-road retail sales.
On the ATV side, our North American retail sales are up mid-single digit for the season to date, which is down mid-single digit. Our strong performance was primarily driven by the Outlander L family. Our ATV business is also performing very well in international markets. Can-Am ATV now holds the number 1 market share position in Scandinavia and is continuing to gain market share in Western Europe while solidifying its number 2 position. Turning to the side-by-side. Season to date, the industry is up mid-single digit, while Can-Am is down mid-single digit. The decline in our side-by-side products was driven by a soft start of the season in July and August. Since then, we were able to invest our Q2 saving in additional Q3 programs, and we have regained some momentum. In September and October in the U.S., retail increased mid-single digit. However, Western Canada remained a challenge.
As I mentioned earlier, we just started shipping the Defender and the first shipments are done on an allocation basis so that dealer have unit in their showroom. You will mostly see the initial impact of the Defender on the retail in the first quarter of fiscal year 2017. Moving to Spyder. The 2015 motorcycle season ended on October 31st with the industry up mid-single digit. Can-Am Spyder ended the season with retail sales down mid-single digit. Our performance was impacted by an unfavorable market trend as the industry growth was essentially driven by lower priced units. However, motorcycle retailing at a price of CAD 18,000 and more, the best proxy for Spyder, declined by low single digits. Nevertheless, we had higher expectation for the season in North America, and we are disappointed with our result. On a more positive note, the Spyder F3 is performing well on the international market.
As I mentioned in Q2, the consumer first purchase criteria is now based on look and performance, so we are readjusting our marketing campaign. The European success of the Spyder F3 has continued in the third quarter, and Spyder retail sales in Western Europe have now grown by more than 30% over the last 12 months. We are also seeing positive trends in Japan. Before heading to the seasonal product, I want to come back on another club announcement. We will be a major sponsor of the NASCAR Sprint Cup Series racing team to our Can-Am brand. In addition, we have announced that Can-Am will be the title sponsor of two of the races of the NASCAR Sprint Cup Series, the Can-Am Duel at Daytona and the Can-Am 500 at Phoenix International Raceway.
We believe that this sponsorship represents a significant opportunity to improve Can-Am brand awareness in the U.S. within the target market for our products. Let's now take a look at seasonal products on slide 10. Seasonal product revenues increased 5% to CAD 476 million. This increase was a result of favorable foreign exchange rate variation, but was partially offset by lower shipment to Russia. Russia remained a difficult market at this point. We were behind our plan in term of shipment at the end of the third quarter. The snow condition in most of the country are good as we are heading into the heart of the snowmobile season, but the economy is still fragile and access to credit is a challenge for many dealers. On the North American side, where snow coverage is weaker than last year, the snowmobile industry at the end of November was down mid-teen digits.
The overall situation was up in the western part of the continent and down in the central and western region. In the meantime, Ski-Doo gained market share mid-single digit. To stimulate retail, we have launched sales program in early December into the western region, which is the most affected. Having been through this cycle before, we are closely monitoring the situation. Moving now to the personal watercraft North American retail. The 2015 season ended on September 30th with the industry up low double digits. Sea-Doo had another strong season with retail up mid-double digit and now hold its highest market share position in the last decade. After two season on the market, I think it is fair to say that the Sea-Doo Spark has met its objectives.
It resparked the personal watercraft industry as it has for a second straight season, driven double-digit industry growth in multiple markets around the globe. Now turning to propulsion system. Our sales stood at CAD 98 million, an 18% increase over last year. For outboard engine, the industry season to date is up low single digit, while Evinrude retail was down low single digit. However, the E-TEC G2 has driven market share gain in the 200 horsepower-plus category. Another highlight of the quarter was the agreement with Sea Pro Boats. This OEM agreement is an additional acknowledgment of the multiple benefit of our new engine. Sales from PAC business have increased 14% to reach CAD 176 million. The growth came from higher volume of outboard engine driven by the sales of the G2 color panels.
We also have continued to see good sales momentum in our international market, mainly in Asia-Pacific and Western Europe. Our PAC business has been performing well. The introduction of the Can-Am Defender will help to support the growth. The utility side-by-side customer usually like to accessorize their vehicles to fit their need. Can-Am is offering a wide selection of accessories specially adapted to fit the Defender. Sébastien will now walk you through the financial review of the quarter.
Thank you, José, and good morning, everyone. Earlier this morning, we reported revenues of CAD 1 billion 10 million for the third quarter of fiscal 2016, up 10% from last year. We generated gross profit of CAD 246 million, resulting in a gross profit margin of 24.4%, a decline of 170 basis points from last year. This decline was primarily driven by unfavorable foreign exchange rate variations. Currencies have a positive impact on our revenues, but a negative impact on our gross profit, and this resulted in a net negative impact of 260 basis points on gross profit margin %. Our normalized EBITDA for the quarter came in at CAD 142 million and now stands at CAD 286 million after nine months. Normalized net income amounted to CAD 73 million, and our normalized diluted earnings per share was CAD 0.62. Moving to our revenues by product categories and geographies on slide 15.
Our product category mix for the quarter was similar to last year, with 26% of our sales coming from year-round products, 47% from seasonal products, 10% from propulsion systems, and 17% from parts, accessories, and clothing. When looking at our different regional markets, most of the growth came from the U.S., which benefited from the strengthening of the US dollar over the Canadian dollar, driving a 30% revenue increase. Canada was only slightly up, as Western Canada is still feeling the impact of the decline in oil prices. As José mentioned, the economy in Western Canada is difficult, which is driving an overall weaker demand for powersport products. International revenues were down 5%, driven by lower unit deliveries to Russia and unfavorable foreign exchange rate variations. The decline was partly offset by higher snowmobile shipments in Scandinavia. Now for the normalized net income bridge.
Normalized net income was up CAD 1 million from last year's third quarter. We had a positive CAD 26 million impact coming from volume, mix, pricing and sales program, which was mostly offset by higher production costs and operating expenses for CAD 11 million, driven by higher overheads and warranty costs. A negative impact from normalized tax expense and financing costs, CAD 4 million, increased depreciation expense for CAD 3 million, and unfavorable foreign exchange rate variations for CAD 10 million. Now on to the balance sheet and cash flow update. Our cash position at the end of the quarter was CAD 94 million, and our long-term debt was up CAD 31 million from year-end 2015, as the US dollar continues to strengthen.
Our free cash flow for the first nine months of the year is slightly down compared to last year, despite an improvement of CAD 64 million in normalized EBITDA, as we invested more in working capital to support the growth of the business in CapEx, which is up CAD 42 million, mostly due to investments in the new Juárez manufacturing facility. Finally, we have repurchased about 1.7 million shares during the third quarter for a total of CAD 44 million, driving the total number of shares repurchased since the launch of the NCIB to 2.9 million shares. Now, slide 18 for a look at BRP's Powersport dealer inventory for North America at the end of October. Our network inventory is up 18% from last year's third quarter, the inventory growth is down sequentially from previous quarters.
Our network inventory remains healthy as 90% of the increase is due to earlier shipments of snowmobile this year and the inventory ramp-up in new dealers that we have signed in the last two years. The rest of the increase was driven by new product introductions. Finally, our guidance for fiscal 2016 on slide 19. Nine months into the year, we have been able to deliver on our plan, and we feel we are in a good position heading into the fourth quarter with a good level of orders from dealers for ATVs, SSVs, and PWCs. However, the snowmobile season is young, and there are still uncertainties ahead with a thin snow coverage in North America and with retail demand in Western Canada, which continues to be difficult. As José talked about, Russia is still soft and may end up being worse than initially planned.
After accounting for all the pluses and minuses, our guidance remains essentially unchanged other than some small adjustments to revenue, tax rate, and share count. On the revenue side, these changes bring our total revenue guidance range from up 5%-9%, to up 6%-9%. On the profitability side, as we get closer to year-end, we have better visibility on our profit mix in the different tax jurisdictions, allowing us to reduce the high end of our tax guidance. Our tax guidance range is now 27%-28%. With this adjustment, our normalized net income guidance range is now from down 5% to up 4%, to down 3% to up 4%.
When we factor in the tax rate adjustment and the share count adjustment from the NCIB, our normalized EPS range is now CAD 1.60-CAD 1.72, as the tax range adjustment has a CAD 0.03 positive impact on the low end of the range, and the progress made with the share buyback is expected to improve our EPS by CAD 0.02. This wraps up our guidance update. With that, I will turn the call back to José.
Thank you, Sébastien. All in all, I am pleased with how we have progressed so far this year. We have delivered on our plan, all the while making some key moves to position the company for our long-term growth objective. We are the world leader in snowmobile and the watercraft business. Spark continues to be a great success. We are gaining share in ATV. We are making a push in side-by-side utility market with the Defenders. The Spyder F3-S and Evinrude E-TEC G2 are innovative product that will help us grow in their categories, and we continue to gain momentum with our network worldwide. We are transforming our manufacturing footprint to be more agile and lean. All our Mexican facility are in full operation, including Juárez 2. Last week announcement reaffirmed Valcourt contribution for the future of BRP.
Although world economies are still somewhat unstable, our diversified product portfolio and our strong global presence allow us to keep growing and performing well. Finally, I am proud of our employee contribution. I want to underline their commitment and resilience in relation to the necessary transformation that we have made over the years Because of globalization, we had to take tough decisions to improve our efficiency and remain competitive. One of these was last week's announcement that directly affected our Valcourt employees. They understood that we are taking these decisions to ensure Valcourt remains a center of expertise for the company, not only for design, innovation, and product engineering, but also for manufacturing. I want to thank them for their loyalty and dedication. Thank you. We'll be pleased to answer your 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 Steve Archer from RBC Capital Markets. Please go ahead.
Great. Thank you. Just a couple questions, starting with the Defender. The feedback at the launch event a couple months ago was quite positive. Can you give us some flavor of how that's translated to initial order flow? Was it at or above your expectations? When you look at the planned production ramp in Mexico, does that really sync up with the initial demand?
Good morning, Steve. When we introduced the Defender in Nashville, we told dealers that they would be on allocation from the beginning of production or deliveries in November till the end of February. After that, in March, we'll try to supply to the demand. We didn't take any orders in Nashville, but we have asked for their feeling about, or their plan, their estimation for the first half of next year, and we were happy with the response. We're taking, right now, orders for deliveries in February. It's still an allocation. In January, we'll take orders for deliveries in March.
Okay. I guess, just more generally, a very competitive environment out there for the year-round products. What are you seeing now and in the expectations for the next few months on sales programs, incentive levels? Any expectations that those will move materially outside of your normal ranges?
If I look, obviously, snowmobile right now is slowing down because of the warm weather. You can expect, if the situation continues too long, to have aggressive programs in January, February from all the OEMs to try to maximize the retail in a season that will be very short. We've been through those cycles before, and typically that's what's happening. On the ATV front, I would say the competitiveness of programs is about the same than what we saw last summer and this fall. We're gaining momentum with ATVs because the Outlander L is extremely well received. On the side-by-side, I would say no change since Q2 in terms of program. If there is one thing that is happening on the side-by-side industry, it is the number of new models that are announced by many OEMs, the competitive environment is higher than it was before.
That being said, we enter with the Defender in a segment that represents more than half of the market, and we believe we can grow in that segment.
Spyder incentives, any material changes there?
No. We are in the low season for Spyder and watercraft. No change there. The retail will restart more in February.
Great. Thanks very much. I'll pass the line for now.
Thank you.
Thank you. The following question is from Jaime Katz from Morningstar. Please go ahead.
Good morning. Thanks for taking my questions. I am curious how you see your ability to raise prices in some of the segments going forward in light of the competitiveness across segments that is ongoing right now in North America.
Let us say that pricing, you always need to be careful how fast you increase pricing or reducing pricing because you generate typically cross-border shipment between countries and dealers, and it is somewhat not healthy for anyone. Right now, the US dollar is very strong, and we see some of our competitors raising pricing in country, and we are trying to follow, but you cannot go too fast up or down because it is very difficult for the resale value of the unit. The dealers start to do some cross-border shipment. We are going pace by pace. Typically, in a year, we are increasing pricing by about 1% overall. Right now, with the situation, we might be a bit more aggressive, but you cannot go too fast up or down.
Okay. For the Can-Am side-by-sides, it looked like in the slides you guys had said that the retail sales were down at a mid-single digit rate, and I think that the industry was up. How do you think you can pull on different levers, I guess, to regenerate share gains, either through maybe financing or promotions there in the upcoming period?
If I look at the side-by-side industry, we are competing with the Maverick in the sport category, which is about a third of the industry. Our market share in that category is about flat-ish right now.
Okay.
The Rec-Utility, where we have above 30% of that segment, is 10% of the industry, and that segment have declined in the last year. That's why the Commander sales are affected because of that industry trend. We entering with the Defender in a segment which represents 55% of the industry, and that's why we are so upbeat about the reception of the units and the enthusiasm about the dealer, and we believe we can grow in the side-by-side industry when you look at the big picture.
Thank you so much.
Thank you. Our following question is from Robin Farley from UBS Securities. Please go ahead.
Great, thanks. I have two questions. First is just trying to understand how much FX has kind of moved your revenue guidance. Trying to think about how much it drove outperformance in Q3, and then how much it was lifting your total revenue guidance that in overall sort of percentage point off the bottom. Maybe if you could quantify how much currency is affecting your full-year guidance now versus what you had said earlier in the year.
Hi, Robin. When we announced our guidance last March, the U.S. dollar was trending about 30% above the Canadian dollar, and that's the trend we're seeing today. When you look at it globally, the currency fluctuations that we've seen in the last, let's say, nine months hasn't influenced tremendously our year-end guidance. Obviously, when you look at a year-over-year comparison, well, last year, the currency, the U.S. dollar was not as strong as it was, and that's why you're seeing such a big variation in revenues. I'm not expecting an 8% FX impact on top line for the fourth quarter if the U.S. was to maintain at the same level as the U.S. rates started to increase last year at the end of the year.
If you just look, I guess, sequentially from Q2 to Q3, I think FX was a little bit more of a benefit maybe. I guess on your full-year guidance, a quarter ago, you had said there was about 600 basis points of FX benefit in the
Yes
in the 5%-9% guidance. What would you say now is that FX benefit in your full-year guidance?
I would say probably in around the 6%-7% overall impact, Robin.
No, that's helpful. Thank you. Then, I don't know if you commented on, if you could give any color on November side-by-side sales. I realize you may not know industry color at this point, but just how you feel that side-by-side sales trended in November?
Yeah. As you said, we don't have any industry data. Basically, if you remember in Q2, we lost some momentum. We saved some dollar on program that we reinvested in Q3, you saw the lift that we had in Q3. In November, our retail is similar to what we saw in Q2.
Do you attribute that to less promotional programs in November?
No. A few thing, Robin. First, Q2 is always a bit a funny quarter because it's the end of the season for off-road business. OEM sometime are aggressive to retail as soon as possible the model year. The Q2 is always a bit a funny quarter. Q3, you have the ramp-up of the new model year product in the retail. Our level of inventory is I feel comfortable overall. Sometime we're missing product in a quarter at the end of a season versus some of the OEM. This is in a nutshell the situation.
The other thing is, as I said before, the club was a big club because the dealer who attend the club in Nashville saw our commitment for the off-road business with the Defender, the new facility, the commitment of new model every six months for the next four years, plus the novelty on the ATV lineup. It's the combination of all those thing that make a difference and fuel the momentum.
Okay, great. Thank you very much.
Thank you.
Thank you. Our following question is from Anthony Zicha from Scotiabank. Please go ahead.
Yes, good morning. José, could you give us a bit more color what's behind the 7% increase in retail sales for the seasonal and for the year-round products? Second part to that question is what's up with the U.S. consumer? Are they migrating towards lower price points? Are they going towards the Asian manufacturers here? Has anything changed in the psychology of the U.S. consumer?
For your first question, the retail was up 7%. If I remove snowmobile, like I said in my statement.
The retail was up 11%. It's a combination of solid retail, solid ending of the watercraft season, plus the off-road momentum that we had reinvesting the money we save in Q2 and Q3, and model year 2016 competing against the other OEM model year 2016. The model year 2015 had been clean for some OEM then. This is the situation of the good momentum we had in Q3, and so far in November it's ongoing. In terms of your question about entry-level product, if you look what's happening in every industry, you see what we've done with the Spark in Watercraft. You see the trend in motorcycle. The motorcycle industry in 2016 was up mid-single digit, but if you remove the entry-level motorcycle, it was down mid-single digit. There is definitely a trend where there is demand for more pricey unit in every product line.
There is some good Asian product out there, but I think there you're going very low in the food chain. I think there is a trend, but I'm not sure if the U.S. customer will go buying a lot of Asian product.
Okay. One last question. With reference to inventories at the dealership level, you had seen a good improvement from Q2 to Q3. What about Q4? Is the positive momentum continuing in the last couple of months?
Yeah, I'm expecting Q4 inventory to be up slightly, but it should be in the low single digits. Obviously, snowmobile season is a big factor, and there's always good retail that happens in January, so that could influence the snapshot that we have at the end of the year. If the snow comes and the retail picks up on snowmobiles, Anthony, I'm expecting to be in the low single digits.
Okay, excellent. Thank you very much, gentlemen.
Thank you. Our following question is from Martin Landry from GMP Securities. Please go ahead.
Good morning, José and Sébastien. My question is on the Spyder. I think your sales were a little bit below your expectations. Wondering how does the inventory at the dealer level looks like right now? I'd love to hear color, both from a unit standpoint and from an age standpoint.
Good morning. Good morning, Martin. You're right. We were disappointed with the Spyder season last year. I think one of our surprise is despite the good media coverage we had for the F3 introduction, the marketing campaign that we had, only a third of the Spyder customer, the people who own a Spyder, know about the F3. This is the disappointment. Our marketing campaign was not as efficient as we had planned. You're right, the level of inventory in North America is behind or higher than what we had predict. Most of it is model year 2015. We don't have much model year 2014 out there. We take the approach that when we have inventory, we prefer at the end of a model year to be aggressive and try to clean it out as much as we can.
Out there you have a good level of inventory of model year 2015, but we don't have much 2014. That being said, very happy with the Spyder business outside North America. It's smaller in number of units, but like I said in my statement, when you wrap up the season 2015, it was up 30%, and we expecting with the F3T a continued growth in both North America and in international.
Okay, that's helpful. On your snowmobile, you said you initiated some sales programs. Is this in reaction to your competitors, or it's more an anticipation of slower sales, meaning have your competitors started to initiate some sales programs as well?
What we've done so far, the sales program we implemented, it was launched, I think, December 1st, is just what we call internally a no, no. The customer buy a snowmobile, you don't pay for the first year. We're trying to give reason for people who are uncertain about their financial situation. We're trying to give them a reason to feel better and buy a snowmobile. It was not aggressive program so far from us or from any competitor.
Okay.
It was done only in the West, by the way.
Okay. Thank you very much.
Thank you.
Thank you. Our following question is from Benoit Poirier from Desjardins. Please go ahead.
Yeah. Good morning, gentlemen. Just to come back on the Spyder, did you have a feeling that some of the sales were impacted by people waiting for the new cruiser bagger? I understand it was supposed to start shipments in December, I'm just wondering whether it put some pressure on the sales.
Good morning, Benoit. For sure, some customer were waiting for the Bagger because if you buy a base F3 or an F3S and you want to equip it for better wind protection and some more comfortable equipment for the passenger, it's a lot of money. For sure, the Bagger, it's a good deal for people who want to ride too, someone who have a more high-end product. We started shipping the F3T in December as planned, we'll see how it goes. Again, at this time of the year, it's very, very small numbers. It's too early to have a feeling of how the retail will go next year.
Okay. For FY 2017, what should we expect in terms of F3 sales, in terms of with the Spyder?
Obviously, Benoit, for competitive reason, I cannot elaborate too much on this, but our marketing campaign will evolve next year because one of the disappointment we had is despite the money we invested last year, only a third, again, of the owners knew about the F3. You can expect quite a different marketing campaign this coming spring, because it's key that we find a way to build the awareness as soon as possible, and we know that we have a very good product between the F3 lineup and the RT lineups.
Okay. Just on the outboard engine, obviously, the market is still healthy, is it still driven by the new boats as opposed to the repower market, which is still weak, is there more a trend toward buying smaller engines as opposed to the larger engines? Is there any trend in terms of pricing point, it's again driven by new boats?
No, the trend we're seeing, Benoit, is a strong market in the saltwater market. Looking at Florida, Texas, very strong, also in the new boats and pontoons. These are the key markets we're seeing growth in.
Okay. Is it fair to say that the G2 engine, basically the 200 horsepower plus, outperformed the industry in terms of growth rate?
Well, we did get good retail and market share gains with the G2, as it's a new product and offers clear benefits to the consumer. We did see good momentum there. However, we've talked before on our dealer network and the footprint of that network, that we're not as strong in saltwater markets, we're not going to be seeing a pickup in retail, let's say, in Q4 for the G2, because it's not a market where we're strong. It's much more in the Northeast and the central U.S. that we are strong and have a good dealer base.
Okay. In terms of cost saving, with respect to the ramp-up of Juárez 2, in Mexico, you were looking for about CAD 25 million of cost saving coming from Mexico, mostly skewed towards fiscal 2017, I understand. How confident are you to achieve kind of a CAD 25 million of cost saving from Mexico next year?
Well, the cost saving is going to be, one, driven by the fact that now next year, 100% of the watercrafts will be manufactured in Mexico. Therefore, that's going to be driving savings to the bottom line. Also the fact now that we have an additional plant in Mexico, obviously, it won't be running at full capacity next year because we'll have one product which is going to be manufactured there. Over time, as we introduce new products, we're going to be gaining even more efficiency from our operations in Mexico. We'll see that margin improvement come down to the bottom line.
Okay. Thank you very much for the time.
Thank you.
Thank you. Following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. You guys talked about a richer product mix. Can you give us some examples? Because it looks like Outlander L and Spark have really been driving some sales. What's driving the better mix?
Yeah. Good morning, Gerrick. Actually, two product lines had good mix this quarter and actually drove almost a 300 basis point improvement on the margin this quarter. First one was snowmobile. We had a lot of crossover sleds, which were being shipped this quarter, and some mountain sleds, which do have a better margin profile than the overall average of snowmobiles. Also, as José indicated, we launched a new XMR mud version, and we shipped quite a few units this quarter, and that also helped our gross margin percentage.
Okay, great. Thanks. After last quarter, you mentioned ramping up promos to compete better against Arctic Cat who have their own inventory issues, the Japanese who've been more promotional on your margins. Was there an impact on your margin from more programs and promotions?
Yes, there was, that's included in, we'll call it, the pricing mix and sales program. We did invest quite a bit of that money that we had saved in Q2 into the third quarter in order to drive the retail performance.
Okay, great. Thanks, Sébastien.
Thanks.
Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.
Good morning. With regards to the snowmobile inventory, you gave some pretty good specifics with Q2 in that snowmobiles were up 12%, I think, in terms of inventory specifically. What was that number at Q3?
Yeah, I have this number. The inventory impact was 11% year-over-year, Mark, for the third quarter.
Snowmobiles were up 11% year-over-year.
Yeah.
Okay. I think the Scandinavia market was relatively weak for you guys last year, at least relative to North America on snowmobiles again. What's your outlook there? What's the snow coverage like in Scandinavia, and what's your outlook in terms of competitive activity?
Good morning, Mark. Scandinavia, last year, they had snow, but very late. They had a very slow start of the season, which improved on the back end of the season. Over there, the season run till end of March, mid-April. This year, the start of the season is better than last year. We having a good retail over there for Scandinavia. Russia, the snow coverage right now is very good. It's one of the best we've seen in the last few years. The difficulty is the credit line for the dealers. We're off our target at the end of Q3. We have a plan right now to catch up by the end of Q4, but this is a risk that is factored in our guidance. We could be off our target by the end of January.
The season over there, again, is longer than here. It's a good start overall in Scandinavia.
Okay, that's helpful. Thanks. Just a couple of follow-ups on the utility side-by-side. What's the pace of production right now as far as for the Defender?
Right now, we running at the one full shift operation, half the pace about that we intend to go. Like I said, we will be at the full daily rate or hourly rate by the end of February, one shift. After that, we can ramp up, depending of the demand. That's why in January, we'll take orders for the Defender for deliveries in March, and we'll adjust accordingly.
What is that rate in terms of units per hour?
We don't go in those specifics, Mark, for competitive reasons.
Yeah. Okay. Just last, what's your outlook? Obviously, the utility segment of the side-by-side market has been a strong performer, and clearly, it's the largest segment. What's your outlook over the next year or two in terms of growth of that segment?
We saw growth of double-digit in the last few years and high double-digit in the last year in the utility segment. Now it's slowing down. I would say it's probably in the range of, it's a high single-digit for now or half, about 5%. For us, it's a huge opportunity. It's a segment that it represents 55% of the industry, where we're totally absent. That's why, obviously, we'd like the segment to continue to grow. Even with a moderate growth, for us, it's offering a big opportunity because we're starting from scratch.
Yeah. No, I understand. Perfect. Thanks very much.
Thank you. Our following question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yeah. Hi, guys. Just on the inventory levels, I just want to get the math right here. If snowmobile was up 11, does that imply that the other 7% was just new dealer adds?
No, new dealers is about 5%, Derek, and the rest would be other product lines.
Okay, great. In terms of the promotion on snowmobile, I understand you guys are going to put some promotions through in Q4. Are you seeing that matched by your competitors, or is it as competitive an environment as we're seeing in ATV and SSV?
Right now, Derek, again, we've launched some, I would call it soft program in the West, which is a financing programs. Where, depending on how the snowmobile season would evolve, and we've been through those cycle before, if the season is very short, the retail season is short, you become more aggressive to make sure you maximize your market share. This is one of the risks we have for year-end, is a sales program for snowmobile. That will happen probably most of it after Christmas time.
The retail season is short for all OEMs, and the industry trends are down. Obviously, no one wants to get stuck with inventory at the end of the season. It's fair to assume that if the trend continues, other OEMs will also be supporting their dealers with retail incentive programs.
Okay, great. Yeah, that's helpful. Just a couple more housekeeping questions. In terms of your capital allocation going forward, should we expect you guys to remain aggressive with the NCIB, given your healthy balance sheet?
Well, obviously, with the current share price, the NCIB remains an attractive way to return capital to shareholders. Obviously, we will continue and consider it. The current NCIB expires at the end of March, and in due course, we'll have further discussions with the Board to decide what we do with any cash that we have on the balance sheet.
Okay. Then just the last one for me. Can you just give us an updated guidance just on your tax rate for fiscal 2017?
We'll be actually providing guidance in March when we publish our Q4 results, Derek. Today, we'll focus on Q4, which is coming up.
Okay, great. Thank you very much.
Thank you. Our following question is from Tim Conder from Wells Fargo. Please go ahead.
Thank you. A couple questions here, gentlemen. You've given some color, specifically, again, your exposure in the southern portion of the U.S., you're working on building up your dealer network there specifically. Any comments that you can have relating to the cadence of sales, say, in Texas, over the last four months, also other commodity-dependent areas? A little more color, if you could, on Western Canada, maybe Australia. Brazil. Obviously, Brazil's got more issues than commodities. Just any comments on those areas, specifically the sales cadence at retail the last four months.
Good morning, Tim. If you take Western Canada, if you look at all the industry, it's about down 25% right now if you mix all the product lines together, which is a big decline. In the United States, there is a slight decline in Texas and states like this, but it's not material. I would say it's below 10%. If you go in Brazil, in Brazil at the beginning of the year when the real lost 35% in value, every OEM increased their pricing in the range of 20%-25%, and we had the big drop in demand in Brazil. APAC, Asia Pacific, the retail is going up. Obviously, with the weakening of the Australian dollar, the profitability have declined. If you look at the big picture, that's what happening overall.
Okay. On the motorcycle market, thanks for the color earlier. As you're seeing again, the lower end of the market or the more entry level of the market perform better, what do you think changes that here? Can Spyder make the turn if the rest of the, let's call it, the heavyweight market does not? What's your comfort level in that? A clarification question on the outboard. Are you saying that your share, because of your less exposure to the saltwater market, the products are performing well where you have distribution, but are you saying overall that your share maybe shrank a little bit?
Let's talk about the motorcycle. The motorcycle industry increased last year by mid-single digit, but the heavyweight, the more expensive motorcycle declined by mid-single digit. The point I want to make is the growth is coming from the entry-level product, but there is still a big portion of motorcycles that are above CAD 15,000. I think there is definitely a trend where there is new customer who are looking for more entry-level product on any product line. There is still a lot of customer who are looking for high-end product in the motorcycle industry. On the outboard engine, as Sébastien explained earlier, we always been stronger in the power versus OEM. We're trying now to shift that trend. We're signing more and more OEM. Because the trend is going down in the power, gaining in OEM, that's where we've lost our market share.
That being said, our propulsion system is up 18% because the reach is good because the G2 right now is offered only in the 200 horsepower up category, where obviously, higher horsepower, higher margin.
Okay. Last question, gentlemen. Just a little bit on the manufacturing. Again, the Juárez 2 appears to be going very well and good execution overall there. As it relates to going to more of a, if you want to call it just-in-time pull type of process, where are you roughly? If you can, give us some color. If dealer sells a side-by-side or a Spyder or each of the main product lines, where are you in the ability to replenish, say, in terms of weeks or months? However way you want to comment on that.
Okay. When we acquired Juárez 1, we acquired an existing factory and we moved ATV from Valcourt to Juárez 1. After that, we started side-by-side in the same factory, and we were missing space. To be able to manufacture both product in the factory, we had to farm out a few things that we're doing internally, and we had no paint system, no metal print system for all the product made in Juárez 1. The Juárez 2 right now, we have the capacity to make internally everything around the frame, the rack. We're doing our painting ourself, and that's where we have an efficiency gain going forward. That's why we needed to invest in Juárez 2, to be more efficient. Plus, it's the facility. Manufacturing sites are always improving, and this facility operate in one-piece flow principle.
It's very flexible, the way it's designed. That's why we will be able to implement so many new model in that factory in the next four years.
Okay. Just the turnaround times, José, from, I guess, a replenishment cycle perspective.
We can turn around. If you increase by a big number, the lead time will be anywhere between three to four months to be realistic.
Our objectives, Tim, are actually to reduce those lead times down the road as part of lean manufacturing, and give more flexibility to dealers and a shorter window for ordering goods and having them on the floor ready to sell.
Okay. Thank you, gentlemen.
Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.
Good morning. Thanks for taking my question and squeezing me in. You've addressed most of them, but a question on Defender. I am curious if you have any expectations for the impact on the parts and accessory business. I imagine that the attachment rate of additional accessories on that particular unit is particularly high.
Definitely. The Defender is the type of product where we expect a big dollar per unit. I would say that even with the other side-by-side, we have quite a high level of dollar per unit. The Defender will be higher, but it is not a big increase versus Commander and Maverick dollar per unit.
Great. Thank you.
Thank you. Our following question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Yeah, thanks. Good morning. Firstly, just a quick, I guess, guidance question. Just on the seasonal products revenue for the full year are flat to up 4%. It sort of implies, at least if my math is right, a fairly significant decline year-over-year in revenue in that segment. Is that just a reflection of your conservatism on the snowmobile market with Russia, Western Canada, et cetera? Or is there also some timing issues in there?
Good morning. Yeah, two things actually. First is it was planned that way. We early shipped snowmobiles in Q2 this year versus last year. We knew our Q4 shipments of snowmobile would be lower. Also, yes, some Russia units. Russia's going to be slightly lower than what we had anticipated. Usually, we do good deliveries to Russia in Q4, that's impacting the numbers somewhat. The main reason is timing and deliveries, Cameron.
Okay. That's what I thought. Just second question. I know it's too early to be talking about fiscal 2017, but maybe just sort of big picture. What worries you the most as we head into next year? Is it the demand environment? Is it competition, or is there something else? Just sort of want to get your thoughts on sort of the big picture things that are maybe the biggest question marks for you as we head into next year.
I would say, Cameron, that in term of our product, our frame, we're quite comfortable with our product, our frame. If you look at all our product line are up to par, very competitive in their respective industry. Not to worry there. Demand, the world is getting more volatile, and it swing very quickly from good to bad or bad to good. For sure, demand is a bit more difficult to predict. Again, I think right now you're starting to see one of the strength of BRP, our product diversification and our geographic diversification, and also our manufacturing diversification. When something happen in one product line in one country, we have many legs or many lever that we can pull to help to continue to grow in that volatile environment.
Okay. Very good. Thanks very much.
Thank you.
Thank you. Following question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey. I just wanted to ask you about demand for the Maverick Turbo since Polaris came out with their Turbo, and also how is the side-by-side market over that CAD 20,000 threshold?
Let's say that it's difficult, Gerrick, to read the situation in the sport category. As you remember, we came out with the Maverick 121 late last season. It was in November, we were a bit on the back end of the season for the Southwest. We had an okay spring. We came out with the 131 on time right now. Polaris came out with their 144, I think, a month later. Right now, we don't have much industry data so far on the side-by-side business. Our retail is about on track on the sport category, it's difficult for me to comment versus the competition. One thing I could add, our product is very competitive. The Maverick 131 is a very competitive product.
Okay, you're still seeing strength in the CAD 20,000 above category?
There is definitely How can I say? When you pass the bar of CAD 20,000, it's getting expensive. You need to be careful. We need to be careful as OEM to be realistic with pricing. There is some elasticity there when you arrive above CAD 20,000.
Okay, fair enough. Thank you.
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. We look forward to speaking with you again in March for our fourth quarter earnings call. Thanks again, everyone, and have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.