Welcome to BRP Inc. 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 Deschenes.
Aviv Deschenes, please go ahead.
Thank you, Umo. Good morning, and welcome to BRP's 3rd quarter conference call for fiscal year 2016. Joining me on the call this morning are Jose Bojeli, President and Chief Executive and Sebastien Martel, Chief Financial Officer. Before we
move to the prepared remarks, I would like
to remind everyone that certain forward looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD and A for listing of these. Also during the call, reference will be made to supporting slides, which you can find on our website at brp.com under the Investor Relations section. So with that, I'll turn call over to Jose. 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 URA's and our performance in the personal watercraft business has been very good as well as in the ETV business. Now let's have a look at the financial highlight of the quarter on Slide 4.
Revenues in the quarter grew 10% to just over $1,000,000,000 The growth was primarily driven by strong sales to the U. S, which benefited from favorable foreign exchange variation. The revenue increase was also helped by a richer product mix across portfolio. Looking at the bottom line and despite a currency headwind of $10,000,000 our normalized EBITDA reached $142,000,000 an increase of $7,000,000 This translated in a normalized diluted earnings per share of $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 steaming 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 3rd quarter, including a 30% drop in Western Canada. As we advance to the snowmobile retail season, we are closely monitoring Despite the market volatility, I am pleased with our result. From an operation point of view, everything is running smoothly and all our programs are on plan. Sebastien will give you more details about our financial performance in a few minutes.
Now, let me walk you through some of the key events of the quarter starting on Slide 5. 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 the retrospective, it may have been an understatement. Our products were well received and since that lab we have signed 34 new dealers from which 25 are already operational. We are tracking to reach our objective of signing 75 to 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 Spider F3T that extend the Spider reach by appealing to a group of bikers similar to that of the Cruiser Bagger, one of the largest motor cycle crowds. We also unveiled the new Sea Doo Rotax 1630 ACE engine, a new more efficient 300 horsepower engine that is 15% 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 XMR, the most powerful mod ATV in the industry.
This confirms our position as the biggest player in the off road mod market. But 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, of the industry that enjoy a fast growth pace over the past few seasons. And 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 vehicles 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 been test 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. Now let's speak about the plan where the Defender is manufacturer, the ULS 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. The 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 have 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 6 months for the next 4 years. On that, let's move to the product category review, starting with year round product on Slide 9.
Year round product revenue reached 260,000,000 dollars a 14% increase driven by favorable currency variation and improved mix of ATVs and side by side 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 one 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 August. Since then, we were able to invest our Q2 savings in additional Q3 programs and we have regained some momentum.
In September 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 Q1 of fiscal year 2017.
Moving to Spider. The 2015 motorcycle season ended on October 31 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 price units. However, the best proxy for Spider declined by low single digits.
Nevertheless, we had higher expectation for the season in North America 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. Success of the Spider F3 has continued in the Q3 and Spider 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'll be a major sponsor of the NASCAR Spring Cup Series racing team to our Can Am brand. In addition, we have announced that Can Am will be the title sponsor of 2 of the races of the NASCAR Sprint Cup Series, the Can Am dual 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 $476,000,000 This increase was a result of favorable foreign exchange rate variation, but was partially offset by lower shipment to 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 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 America Retail. The 2015 season ended on September 30 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 2 seasons on the market, I think it is fair to say that the Seadust Spark has met its objectives.
It re sparked the personal watercraft industry as it has for a 2nd straight season driven double digit industry growth in multiple markets around the globe. Now turning to Propulsion System. Our sales stood at $98,000,000 an 18% increase over last year. For outboard engine, the industry season to date is up low single digit, while even road retail was down low single digit. However, the Etech G2 has driven market share gain in the 200 horsepower plus category.
Another highlight of the quarter was the agreement with Seapro 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 $176,000,000 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 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, especially adapted to fit the Defender. Sebastien will now walk you through
Thank you, Jose, and good morning, everyone. Earlier this morning, we reported revenues of $10,000,000,000 for the Q3 of fiscal 2016, up 10% from last year. We generated gross profit of $246,000,000 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. In fact, 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 2 60 basis points on gross profit margin percentage.
Our normalized EBITDA for the quarter came in at $142,000,000 and now stands at $286,000,000 after 9 months. Normalized net income amounted to $73,000,000 and our normalized diluted earnings per share was $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 U.
S. 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 Jose 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 in Scandinavia. Now for the normalized net income bridge. Normalized net income was up $1,000,000 from last year's 3rd quarter. We had a positive $26,000,000 impact coming from volume, mix, pricing and sales program, which was mostly offset by higher production costs and operating expenses for $11,000,000 driven by higher overhead and warranty costs. A negative impact from normalized tax expense and financing costs $4,000,000 increased depreciation expense for $3,000,000 and unfavorable foreign exchange rate variations for $10,000,000 Now on to the balance sheet and cash flow update.
Our cash position at the end of the quarter was $94,000,000 and our long term debt was up $31,000,000 from year end 2015 as the U. S. Dollar continues to strengthen. Our free cash flow for the 1st 9 months of the year is slightly down compared to last year despite an improvement of $64,000,000 in normalized EBITDA as we invested more in working capital to support the growth of the business and CapEx, which is up $42,000,000 mostly due to investments in the new UIs manufacturing facility. And finally, we have repurchased about 1,700,000 shares during the Q3 for a total of $44,000,000 driving the total number of shares repurchased since the launch of the NCIB to 2,900,000 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 Q3, but 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 2 years. The rest of the increase was driven by new product introductions. And finally, our guidance for fiscal 2016 on Slide 19.
9 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 Q4 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 Jose talked about, Russia is still soft and may end up being worse than initially planned. So 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% to 9% to up 6% to 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. So our tax guidance range is now 27% to 28%. With this adjustment, our normalized net income guidance range is now from down 5% to up 4% to down 3% to up 4%. So when we factor in the tax rate adjustment and the share count adjustment from the NCIB, our normalized EPS range is now $1.60 to 1.72 dollars as the tax range adjustment has a $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 $0.02 So this wraps up our guidance update. And with that, I will turn the call back to Jose.
Thank you, Sebastien.
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 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 Defender. The Spyder F3T and Evenro DTAC 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 mean. All our Mexican facility are in full operation, including Juarez 2. And last week announcement reaffirm Valco 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 decision to improve our efficiency and remain competitive. One of these was last week announcement that directly affected our VAALCO employees.
They understood that we are taking these decision to ensure VAALCO remain 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. Our first question is from Steve Harcher from RBC Capital Markets. Please go ahead.
Great. Thank you. Just a couple of questions, starting with the Defender. The feedback at the launch event a couple of 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? And 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've told dealer that they would be on allocation from the beginning of production or deliveries in November till the end of February. And after that in March, it will be we'll try to supply to the demand. Then we didn't took any order in Nashville, but we have asked for their feeling about or their plans, their estimation for the first half of next year and we were happy with the February. Is still an allocation.
And in general, we'll take orders for deliveries in March.
Okay. And I guess just more generally a very competitive environment out there for the year round products. What are you seeing now and then 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 at obviously, snowmobile right now is a bit is slowing down because of the warm weather. You can expect, if the situation continue too long to have aggressive program in January, February from all the OEM to try to maximize the retail in the season that will be very short. We've been through those cycles before and typically that's what happening. On the ATV front, I will 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 well is exceptionally well received.
And on the side by side, I would say no change since Q2 in term of program. If there is one thing that is happening on the side by side industry is the number of new models that are announced by many OEMs and the competitive environment is higher than it was before. That being said, we enter with the Defender in a segment that represent more than half of the market and we believe we can grow in that segment.
And Spider incentives, any material changes there?
No. We are at the low in the low season for Spider and Watercraft, then no change there. The retail will restart more in February.
Okay. Thanks very much. I'll pass the line for now.
Thank you.
Thank you. The following question is from Jamie Katz from Morningstar. Please go ahead.
Good morning. Thanks for taking my questions. I'm curious how you see your ability to raise prices in some of the segments going forward in light of the competitiveness across segments that's ongoing right now in North America?
Let's 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's somewhat not healthy for anyone. Then right now, the U. S. Dollar is very strong and we see some of our competitor raising pricing in country and we're trying to follow, but you cannot go too fast up or down because it's very difficult for the resale value of the unit, the dealer start to do some cross border shipment, then we're going pace by pace. Typically in a year, we're 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. And then 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. So 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?
But if I look at the side by side industry, we're competing with the Maverick in the sport category, which is about a third of the industry. And our market share in that category is about flat TIF right now.
Okay.
The Recue where we have above 30% of that segment is 10% of the industry and that segment have declined in the last year. Then that's why the Commander sales are affected because of that industry trend. But we're 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 enthusiasts 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
I have two questions. First is just trying to understand how much FX has kind of moved your revenue guidance. I'm trying to think about how much it drove outperformance in Q3 and then how much it was lifting your total revenue guidance that incremental sort of percentage point off the bottom. Maybe if you could quantify how much currency is affecting your full year guidance now versus kind of 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. So when you look at it globally, the currency fluctuations that we've seen in the last, let's say, 9 months hasn't influenced tremendous the our year end guidance.
Obviously, when you look at a year over year comparison, while 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 rate started to increase last year at the end of the year, as the U. S.
Rate started to increase last year at the end
of the year. But if you just look I guess sequentially from Q2 to Q3, I think FX was a little bit more of a benefit maybe. So I guess on your full year guidance, a quarter ago, you had said there was about 600 basis points of FX benefit in the 5% to 9% guidance. What would you say now is that FX benefit in your full year guidance?
I would say probably in around the 6% to 7% overall impact, Robin.
Okay. No, that's helpful. Thank you. And 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?
Yes. 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 and you saw the lift that we had in Q3. And in November, our retail is similar to what we saw in Q2.
And is that do you attribute that to less promotional programs in November?
No, I think a few things, Robyn. First, Q2 is always a bit of funny quarter because it's the end of the season for off road business. Then OEM sometime are aggressive to retail as soon as possible the model year. Then the Q2 is always a bit a quarter. Q3, you have the ramp up of the new model year product in the retail.
And our level of inventory is, I feel comfortable overall and sometime we're missing product in the quarter at the end of the season versus some of the OEM. Then 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 saw our commitment for the off road business with the Defender, the new facility, the commitment of new model every 6 months for the next 4 years, plus the novelty on the ATV lineup, then it's the combination of all those things that make a difference and fuel the momentum.
Okay, great. Thank you very much.
Thank you.
Thank you. Our following question is from Anthony Zika from Scotia Bank. Please go ahead.
Yes, good morning. Julien, 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? And 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?
Listen, 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 completing our model year 16 competing against the other OEM model year 16, the model year '15 have been clean for some OEM. Then this is the situation of the good momentum we had in Q3 and so far in November is 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 and Watercraft.
You see the trend in motorcycle. The motorcycle industry in '15 was up mid single digit. But if you remove the entry level motorcycle, it was down mid single digit. Then there is definitely a trend where customers there is demand for more pricey unit in every product line. I don't think that there is some good Asian product out there, but I think there you're going very low in the food chain.
And 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. And one last question, with reference inventories at the dealership level, so you had seen a good improvement from Q2 to Q3. What about Q4? Is the positive momentum continuing in the last couple of months?
Yes, 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. But if the snow comes and the retail picks up on snowmobiles, Anthony, I'm expecting to be in the low single digits.
Our following
My question is on the Spider. 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, Martin. First, you're right. We were disappointed with the Spider 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 Spider customer, the people who own the Spider know about the And this is a disappointment. Our marketing campaign was not as efficient as we had planned.
And you're right, the level of inventory in North America is behind or higher than what we had predict. But it's not it's either it's most of it is model year 'fifteen. We don't have much model year 'fourteen out there. It was we take the approach that when we have inventory, we prefer at the end of the model year to be aggressive and try to clean it out as much as we can. Then out there, you have a good level of inventory of model year 'fifteen, but we don't have much 'fourteen.
That being said, very happy with the Spider business outside North America. It's a smaller in number of units, But like I said in my statement, when you wrap up the season 15, it was up 30% and we are expecting with the F3T continued growth in both North America and in international.
And 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?
But what we've done so far, the sales program we implemented and it was launched, I think, December 1, is just what we call internally a no, no, no. Then the people the customer buy a snowmobile and you don't pay for the 1st 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. Then it was not aggressive program so far from us or from any competitor.
And it was done only in the West by the way.
Okay. Okay. Thank you very much.
Thank you.
Thank you. Our following question is from Benoit Poirier from Desjardins. Please go
And just to come back on the spider, did you have a feeling that some of the sales were impacted by people awaiting for the new Cruiser Bagger? Because I understand it was supposed to start shipments in December. So I'm just wondering whether it put some pressure on the sales?
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. Then for sure the Bagger, it's a good deal for people who want to ride 2 and someone who have a more high end product. And we started shipping the F3T in December as planned and we'll see how it goes. But again, at this time of the year, it's very, very small numbers. Then it's too early to get to have a feeling of how the retail will go next
Okay. And for fiscal 'seventeen, what should we expect in terms of F3 sales in terms of with the Spider?
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 we have we have a very good product between the F3 lineup and the RT lineups.
Okay. And just on the outboard engine, obviously, the market is still healthy, but is it still driven by the new boats as opposed to the repower market, which is still weak? Or is there more a trend toward buying smaller engines as opposed to the larger engines? Is there any trend in terms of the pricing point or it's again driven by new boats?
No. The trend we're seeing Benoit is a strong market in the saltwater market. So looking at Florida, Texas, very strong and also in the new boats and pontoons. These are the key markets we're seeing growth in.
Okay. So 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 a clear benefits to the consumer. So we did see good momentum there. However, we've talked before on our dealer network and the footprint of that network, we're not as strong as saltwater markets. And so 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. And just in terms of cost saving with respect to the ramp up of Juarez 2 in Mexico, you were looking for about $25,000,000 of cost saving coming from Mexico, mostly skewed towards fiscal 'seventeen, I understand. So how confident are you to achieve kind of a $25,000,000 of cost saving from Mexico next year?
Well, the cost saving is going to be 1, driven by the fact that now next year 100% of the watercrafts will be manufactured in Mexico. And therefore, that's going to be driving savings to the bottom line. And 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. But over time, as we introduce new products, we're going to be gaining even more efficiency from our operations in Mexico. And 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. So what's driving the better mix?
Yes. Good morning, Eric. Actually, 2 product lines had good mix this quarter and actually drove almost a 300 basis point improvement on the margin this quarter. The first one was snowmobile. We had a lot of crossover sleds, which were being shipped this quarter and some mountain sleds, which do have better margin profile than the overall average of snowmobiles.
And also as Jose indicated, we launched a new XMR, or mud version, and we shipped quite a few units this quarter and that also helped our gross margin percentage.
Okay, great. Thanks. And then after last quarter, you mentioned ramping up promos to compete better against Arctic Cat players who have their own inventory issues, the Japanese who've been more promotional on your margin. So was there an impact on your margin from more programs and promotions?
Yes, there was and that's included in the 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 Q3 in order to drive the retail performance.
Okay, great. Thanks, Sebastien. Thanks.
Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.
Hey, 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 of inventory specifically. What was that number at Q3?
Yes, I have this number. The inventory impact was 11% year over year, Mark, for the Q3.
So snowmobiles were up 11% year over year?
Yes. Okay.
And I think the Scandinavia market was relatively weak for you guys last year, at least relative to North America on snowmobiles 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?
Yes. Good morning, Mark. Scandinavia last year they had snow but very late. Then they had a very, very slow part of the season, which improve on the back end of the season and over there the season run till end of March, mid April. Then this year, the start of the season is better than last year and we're 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 then. 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 and the season over there again is longer than here. But that's a good start overall in Scandinavia.
Okay, that's helpful. Thanks. And then just a couple of follow ups on the utility side by side. What's the pace of production right now at Juarez 2 for the Defender?
Right now, we're running at the one full shift operation at 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. And after that, we can ramp up depending why in January we'll take orders for the Defender for deliveries in March and we'll adjust accordingly.
And what is that rate in terms of units per hour?
We don't go in those specific, Mark, for competitive reasons.
Yes. Okay. And then just last, what's your outlook? I mean, 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 2 in terms of growth of that segment?
But we're planning we saw growth of double digit in the last few years and high double digit in the last few years 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%. But for us, it's a huge opportunity. It's a segment that it represents 55% of the industry where we're totally absent.
And that's why obviously, we'd like the segment to continue to grow. But even with a moderate growth for us, it's offering a big opportunity because we started from scratch.
Very much.
Thank you. The following question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yes. Hi, guys. Just on the inventory levels, I just want to get the math right here. So if snowmobile is 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, 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, Direct, again, we've launched some, I would call it soft program in the West, which is a financing programs. But where depending on how the snowmobile season would evolve and we've been through those cycles before, If the season is very, very short, the retail season is short, you become more aggressive to make sure you maximize your market share. Then we 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.
And it's I mean the retail season is short for all OEMs and the industry trends are down. So obviously no one wants to get stuck with inventory at the end of the season. So 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, I mean, 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. So 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
balance sheet.
Okay. And then just the last one for me. Can you just give us some an updated guidance just on your tax rate for fiscal 2017?
We'll be actually providing guidance in March when we published our Q4 results, Derek. So today, we'll focus on Q4, which is coming up.
Okay, great. Thank you very much.
Thank you. The following question is from Tim Conder from Wells Fargo. Please go ahead.
Thank you. And a couple of questions here, gentlemen. You've given some color, but specifically, again, your exposure in the southern portion of the U. S, you're working on building up your dealer network there specifically. But any comments that you can have relating to the cadence of sales, say, in Texas, over the last 4 months and then also other commodity dependent areas?
A little more color, if you could, on Western Canada and then maybe Australia and then Brazil. Obviously, Brazil has got more issues in commodities. But just any comments on those areas, specifically sales cadence at retail in the last 4 months?
Yes. If you take good morning, Tim. If you take Western Canada, all our I mean, 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 state 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 a 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 this the weakening of the Australian dollar, the profitability have declined. Then if you look at the big picture, it's that's what's happening overall.
Okay. Okay. And then on the motorcycle market, thanks for the color. Earlier, as you're seeing again the lower end of the market or the inventory level of the market perform better. What do you think changes that here?
And can Spider make the turn if the rest of the, let's call it, the heavyweight market does not? What's your comfort level in that? And then a clarification question on the outboard, are you saying that your share because you're less exposure to saltwater market, the products are performing well where you have distribution, but are you seeing overall that your share maybe shrank a little bit?
Yes. Let's start by the motorcycle. The motorcycle industry increased last year by mid single digit, But the heavyweight, the more expensive motorcycle declined by mid single digit. Then the point I want to make is there is still the growth is coming from the entry level product, but there is still a big portion of motorcycles that are above $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. But there is still a lot of customer who are looking for high end product in the motorcycle industry.
On the outboard engine, as Sebastien explained earlier, we always been stronger in the power versus OEM. We're trying now to shift that trend with signing more and more yen. Then because the trend is going down in dirty power, gaining in OEM, that's where we've lost our market share. That being said, our propulsion system is up 18% because the rich is good, because the G2 right now is offered only in the 200 horsepower up category, where obviously higher as far higher margin.
Okay. And then last question gentlemen, Just a little bit on the manufacturing, again, the Warrior S2 appears to be very, 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, where are you if dealer sells a side by side or a spider, based on the main product line, where are you in the ability to replenish, say, in terms of weeks or months and however way you want to comment on that?
Okay. When we acquired URS 1, we acquired an existing factory and we moved ETV from Belco to URS 1. And after that, we started side by side in the same factory and we were missing space. And to be able to manufacture both product in the factory, we had to farm out some like a few things that we're doing internally and we had no paint system, no metal print system for all the product made in Eura Ace 1. Then the Eura Ace 2 right now, you have we have the capacity to make internally everything around the frame, the rack, we're doing our painting ourselves and that's where we have an efficiency gain going forward.
That's why we needed to invest in ULA's 2 to be more efficient. Plus it's the facility, things are manufacturing sites are always improving. And this facility operate in 1 piece flow principle. And it's very, very flexible the way it's designed. And that's why we will be able to implement so many new model in that factory in the next 4 years.
Okay. And then just the turnaround time survey from, I guess, a replenishment cycle perspective?
We can turnaround, I mean, if you increase a few if you increase by a big number, the lead time will be anywhere between 3 to 4 months, to be realistic.
But our objectives 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'm 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. But I would say that even with the other side by side, we have quite a high level of dollar per unit. Then the Defender will be higher, but it's not enough to it's not a big increase versus Commander and Maverick dollar per unit.
Great. Thank you.
Thank you. Our following question is from Cameron Doerksen
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, etcetera? Or is there also some timing issues in there?
Good morning. Yes, two things actually. First is it was planned that way. We early shipped snowmobiles in Q2 this year versus last year. So we knew our Q4 shipments of snowmobile would be lower.
And also, yes, some Russia units, Russia is going to be slightly lower than what we had anticipated. And usually, we do good deliveries to Russia in Q4. So that's impacting the numbers somewhat. But the main reason is timing in 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? I mean, 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 you are maybe the biggest question marks for you as we head into next year.
I would say, Cameron, that in term of our product offering, we're quite comfortable with our product offering. If you look at all our product line are up to par, very competitive in their respective industry, then not to worry there. Demand, the world is getting more volatile and it's swing very quickly from good to bad or bad to good, then for sure demand is a bit more difficult to predict. But we if you look at the overall with our and 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. Then when something happened in one product line in one country, we have more than one we have many legs or many levers 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 Jerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, I just wanted to ask you about demand for the Turbo since Polaris came out with their Turbo and also how is the side by side market over that $20,000 threshold?
Let's say that it's difficult, Gerrit, 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, then 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. And right now, we don't have much industry data so far on the side by side business. Then our retail is about on track on the sport category, but it's difficult for me to comment versus the competition. One thing I could add, our product is very competitive. The Mavriq 131 is a very competitive product.
Okay. So you're still seeing strength in the 20,000 above category?
There is definitely how can I say? When you pass the bar of 20,000, it's getting expensive. Then you need to be careful. We need to be careful as OEM to be realistic with pricing. There is some
further questions registered at this time. Back to you, Mr. Deschenes.
Great. Thank you, Haimo. 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 Q4 earnings call. So 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.