Hello ladies and gentlemen. [Foreign language] Welcome to BRP Inc.'s First Quarter and Fiscal Year 2016 Financial Results. [Foreign language] This call is about to begin. I would now like to turn the meeting over to Mr. Philippe Deschênes. [Foreign language] Please go ahead.
Thank you, Maude. Good morning and welcome to BRP's first quarter for fiscal year 2016. Joining me on the call this morning are José Boisjoli, President and Chief Executive Officer, Sébastien Martel, Chief Financial Officer, and Annie Biron, Corporate Finance Director. 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 those. Also, during the call, reference will be made to supporting slides, which you can find on our website at brp.com under the investor relations section. With that, I will turn the call over to José.
Thank you, Philippe. Good morning, everyone. The beginning of the year has seen a lot of exciting moments for BRP. We introduced strong new lineups for snowmobile and off-road vehicle. We won multiple awards. We produced our 100,000 Spyder, and all our new products have been well-received in the marketplace. Spring also brought a share of headwinds with the volatile currency fluctuation and a more aggressive competitive environment. Through all of this, our team did a good job and was able to deliver strong Q1 results slightly better than planned. Looking at the financial highlight on slide four, our revenues increased 18% compared to last year to reach CAD 898 million.
The growth was primarily driven by the increase in personal watercraft shipments, by higher side-by-side sales fueled by the introduction of the Maverick X ds TURBO, and by a better-than-expected end of snowmobile season in Scandinavia, which drove higher snowmobile shipment and PAC sales. On the profitability side, we achieved normalized EBITDA of CAD 91.5 million and a normalized diluted earning per share of CAD 0.31, both improving significantly compared to a weaker-than-usual first quarter last year. Sébastien will walk you through the detail of our financial performance in a few minutes. Moving to the business highlights on slide five. Our revenues from North America grew by 28% over the same period last year. Our retail sales in North America for both seasonal and year-round products increased by 6% for the quarter when compared to last year. Also, our dealer expansion plan in North America is proceeding as expected.
Our revenue from international declined slightly by 1%, driven by currency pressure, most notably the weakening of the euro compared to the Canadian dollar. As anticipated, the aftershock of the difficult Russia economy contributed to the decline, with sales down more than one half of what they were two years ago. Both of those factors were partially offset by increased shipment of seasonal product in Western Europe and Scandinavia. On the product side, we launched our Ski-Doo and Lynx 2016 lineups, and both of them were very well received by our dealers. We have also just introduced last week a solid lineup for 2016 off-road vehicle season. I will come back with more on this. From an operation point of view, everything has been running smoothly since the beginning of the year.
The personal watercraft production transfer to Querétaro was completed in May, which means that the next personal watercraft model year will be entirely produced to our Mexican facility. Our joint venture in China is up and running since February. Finally, we've just closed the repricing of our long-term debt, effectively reducing our interest rate by 25 basis points. Switching to year-round product category highlights. Our revenue increased by 9% in the quarter, driven by shipment of the Maverick X ds and X ds TURBO. As for our ATV business, 10 months into the season in the North America industry is up low single digits season to date, and our Can-Am retail is up mid-single digits over the same period. The Outlander L continued to perform well for us and is driving market share gain.
When excluding the youth ATV, a segment where we reduce our offering, the industry is flat season to date, and our retail is up high single digits. We are pleased with our momentum in the ATV business, despite a very competitive environment. For side-by-side. The North American industry is up mid-teens digits season to date. The dynamic of the industry is the same than last year, constantly putting pressure on our market share. It is still being driven up by strong growth in the utility category, a segment in which we don't have any model, and the sport category. The Rec-Ute category, the segment in which the Can-Am Commander competes, has continued declining. While the Maverick X ds TURBO has helped accelerating retail sales in the sport category, overall, we are still behind our plan in term of market share for the season.
However, we have adjusted our strategy for model year 2016. On the Spyder side, it is still early into the season, but the motorcycle industry is up mid-single digit, while Can-Am Spyder is down low single digit. The retail of the RT is slightly behind our plan for the spring, as we had bad weather in some key market, and we are also facing a tough comparable, as last year early season was very strong with the introduction of the new RT 1330. On the F3 front, the retail in North America is right on plan. In Europe, we are substantially in advance of our plan, especially in country like Germany, France, Italy, and the U.K. In aggregate, we are over 20% better than last year in Western Europe.
The F3 drove a lot of interest in the motorcycle shows, which, combined with the ongoing demo tour in North America and Western Europe, generated several leads with a good potential conversion rate. We like what we are seeing so far, and we are excited about the long-term prospect of the new F3 family. Continuing on year-round products, we have just introduced our model year 2016 off-road vehicle lineup last week, and you will find the highlight on slide seven. Once again, we have taken steps to remain the performance leader in the off-road industry, as we brought the latest engine technology and an industry-leading power in all ATV segments. We introduced three new Rotax ATV engine by upgrading all our 500cc engine to 570, all the 800 to 850, and our 1,000 to 1000R.
We are expanding our Outlander L platform with multiple model adapted to rider needs, most notably the Outlander L XMR, an entry-level mod ATV that is expected to drive a lot of interest in that category, especially in the southern part of U.S. On the U.S. side front, we have improved our offering by upgrading the Maverick X ds TURBO version from 121 to 131 horsepower. We have also introduced the Maverick 1000R TURBO with the same great power as the X ds version, which has become the most affordable high-performance side-by-side in the industry. Another highlight of our 2016 lineup is the new hunting edition Outlander L ATV and Commander side-by-side, developed and market in cooperation with Mossy Oak, an outdoor industry leader in modern camouflage design. We see this as a very interesting opportunity for Can-Am, as the hunting community represent about 15 million hunter and growing.
The hunter interest a lot in their sport, and a high percentage of them own an off-road vehicle. This initiative give additional exposure to our brand. Overall, we feel that we have a strong lineup for 2016, with functionality, affordability, and industry-leading performance. We are confident that with our lineup, we will be able to maintain our momentum in the off-road vehicle business. Now on the seasonal product front on slide nine. Our revenue were up 47% in the quarter compared to last year. The increase was primarily driven by higher personal watercraft shipment. Last year, we didn't ship as many traditional personal watercraft as usual during Q1, because we were in the production ramp-up phase in Querétaro. Now that the transfer of the personal watercraft production is completed, we were able to ship a greater number of traditional personal watercraft, reaching our more traditional shipment levels.
The increase in revenue was also fed by higher Sea-Doo Spark deliveries. Last year at this time, many dealer were short of this model, so we increased our shipment to meet expected retail demand. Switching to our retail performance. Season to date, the North American personal watercraft industry is up mid-single digit. Sea-Doo retail is up high single digit over the same period. Both the Sea-Doo Spark and traditional Sea-Doo lineup are performing very well, and we are hearing from some dealer that they have been able to upsell Spark to traditional personal watercraft. In the southern hemisphere, the personal watercraft season is coming to an end, and our result in Australia have been good.
However, it has been more challenging in Latin America due to the difficult economic environment, most importantly in Brazil, where we saw a significant decline in demand after we increased our price by 15% because of the devaluation of the real. On the snowmobile side, the North American industry ended the 2015 season up mid-single digit. Ski-Doo gained market share with retail sales up high single digit for the season and maintained its market share leadership into the industry. Looking at next season, our spring order for the North American East Coast were very good, in line with what we had last year. They were lower on the West Coast as this region suffered from bad snow conditions last season and ended with higher dealer inventory.
Overall, our spring order ratio is lower than last year, but we are pleased with the booking as it is the second best of the past decade. On the international front, Scandinavia had good snow late in the season, which generated increased shipment of snowmobile and tech in the first quarter. Despite the good end of season, the industry is still down mid-single digit and Ski-Doo and Lynx combined market share are slightly declined as cycling declined. The business environment has been tougher because some special sales program have been offered by two of our competitors almost all season long. Let's have a look at our propulsion system business on slide 10. Our revenue grew by 5% in the quarter as we had the strong sales mix driven by the deliveries of the Evinrude E-TEC G2.
Approaching the end of the season, the North American outboard engine industry retail is up high single digits. BRP retail sales are also up high single digits over the same period. After a slow start to the season for Evinrude, we are clearly seeing the impact of the G2 in Q1. We gained market share in the over 200 horsepower plus category, the only category in which the G2 is sold and now available in large quantities. This new engine has also helped us expand our dealer network since the beginning of fiscal year 2015. 20 new boat OEMs have partnered with us and 99 new marine dealers have joined our network. We'll keep on building on that momentum and continue to expand our network to reach our target of adding 150 to 200 Evinrude new dealers in North America by the end of fiscal year 2019.
On the part, accessories, and clothing side, we had good results. Our revenue for our overall business were up 13% into the quarter. The increase was primarily driven by year-round product and outboard engine parts and accessories coming from new product introduction. However, we were disappointed with the overall snowmobile PAC sales for the first quarter. Sales remained flat compared to last year because of the difficult Russian situation and the volatile market condition in the western part of North America, which led to an average end of season. It is also worth mentioning is that the transfer of PAC distribution activity to a third party is now completed and a new distribution center is fully operational and the service level to our dealers is constantly improving. With that, I will turn the call over to Sébastien and I will return with a few closing remarks. Sébastien?
Thank you, José, and good morning, everyone. This morning we reported revenues of CAD 898 million for the first quarter of fiscal 2016, an 18% increase from the first quarter of last year. Our gross profit amounted to CAD 213 million for the quarter, resulting in gross profit margin of 23.7%, an increase of 80 basis points over last year. Normalizing for elements, most notably the $46 million gain on our US dollar-denominated debt, normalized net income stood at CAD 37 million, an increase of CAD 21 million compared to the same period last year. Normalized EBITDA amounted to CAD 92 million and normalized diluted earnings per share is CAD 0.31. Turning to our revenues by product categories and geographies on slide 14.
As José mentioned, revenue growth was primarily driven by seasonal products with increased PWC shipments as our Terrebonne facility is now fully operational, allowing for higher level of traditional PWC production compared to last year, as we increase Sea-Doo Spark deliveries to accommodate for higher anticipated retail demand. From a regional standpoint, most of the growth came from North America with U.S. revenues growing 32% and Canada 17%, while international revenues declined 1%. Normalized net income bridge on slide 15. Quarterly normalized net income increased by CAD 20 million driven by volume and mix, pricing and sales program with a net positive impact of CAD 30 million and production costs and operating expense with a CAD 9 million favorable impact. These were primarily offset by higher income tax expense compared to last year for about CAD 13 million and an unfavorable foreign exchange impact of CAD 5 million.
Moving to the balance sheet and cash flow update. We ended the first quarter with a cash position of CAD 235 million. We generated CAD 6 million of free cash flow, a slight decrease compared to last year, driven by higher investments in capital expenditures. Two weeks ago, we closed the repricing of our long-term facility, reducing our interest rate by 25 basis points. At the current foreign exchange rate, this reduction of interest rate should lead to a net interest expense reduction of about CAD 2 million on a full year basis. Slide 17 for a look at BRP's Powersports dealer inventory for North America at the end of April. Dealer inventory was up 26% from the first quarter of 2015 levels. Sea-Doo Spark accounts for a large part of that inventory growth as we increase shipments in the first quarter to accommodate the higher expected demand for the upcoming season.
Traditional PWC inventory also ended up the quarter since, as we mentioned earlier, last year's production ramp-up in Pierrefonds limited our first quarter shipments, and we ended with a lower than usual network inventory. This year, with the ramp-up completed, we were able to increase shipments and our inventory stands at a more normal level for the beginning of the summer retail season. Another contributor to the growth is our snowmobile inventory, which is up compared to a historically low level last year. On the year-round product side, dealer inventory is only slightly up, driven by new products recently introduced, primarily the Outlander L and the Spyder F3. Finally, our guidance for fiscal 2016 on slide 18. One quarter into the year, we're reaffirming our guidance for the year.
We're expecting revenues to grow between 5% and 9%, normalized EBITDA between 6% and 10%, and normalized diluted EPS to end between CAD 1.50 and CAD 1.65. As for profitability distribution through the year, we are still expecting the same distribution as we presented to you back in March, which is a normalized EBITDA distribution, slightly less skewed towards the second half compared to last year. This concludes my remarks, and we'll turn the call back to José.
Thank you, Sébastien. Let me conclude by saying that all in all, we are pleased with our strong Q1 result. However, there are still some challenges ahead of us because of the market volatility, especially in countries like Brazil and Russia, and because of a tougher competitive landscape in North America. Also, currency exchange remains very volatile. From an operation point of view, all our factories are running smoothly, and Juárez 2 is on plan and on budget. As for our year-end result for fiscal year 2016, we expect that the relative weight between H1 versus full year will be slightly higher than last year, and we'll maintain our guidance for the end of the year. About 10 days ago, we announced the departure of Chris Dawson to ICON.
Although we are disappointed to see him go, we want to thank him for his contribution and wish him good luck in his new challenge. We have a strong marketing and sales team in place, and we will be managing business as usual during the replacement and hiring process. Finally, I want to reiterate what we said on April 8 in Austria, that our strategic priorities are about growth, agility, and lean enterprise. With that, I will turn the call back to the operator for questions.
Thank you, Mr. Deschênes. 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 Arthur from RBC Capital Markets. Please go ahead.
Yes, thank you very much. I just wanted to discuss the Spyder a little bit more. It sounds like it was down slightly in Q1. I guess when you look at the current dealer feedback and order flow of the F3 in particular and the RT, any thoughts on expectations heading into Q2, which presumably is seasonally a strong one, or any change to your full-year view of Spyder products?
Good morning, Steve. Almost all Spyder have been shipped worldwide. I think we're ending production in about two weeks, and everything will be shipped worldwide. On the retail front, it's a bit of a transition year. The F3, as I said in my remark, is going well in North America, on plan. To be honest, in Western Europe, better than planned, and we're happy with that. It's a difficult comparison because of the RT. Last year, we introduced the RT 1330 after four years with the RT twin cylinder, and we saw a lot of existing consumer buying very early the RT 1330. This year, we're a bit behind on the RT sales. The tougher idea is the ST. The ST price point is somewhat similar to the F3. Right now, we are behind in the ST sales.
That being said, we didn't ship much model year 2015 to the network, but we still have some 2014 out there with non-current program. All in all, when you look at all of this, there is a lot of moving piece with the Spyder business, but we are still upbeat with the F3. The media coverage is incredible. Very positive. The customer who purchase it are very happy with the product and very vocal about it. As I said last year, the F3 base and the F3 S that we have right now is the first of a family of product, and we're still positive overall with the Spyder business.
Okay. I guess just related to that, in the gross margin discussion, you said, if I remember correctly, it was weighed down a little bit by the mix of Sea-Doo and Roadster. I understand the Spark thing on the Sea-Doo side, the Roadster impact on lower gross margins, is that because of this non-current inventory, or is that an F3 issue, or
It's the F3 versus the RT. The RT is a much richer margin product than the F3. As we ship more F3s this quarter, that's why we had a little bit of a downward pressure on the margin for mix.
Maybe, Steve, I would add the F3, the two models we have right now are not comparable to the RT. You can expect in time other F3 model with richer margin, comparable maybe a bit less than the RT, but higher than what we have today.
Okay. Just final point, you referenced more aggressive competitive environment, I think in particular in North America. Can you elaborate on that just a little bit? Which segments in particular you're seeing that stronger competition?
Yeah, there is no secret, Steve, that in North America on the ATV front, there is some of our competitor, we believe, has a lot of non-current inventory, and there is a lot of big discount right now on non-current models. A lot on ATV, a bit less on side-by-side, but overall, there is a lot of sales program going on right now. To be honest, if you remove the youth ATV because we discontinued the DS 70. If you remove the youth ATV from the numbers, the industry is flat in North America for the ATV front, and we up high single digit. Very happy with our momentum in the ATV business. The side-by-side, again, a lot of competition there. Definitely, there is increased competitiveness pressure in North America in the last, I would say six months.
Okay, thanks. I'll pass the line for now.
Thank you. Our following question is from Martin Landry from GMP Securities. Please go ahead.
Good morning. From what I can gather from your remarks, it seems that the Spyder F3 is getting a little bit better traction in Europe than in North America. Is there anything that would explain that?
Good morning, Martin. In North America, there is some Japanese company that are very aggressive right now, probably because of the yen situation in program and pricing, who can influence the situation. If you look at the industry in motorcycle, the industry is up. If you look another level, it's in the sport category fueled by the Japanese. The cruiser and the touring segment are about flat versus last year. That being said, I would like to remind to you that half of our customer are people who don't come from the motorcycle industry. We believe the weather also could have some influence. The month of May was warm, at least here, but a lot of ups and downs. June so far so-so. There is a lot of factor overall.
I would like to remind you that we are about on plan in North America, not behind.
Okay. Then on the side-by-side, you mentioned that the utility segment is one that's growing really fast and you don't have an offering there. Any plans to launch a utility side-by-side anytime soon?
Your question is quite direct. As you know, year after year, we have always come out with innovative product. I'm very happy with our novelty for 2016 for ATV and side-by-side. For utility, obviously, we're not there yet. You know that we're building a new off-road vehicle plant in Juárez. The plan is on budget, on target, and the intention is to enter new RV segment and this plan will be running at the end of the year. For this morning, for obviously competitive reason, I cannot comment more than that.
Okay, that's fair. Last question on the departure of Chris Dawson. What's your timeline there for the replacement, and have you started the process yet?
For us, being a private company for 10 years and now public for two, seeing some of executive leave was something we're expecting. Not hoping, but we knew that it could happen. Our business is in good hand. We have a strong leadership group with over about 15 years of experience with BRP. We feel confident we have all resources we need to keep a good momentum going. Yes, I was with the board yesterday. We discussed about replacement. Yes, the process is started.
Okay. Thank you very much.
Thank you. Our following question is from Robin Farley from UBS Securities. Please go ahead.
Great. Kind of circling back to the off-road, I was going to ask what your average selling price was for side-by-sides and ATVs. In your commentary, you mentioned, I think you said for the Maverick that you were going to kind of adjust your strategy, and I guess, does that mean kind of increasing rebates and would that have been reflected in the ASP in the quarter that you're reporting? This may be related, I saw your sales and marketing expense up quite a bit. Is that just due to the timing? Is that really more having to do with shipping watercraft, the PWC earlier, and not related to off-road?
Okay. Good morning, Robin. First, let's talk about the Maverick's performance. Last year, our team done an incredible job to come with the Maverick 121, but we were probably a bit late into the season, and the impact was a bit lower than what we wanted. This year, we adjusted our lineups. If you look in the detail of our lineup, we've just introduced a high performance Maverick at 131 horsepower at a lower price range. We believe this was probably missing in our offering, and we believe going forward, that will make a big difference. We're maintaining the model on the high-end side, but we have introduced a well-priced vehicle, high performance, but with less feature on it. We believe this will help the Maverick momentum.
Maybe the sales and marketing question you had. Yes, our sales and marketing investments were higher this quarter as planned. It's because we did several push on a few product lines on the marketing side, on the side-by-side and ATV in the U.S., Spyder as well, and PWC. It's a more of a shift in strategy. Peak retail is happening late spring, early summer. With the teams, we decided to heavy up the investments this quarter in order to make sure that we get retail momentum come the peak retail period.
On the pricing side, Can-Am positioning is we bring to the market innovative product, higher performance, more technology, and we like to price in all our product line, our products slightly above competition. We can go in more detail with you off the call. Basically, this is the overall strategy for ATVs and side-by-side.
Any kind of color on the change in ASP versus the prior year? Just so realizing it's a premium product or would that be fair?
Yeah. We haven't changed our strategy in terms of average selling price. We do increase pricing every year. This year is probably in the range of 1%-2%, depending on the markets. Markets where currencies have devaluated, we've been more aggressive, like Brazil, where we've had to increase pricing more. In terms of financial impact on our numbers, it's not that material. You'll see an average selling price probably go down when you look at the whole product portfolio because the mix is not as rich as in the past. Now that we have Spark, that we have the Outlander L as well, that brings the average selling price down for our products. Maybe if I could give you a bit of color on the mix in terms of impact on the gross margin so you can have an appreciation.
The mix impact is about 70 basis points negative this quarter.
Okay, great. Thank you.
Thank you. Our following question is from Benoit Poirier from Desjardins Securities. Please go ahead.
Yeah. Good morning, gentlemen, and congratulations for the strong start. Just to come back on the earlier shipments of PWC, just wondering if it's more an easy compare versus last year, or should we expect lower shipments in Q2, given you ship a much higher level of PWC in Q1?
Good morning, Benoit. I think there is two level. On the traditional Watercraft, if you remember last year, we delayed some shipment from Q1 to Q2, this year we are back to our normal ratio for the end of the year. On traditional Watercraft, we are where we should be in term of ratio. The Spark, if you remember last year, our dealers were out of stock almost all spring. We decided to front load a bit production to make sure that we would have enough stock out there to retail as early as possible. To be honest, I don't know if the pattern that we have this year will repeat next year. We need to go through the season, see the result at the end of the season and the reception to the model year 2016 product intro. Definitely, on the traditional side, it's normal.
On Spark, I cannot comment for next year.
Okay, perfect. On the new facility in Juárez, you mentioned that it's on budget. I would assume also it's on track in terms of timing, José?
Yeah.
Okay.
It's on budget and on schedule. It will be operational at the end of the year.
Okay. In terms of dealer inventory level, you mentioned very good color for the Q1. We saw the increase of 26%. What should we expect in the coming quarter, especially in light of the upcoming product introduction?
Yeah, Benoit, this is Sébastien. The inventory this quarter up 26%, as mentioned, driven by Spark traditional PWC and snowmobile. I'm expecting the inventory to be up as well in the subsequent quarters, as we have, again, new product introductions that are there. Last year, if you recall, we ended July, we had no Spark inventory in the field remaining. Our expectation is that there's going to be some Spark inventory in the field for retail in August and September. We'll also have some snowmobile inventory as well which will be there coming from this year. The expectation is that we'll be seeing a good increase in inventory as well for the upcoming quarters.
Okay. Are you talking about year-over-year or quarter-over-quarter as an example?
I'm year-over-year, Benoit.
Yeah, perfect. Okay, that's great.
The inventory is at a position where we feel still very comfortable. Again, there are elements which we control. Those levels are levels that we've seen in the past and we're comfortable operating with. The fact that we're expanding our dealer network as well, does result in increased inventories as well, the dealer network.
Okay, what about the mix between new products versus older lines or older models?
The aging is good. If you recall last year, we had to launch more sales program in the second quarter because we wanted to deplete inventory of side- by- side. This situation is not existing today. We're comfortable with the aging of inventory with our non-current levels. It's at a right level where the dealer has the right mix of current and non-current to meet the various consumer needs. It's good.
Okay. Last question, if I may. When I look at the ruble, obviously strengthened a lot in the last few weeks. I understand that it takes some time, but what's in your view, the lag impact before we start to see some positive impact on the retail side? It's more a function of the Russian economy that more than offset the strengthening of the ruble?
I think the situation in Russia is still very fragile. The political uncertainty causing unemployment and is putting pressure on credit line. Our product are high end, expensive in those countries. To be honest, Benoit, it's very, very difficult to predict how fast Russia could rebound. In our planning right now, we planning for about half to what our volume was two years ago, fiscal year 2014. This is exactly what we saw in Q1, and that's what we put in our year-end planning.
Okay. Thank you very much for the time.
Thank you.
Thank you. Our following question is from Anthony Zica from Scotiabank. Please go ahead.
Hi, good morning, gentlemen. José, can you please provide some color on your sell-through in the month of May and maybe a bit in June? How does it look compared to last year?
There is no doubt, Anthony, that May is softer than what we had planned. We have adjusted our programs in all product line, and some is because to answer some of the competition situation. We feel comfortable with the overall. You need to understand that Q2 is somewhat a transition quarter for us. The shipment that we do are lower than any quarter. We almost ship every watercraft and Spyder. We don't have much snowmobile shipment. It's a transition period for off-road vehicle where you go from a model year to another, program can influence the result. Also on watercraft and Spyder, if things don't go as well, we could come out with some program probably in July. Overall, Q2, and that's our typical pattern. This has always been like that, and it will be like that for a few more years.
Q2 is our lowest quarter for BRP for all those reasons, we'll adjust our strategy depending on the competition and the retail trend.
Okay. José, when we look at your agreement with Mossy Oak partnership, can you give us a bit more color on that and could you give us some color in terms of the payback, what you're anticipating to get out of this partnership? Lastly, could we expect more of these type of partnerships in the future, maybe with other products as well?
First, we're very excited with Mossy Oak. There are many companies in the hunting market with different pattern and different strategy, but what we like about Mossy Oak, it's one of the most popular and very high end, which we believe ties in extremely well with the Can-Am off-road vehicle product line. As you saw on the slide, there are a lot of hunters in North America, and it's growing and very popular, and people invest in their hunting equipment and ATVs and side-by-side is part of it. We introduce quite a lot of model with the Mossy Oak pattern. Again, we believe it's a good exposure for us. We've been very excited about that. We've done a few other partnerships. I give you the example on the snowmobile side, the Summit X, we have the Burton edition this year where we co-brand a snowmobile.
We're trying as much as we can to find the right fit. If we find companies that have the right fit with our product image and our product performance, it's definitely something we want to do more.
Okay. What kind of payback are you looking at in terms of signing this agreement? Is it percentage of sales or?
Well, in terms of cost, it's an important investment, but not a significant material investment as part of our marketing spend. The benefit as well with the Mossy Oak is, again, they have a large following, and when they'll be showcasing ORV products, they'll be showcasing the Can-Am ORV products. Whenever they do events, shows, clubs, and they want to showcase their products, they'll be using our products to do so. For us, that's a big payback because as José mentioned, the hunting and fishing crowd is huge in North America. That's going to just increase the awareness for our products, especially on more the utility side with the Can-Am Outlander L.
Okay, great. One last one for you, Sébastien. When we look at your net income bridge, it was up by CAD 30 million. How much was that tied to volume and then to pricing? I guess you answered that.
Yeah. Maybe if I give you on the gross margin side, just give you an appreciation of how much of it is volume driven. About 140 basis points of the margin improvement is volume driven. You can do the math and see how much of that flows to the bottom line. As mentioned, about 70 basis points is a negative mix, and foreign exchange was also negative for about 30 basis points. The net, the other element would be pricing to offset that, or probably in the range of 30 to 40 basis points.
Okay. Thank you very much.
Thank you. Following question is from Tim Conder from Wells Fargo Securities. Please go ahead.
Thank you. José, on the side-by-side products, would you give us a little more color there? Is it predominantly Polaris that is still being the most competitive threat, not necessarily promotions, but maybe just from a product perspective? Or are you seeing others come in incremental product from, say, Japanese who have been maybe absent on the innovative front for several years in the market?
Well, good morning, Tim. Let's say to start with, if you go by segment in the sport category, I believe it's definitely a race between Polaris and us. This we are used to compete in high performance category in snowmobile and watercraft and other product line. For us, it's a normal situation, but I would say we are the two biggest contender in that category. After that you have the Rec-Ute or the Commander segment. We are very happy with the performance of our Commander. There, there is more player, and in that product category, we have very solid market share, and we're gaining market share, but the category is shrinking. In the utility segment, we're not there, and that segment represent right now more than half of the North America market, in the side-by-side business.
This is something that we intend to enter aggressively going forward, knowing that there is many competitor there.
Okay. On the ATV side, as you've already referenced, and it's pretty well known, there's some cleanup, especially from one North American competitor occurring there. In that segment also, Polaris has talked about the Japanese being competitive at the entry level ATVs. From your perspective, looking at the industry, when do you anticipate that non-current product maybe cleaning up and maybe the promotions abating?
Very tough question. I wish I would know. In our case, to be honest, we're happy because despite that very competitive environment, we believe our inventories in term of days to come is at a pretty good level overall. There is some dealer who have more than others, but overall, we're very comfortable with our days of inventories. Now, there is some of our competitor who has many non-current and with aggressive program, and it's very difficult to predict how long it will take. You just mentioned one of the North America OEM has said 2 years. Probably it will take a good 2 years for the overall to clean up the pipeline, but I wish I would know that answer, to be honest.
Okay. I apologize if I missed this earlier, but any commentary on Texas, Western Canada, your demand that you're seeing out of those markets from the oil fallout? I know Texas has had quite a bit of rain also in May, but you would expect that to be a little more transitory as far as an impact on demand.
Yeah. It's definitely down. We saw it on our snowmobile Spring Check. Typically, Alberta is very strong on snowmobile, and we had good product news, and it's down. Same thing for Texas area. How long it will take? Difficult to say, but there is definitely a trend there.
Okay. Lastly, if you would, just the May softness that you referenced in response to another question, maybe rank reasons one, two, three there.
Again, just to revisit that question.
Yeah. First, the competitive environment is very strong and particularly for off-road vehicle, where you are into a transition between model year 2015 and 2016 for all the OEM and with the non-current level with some OEM, there is a lot of competitiveness there. This is one element. Second, on the weather. The weather here in Quebec, it was the warmest May ever. On the other hand, it was ups and down, going from very warm to very cold, the people are not in the mood. If you talk to dealer, they will say traffic was low in May. The people who rent product, the thing was low. When you look at all this, and that's what we're planning Q2 for us, it's a low quarter in term of shipment.
On top of it's a quarter that can be affected by sales program to react to situation. That's why despite the strong Q1, we're planning H1 to be slightly better than last year and maintaining our guidance because there is uncertainty around Q2. That being said, we feel we are overall with our product line, with our program, with our control of expense, we are in good shape.
Okay. Thank you. Thank you, gentlemen.
Thank you. Our following question is from Mark Petry from CIBC. Please go ahead.
Yeah, good morning. I just wanted to follow up on a couple things, actually. You just mentioned in terms of cost control, and earlier you were talking about the timing on selling and marketing. Can you just give us a bit more color in terms of how you expect those expenses to track, either in Q2 or through the balance of the year?
Yeah. On average, we're looking at probably a 15% operating expenses as a percentage of revenue, that's usually what we target for the year, and I think that's where we should be ending on an annual basis. Those are gonna be gating on a quarterly basis. Q1 was pretty heavy on marketing. We'll see Q2 as well, a good investment in marketing. Then it's gonna taper down in Q3 and Q4.
On the G&A, pretty consistent?
Yes, pretty consistent, Mark. Yeah.
Okay. On the Spyder, at what point, I think you sort of said July-ish, but at what point would you sort of take action if the RT sales continue to lag?
Typically, as I said, the Spyder business is a bit similar to the Watercraft business in term of timing. Typically, we move in August. That being said, this year, if you look at our programs, we already have a CAD 1,000 rebate on model year 2015 since probably the beginning of June. What happened, Mark, is we had a CAD 2,000 rebate on non-current Spyder RT model year 2014, and those are clean out. When we saw the lag at the end of May, we decided to put CAD 1,000 rebate on model year 2015. It's a bit earlier than what we would like to. What is difficult is the comparable to last year because last year, after four years with the twin engine, now you're going with a nice triple. There was a lot of people who purchased in advance. That's the situation.
Okay, thanks. Just in terms of the number of dealers, I know the target, I think, is 75-85 for the year. How many did you add in Q1?
We won't disclose, Mark, the number quarter-per-quarter because as you know, there is some period where you don't sign much and big numbers. For us, the third quarter, it's a quarter where we had dealers because of the club. If you talk to a dealer right now, most of the dealer will say, "Okay, I'm interested, but I will wait till September to see your product news and to see your plan and to meet the management." For us, we have some done already, but the second half will be key moments for signing new dealers, and we feel comfortable with our 75-85 target.
Okay, thanks very much.
Thank you.
Thank you. Our following question is from Craig Kennison from Baird. Please go ahead.
Good morning. Thanks for taking my question as well. I wanted to revisit the inventory issue. You mentioned inventory was up 26% and most of that driven by the Spark. I'm wondering to what extent the addition of new dealers is also a contributor to inventory growth, kind of piggybacking on the last question.
Yeah, maybe I could give you a bit of numbers on the inventory. For us, it's not an issue. We're, again, comfortable with the inventory situation that we have. Of the 26% inventory growth that we see, you probably have at least 5% coming from new dealers. That's, again, with the dealers that we've signed over the last two years. Spark is about 11% of that inventory growth. Both snowmobile and traditional PWC
Carry about 5% of the inventory growth. The remaining is very small, and it's for year-round products, and it's with the new product adds. As you know, year-round products is the growth area of the business. When we look at the overall picture, yes, the number seems high when you look at 26 compared to last year, but last year was abnormally low, and this year we're comfortable with that situation.
Could you give us a little color on your new dealers? I know you don't want to break out the number, but to what extent are new dealers carrying the full portfolio or a large percentage of your offering?
On average, when we add the new dealers, you'll probably see them carry about 2.5 to 3.5 product lines on average. That's what we see. More in the range of 2.5. That's what you'll see. A dealer is going to take on Can-Am, ATV, Side-by-Side, and maybe Spyder or Watercraft, depending on the geography where they are.
How many product lines would you say you offer today?
Well, we offer five in the powersport industry.
Five. Great. Thank you.
Thank you. Once again, please press star one at this time for any questions. Our following question is from Robin Farley from UBS Securities. Please go ahead.
Hi. Great. Thanks. I wanted to clarify. Earlier in your comments when you talked about May being soft, I had understood your comments to be kind of relative to the competitors because there was so much promotional activity. In answer to someone else's question, you made comments about whether that made it sound like maybe the softness was actually for the industry overall. I wonder if you could just sort of clarify because your comments through April suggest kind of mid-teens and just based on what we know from others in the market would suggest the month of April was at least low double digit, if not mid-teens for the month of April. With your comment about May, I guess first of all, does soft mean what relative to those comments about, and specifically this is Side-by-Sides I'm asking.
Was that just sort of how you feel about your own performance or the industry overall? Thanks.
Okay. First, Robin, when we look at our numbers versus the industry after Q1, we are happy with the performance overall in our product line and we understand what's going on behind the numbers. For May, we have our numbers, but we don't have yet industry numbers. Typically, you receive the numbers mid-May or mid-month, and we have, I think, a few, but not North America. Overall, I cannot comment too much yet on the industry in May. When we've talked to dealers, and we constantly monitor what's going on with dealers, there is definitely less traffic in May than what they believe would be typical. That's the only comment I could say at this point. On the May, we have our numbers, but not too much on the industry.
That being said, we're following closely our competitiveness in each industry, in each country, and we trying to react as quickly as we can, if we see any trend. Hearing again from dealer traffic is down, and they don't believe we've lost momentum versus our competition.
Okay, great. Thank you.
Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschênes.
Thank you, Maude. This concludes today's call, and I want to thank all of you for your interest in BRP. I also want to invite you to our annual shareholder meeting that will be held this morning at 11:00 A.M. and will be accessible on the web at brp.com. Thanks again 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.