Hello, ladies and gentlemen. Welcome to BRP Inc.'s fourth quarter and fiscal year 2015 financial results. The call is about to begin. I would now like to turn the meeting over to Mr. Pascal Bossé.
[Non-English content ] Sébastien. Good morning and welcome to BRP's fourth quarter and year-end results for fiscal 2015. Joining me on the call this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of those. Also, during the call, references will be made to supporting slides, and you can find the presentation on our website at brp.com under the investor relations section. With no further ado, I will turn the call over to José Boisjoli.
Thank you, Pascal. Good morning, everyone. BRP reported this morning its results for fiscal year 2015, highlighted by double-digit revenue and profitability growth and a good free cash flow generation. Starting with an overview of the financial results on slide four. Revenue increased 10% compared to prior year to reach CAD 3.5 billion. The increase was driven by a 14% increase in revenue from North America, offsetting the weaker performance in Eastern Europe. Our gross profit margin for full year was 24%, a decrease that is notably due to unfavorable currency exchange rates impacting margin by 100 basis points. Overall, our performance resulted in an 11% increase in normalized EBITDA and a 16% increase in diluted, normalized earnings per share compared to fiscal year 2014.
I would like to highlight that the effective tax rate was lower than expected, and Sébastien will cover the financial results in greater detail in a moment. All in all, the year turned out more challenging because of the shift toward the back end of the year, but we nevertheless stayed the course, and we focused on the execution of our plan to deliver solid results. Moving to the business highlights on slide five. Revenue from North America increased by 14% compared to prior year. Our retail sales for seasonal and year-round products increased by 8% when compared to last year. Revenues from international increased moderately by 3%, driven by the strong reception of the Sea-Doo Spark and higher volume of year-round products. This increase included a 25% decline in revenue from Russia. Excluding Eastern Europe, revenue from international increased by 8%.
Operationally, we also accomplished a lot. I'm proud of the collective effort of our teams to execute on the strategic initiative. One of the objectives is to constantly bring to consumer market-shaping products. This year again was no exception across all our product line. In snowmobiles, we introduced the T3 package available on the Summit X Mountain sled, an offering that is unique in the industry. The Renegade X series sled that is having a strong market success in the crossover segment. In year-round products, we introduced the Outlander L family of ATVs, a brand-new offering in the mid-CC category that brings the Can-Am DNA to the largest segment of the ATV market. The Maverick X ds and X ds Turbo, the first side-by-side available with a factory-installed turbocharger.
Last but not least, the Can-Am Spyder F3, a brand-new approach to the roadster with a lowered seat, laid-back riding position, and a unique look that will attract to a broad customer base. In propulsion systems, we introduced the Evinrude E-TEC G2, a completely new and differentiated offering in the outboard engine business. This launch has created a lot of noise in the marine industry, so much that we successfully signed 20 North American boat builders throughout the year. The market reaction and consumer reception to all these new products has been very positive. Another of our key strategies is to grow margin long term. While we witness a decrease in gross margin, we are very much focused on project execution, such as completing the transfer of our personal watercraft assembly to Mexico.
We also surpassed our targeted 65-75 new dealers in North America with the addition of 76 new dealers in FY 2015. Finally, before closing on operations, I would like to take the opportunity to thank all our employees for their engagement and hard work and for delivering the best-ever performance on the health and safety front. Our workplace accident rate stood at 0.87 for last year, a result I consider to be world-class performance. We strive to nurture a culture where employees look after the safety of their colleagues as well as their own. I am pleased of this year's accomplishment. Turning to year-round products. Our revenue bounced 53% in the quarter, driven by shipment of the Outlander L ATV family for a full quarter, shipment of the Maverick X ds and X ds Turbo, and shipment of the Can-Am Spyder F3.
We witnessed a change in ordering behavior from our dealers in North America, with some ORV shipments shifting from Q3 to Q4 as a result of the monthly online ordering management system. This tool enables our dealers to better match deliveries with the spring retail season, which explained part of the bump in year-round products revenues. Industry-wide for ATV season to date, the industry is about flat while Can-Am ATV retail is up low single digit, driven by the mid-CC segment. The feedback of our customers to our products offering is encouraging with a complete lineup. I'm happy with the market reception of the Outlander L family of ATVs.
For side-by-side, the North American industry is up mid-teens season to date, and we are trending behind in terms of market share due to continued growth in the utility segment that we do not compete in, representing about 60% of the volume today. No doubt that the off-road vehicle business is highly dynamic, and this is an environment where BRP thrives through product innovation and value proposition to consumers. This segment will be an important earnings lever for several years to come, and I look forward to bringing to the market innovative product that will help BRP grow its year-round product business. On the roadster side, very early in the season, the motorcycle industry is up low double-digit, driven by low displacement sport motorcycle while Can-Am is up high single-digit.
Following the launch of the Spyder F3 in September, the demo tour had been traveling across the U.S. and Europe to promote the product with a seeing is believing claim. We started shipping to dealers in January and a limited number of units have been retailed, but I'm very pleased with the excellent reviews worldwide. From its configuration, the Spyder F3 opens new opportunities to grow the lineup, and it is appealing to a large audience, the cruiser market, representing an estimated two-thirds of the traditional motorcycle industry. On slide seven, an update on the Juarez 2 project. We broke ground in November and the construction of the 400,000 sq ft facility is well on its way. The proximity to our existing Juarez 1 plant provides us with operational synergy with supplier, an excellent talent pool, and flexibility to leverage the existing employee base to reduce startup risk.
The project is on track and we are planning to start up production on the back end of the fourth quarter. Now, the seasonal product on slide eight. Revenue decreased by 4% in the quarter compared to prior year. The decrease in revenue was mostly driven by the situation in Russia and Scandinavia. As of January 31st, the North American snowmobile industry was up mid-single-digit season to date, with Ski-Doo gaining market share. We had a late start to the season in the east, but the average snowfall combined with sustained cold temperature in January, February, and March preserved the snow coverage, so overall, we had a good year in the east. In the Midwest and on the West Coast, snow conditions has been variable with weak precipitation, noticeably in the mountain where we had a poor season.
At international, Scandinavia had a second year of weak snow coverage, and the industry is down low double-digits season to date with BRP retail slightly below the industry. Moving to our personal watercraft performance in the quarter season to date, the North American industry is up low single-digit with Sea-Doo retail sales tracking with the industry. We had a great season 2014 last year with industry up about 20%, and because we are expecting another good season, we started manufacturing earlier this year. The Spark continues to pull new consumers to the category with a value proposition that is unique in the industry, and as such, we are increasing our availability of the Sea-Doo Spark in fiscal year 2016. We will continue to strategically position the Sea-Doo Spark units in the sales channel here and abroad.
We are also on track to produce approximately 50% of traditional watercraft in Mexico in fiscal year 2016, reaching 100% by the end of fiscal year 2017. The financial benefit of the transfer are muted by the fact that we are transitioning with production at two location this year. We are nonetheless on target for absolute margin improvement of between CAD 20 million and CAD 25 million by fiscal year 2017. Turning to model year 2016. A month ago, we host our Club Ski-Doo and introduced a solid lineup of snowmobile highlighted by the Renegade Enduro model, a sled that is inspired by an adventure motorcycle to deliver all around capability wherever it's being taken. The Summit Burton edition, a sled that is appealing to snowboarders and skiers looking for easier access to the backcountry.
The 1,200 four-stroke engine option on the XS chassis, extending the availability of the intelligent throttle control technology with its three driving mode. Finally, the MXZ Blizzard snowmobile with a 129-inch track, an excellent value available all in season. We also introduced new technology such as the industry first adjustable ski, the Pilot TS, a redesigned ski providing riders the ability to instantly adjust ski bite for changing snow condition and riding styles. The new Pilot ski comes standard on seven models and is available as an accessory, which we believe will be very popular. Slide 10. Our propulsion system revenue grew by 44% in the quarter to CAD 108 million, directly impacted by the ramp-up in deliveries of the Evinrude E-TEC G2. It's still early, but the North American season kick off with attendance at boat show trending positively and continued good reaction to the G2.
Seven months into the season, the North American outboard engine industry retail is up mid-single digit, while BRP retail sales were up low single digit over the same period. As we mentioned on previous earnings call, the industry growth is mainly driven by an increase in outboard engine sales on new boats versus the repower business. As we said in Q3, we expect this trend to continue for the next model year. Evinrude has traditionally focused on the repower segment, but we are actively working to be more present in new boat segment. I am pleased to report that we've signed 20 boat builder in North America and two at international since the G2 launch, and we've signed 78 Evinrude dealer in North America and eight at international in the past year.
We are also working with boat OEM partners to facilitate the integration of the G2 and color matching option for future model year. On propulsion system, we continue to work with Chaparral and Rec Boat Holdings in North America to distribute our jet propulsion system, and we continue discussion with other boat OEM brands. On the part, accessories, and clothing side, the overall business was up 2% in the quarter. The growth came primarily from FX and from snowmobile-related vehicle part accessories and clothing in North America, and this was offset by lower sales of snowmobile PAC in Scandinavia and Russia. We've just introduced our model year 2016 snowmobile lineup, and our offering is solid with the Pilot TS ski, an innovative quick adjust limiter strap on the Summit models, and a wide selection of riding gear.
Before turning over to Seb, just an update on our objective to optimize our dealer network in North America. We added a total of 76 new dealer in fiscal year 2015. That, added to the 38 from last year, brings the total count to 112 since the objective was introduced. Moreover, we expanded the North American side-by-side and roadster dealer coverage by 10%. We are continuing on this momentum with a target of signing between 75 and 85 new dealer in fiscal year 2016, with a goal to add between 200 and 300 new dealers by the end of fiscal year 2017. With that, I will turn the call over to Seb and will return for closing remark and an outlook. Sébastien?
Thank you, José, good morning, everyone. This morning, we reported revenues of CAD 1,068 million for the fourth quarter of fiscal 2015, an 18% increase from the fourth quarter of last year. As indicated by José, for the 12 months ended January 31st, revenues amounted to CAD 3.5 billion, a 10% increase over fiscal 2014. Our gross profit amounted to CAD 289 million for the quarter, resulting in gross margins of 27.1%, an increase of 240 basis points over last year. Normalizing for elements, most notably the $112 million loss on our US dollar-denominated debt, normalized net income stood at CAD 116 million, an increase of CAD 68 million compared to the same period last year. Normalized EBITDA amounted to CAD 199 million, and normalized diluted earnings per share is CAD 0.98.
For the full year, normalized EBITDA amounted to CAD 421 million and ended at the higher end of our guidance, and normalized EPS at CAD 1.65 is above our guidance. Foreign exchange rates were quite volatile in the quarter, with a material appreciation in the US dollar. This drove the majority of the CAD 12 million foreign exchange gain recorded this quarter from the revaluation of balance sheet items. It impacted our EPS by CAD 0.07 per share in the quarter. In the fourth quarter, we also benefited from a reduced tax rate as a result of newly enacted laws, which impacted EPS favorably by an additional CAD 0.03. When you consider the foreign exchange gain and the tax rate changes, EPS was impacted favorably by a total of CAD 0.10 this quarter.
You might recall that the Q3 tax rate also benefited from the retroactive application of newly enacted rates. Therefore, bringing the total impact on EPS to CAD 0.05 for the full year. Turning to our revenues by product categories and geographies on Slide 15. Revenue growth was very strong for year-round products and propulsion systems this quarter. New product deliveries were a big driver of the revenue increase. Also for ORVs, with our dealer order management system, we saw a shift in dealer demand from Q3 to Q4. This also increased revenues in the quarter. Despite a very volatile Russian ruble, our snowmobile sales to our Russian distributor ended better than planned. On the PAC side, poor snow riding conditions in certain parts of the world hurt overall sales and resulted in annual revenue slightly below guidance.
The breakdown by geography was 53% of our sales this quarter from the U.S., 17% from Canada, and 30% from international. Normalized net income bridge on Slide 16. Normalized net income increased by CAD 68 million as a result of the following items. Volume and mix, pricing and sales program had a net positive impact of CAD 59 million. Production costs and operating expenses were favorable CAD 14 million. These were partly offset by higher income tax expense compared to last year for CAD 21 million, and higher depreciation charge for CAD 4 million. As I talked earlier, foreign exchange impacted our results favorably this quarter, and even more so when comparing to last year, where we reported an FX loss, this resulting in a year-over-year variance of CAD 20 million. Moving to balance sheet items. Our cash position ended at CAD 232 million.
Working capital, defined as current assets less current liabilities, increased in fiscal 2015 compared to 2014, driven mostly by a higher cash balance. Currency impact on our U.S. dollar-denominated long-term debt resulted in a $145 million increase. We had no drawings on the revolver at year-end. CapEx increased CAD 19 million compared to prior year, for a total amount of CAD 172 million within our guidance for the year. Free cash flow was very strong in the fourth quarter. This resulted in CAD 203 million of free cash flow for the year ended January 31st. Slide 18 for a look at BRP's Powersport dealer inventory for North America at the end of January. Dealer inventory is up 15% for the fourth quarter versus fourth quarter 2014 levels. This is due to higher snowmobile inventory levels compared to an all-time low last year and higher PWC inventory for the upcoming season.
We started shipping newly introduced products this quarter ahead of the spring and summer retail season. We consider our inventory levels in the network to be adequate. For our guidance for fiscal 2016 on Slide 19. For the year, we are expecting revenue growth in total company revenues of 5%-9%, driven by a 7%-11% increase in year-round products. Excluding effects, factors that are contributing to the increase in revenues are new model deliveries in all product categories, the expansion of our North America distribution network, and our marketing efforts to increase brand and product awareness. As we are not in the largest segment of the SSV industry, the utility segment, we are not fully benefiting from the mid-double-digit SSV industry growth expected this season. For our seasonal business, fiscal year 2015 was a great year as we benefited from two key factors.
One, an exceptional year for snowmobile deliveries in North America, driven by a strong lineup, a healthy industry, and replenishment of dealer inventories. Two, strong PWC results with the successful Spark, especially in the second half of the year as we ramped up capacity and deliveries in anticipation of the upcoming retail season. These two elements were offset in part by lower deliveries of snowmobile in Russia. For next year, we are planning revenue to be flat to up 4% in seasonal products. We are planning for reduced snowmobile volume in North America and a further volume decline in Russia as our distributor was impacted by weak snowfall and continues to be impacted by the overall economic condition. For PWC, the outlook is positive and the upcoming retail season will provide further insight as to the full market potential of Spark.
Propulsion Systems revenues is planned up 7%-10% as we continue to build the momentum of the Evinrude G2. We are planning a 10%-15% increase in our revenues from PAC. Normalized EBITDA is forecasted to grow between 6% and 10%. Our effective tax rate is expected to range from between 27%-29%, up from 22% last year. The increase in tax rate is driven by the retroactive tax adjustments experienced in fiscal year 2015, but also by a forecasted higher mix of profit from countries with a higher tax rate. Depreciation expense is forecasted to increase by CAD 22 million to CAD 135 million as a result of investments in the last few years in product innovation and manufacturing footprint expansion. Compared to fiscal year 2015, net income is planned to be down 9 to flat.
Adjusting for fiscal year 2015 tax rate, which ended at a low 22%, normalized net income growth will be between flat to up 7% when using the same fiscal year 2016 tax rate applied to both years. Finally, this results in normalized diluted EPS guidance of between CAD 1.50 to CAD 1.65. We have also provided you with a forecast of capital expenditures for the year of between CAD 200 million to CAD 220 million versus last year. CapEx is impacted unfavorably by approximately CAD 15 million due to foreign exchange next year. Turning to slide 20, we are comparing our tax rate of 22% in fiscal 2015 to our fiscal 2014 tax rate of 25%, and to historical rates from prior years. For fiscal 2016 and onward, we expect consolidated income tax rate to increase to the range of 27%-29%.
As mentioned before, this increase is driven by a higher mix of profit from countries with a higher tax rate and to a lesser extent, by the CAD 0.05 benefit of the retroactive tax laws enacted in fiscal year 2015. When adjusting fiscal year 2015 EPS to the guided 27%-29% tax rate, the implied normalized earnings per share growth is flat to up 7%. Turning to slide 21, we are providing you with an assessment of expected profitability distribution throughout next year. As such, based on our forecast, we are planning a slightly better profit distribution between the first half and second half. Similar to fiscal 2015, we expect a stronger second half. Finally, our exposure to currencies on slide 22.
You might recall from the IPO that in our procurement strategy, we attempt to hedge the exposure to the U.S. dollar and the euro by having a cost base that matches the currency of our revenue. For fiscal 2016, we are slightly short the U.S. dollar, the euro, and the Mexican pesos, and we have long positions in several export markets, most notably the Scandinavian countries. Based on current exchange rates, the expected impact on fiscal year 2016 is a positive 500 basis points on revenues, but a negative 100 basis points on gross margins. The pricing of most of our products is benchmarked to the U.S. in most of the regions we serve, we do view favorably the appreciation of the U.S. dollar long term. This concludes my remarks, and I will turn the call back to José.
Thank you, Sébastien. The year clearly turned out more volatile than we anticipated with several externalities to cope with, we stayed the course, kept the focus, and delivered on our objectives. We grew sales in all product categories, grew revenue from the international market despite Russia, exceeded our objective for new dealer in North America, and launched several exciting product with significant volume potential. Our history suggests that our EBITDA distribution will typically be 40% in the first half and 60% in the second half, we ended up fiscal year 2015 with a 20/80 split. Factors such as the timing of major product introduction, weather conditions, or currency exchange rate will bring volatility in our earning distribution. fiscal 2015 was a perfect combination of those three factor. I certainly prefer a smoother earning distribution over a back-ended loaded profitability.
we experienced those split in our history and in the past two year, and most importantly, we deliver on our commitment. to summarize, our execution resulted in a strong financial performance for fiscal year 2015, and we have good revenue and earning growth expected next year and beyond. We have a lot of new exciting product in the pipeline, which we will introduce all year long, and I look forward to continue growing BRP into the future. Thank you again for your support, and we'll now take questions.
Sébastien, we're now ready to take questions. if we could ask our participants to only ask a few questions at a time and return to the queue so that we get the questions from the most people. Thank you.
Thank you, Mr. Bossé. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. We thank you for your patience. The first question is from Steve Arthur of RBC Capital Markets. Steve Arthur, RBC Capital Markets, please go ahead.
Great. Thank you very much. Just wanted to follow up on one of your latter points there, just in terms of the EBITDA weighting into fiscal 2016. I understand that's the normal pattern, to the degree of it in fiscal 2016 surprises me a little bit. I would have thought with all the recently launched products contributing to the first half that it might have been closer to that 40/60. Any color on why that is, a heavier weighting again in the back half into 2016?
We saw some change this year, Steve, and we believe next year with our planning that we have right now, we believe that 2016 will be similar to 2015. Again, there will be a lot of new product introduction throughout the year, that with the timing of those new product, and with the ramp up of Watercraft in Mexico, because the full production will be in Mexico starting that fall. The Juarez to ramp up for a new off-road segment. With all of those elements together We believe that we're planning our distribution H1, H2 similar to 2015.
Is the Juarez 2 contribution in fiscal 2016 a meaningful part of that impact?
Again, we're going to be starting production late Q4, so it should be more a cost than a contribution because we'll have startup costs. Until we are full ramp-up, it will take a few months. Q4 next year will be more of a cost than a benefit.
Okay. Final question, just looking at some of the products specifically in year round that were contributing in the quarter. Looks like you had a lot of growth and a lot of strength in Q4. Just wondering about the F3 in particular. It launched in the quarter, some shipments at the quarter end. We're now two-thirds of the way into Q1. Any color on how those orders or shipments have been proceeding and the dealer reception so far this quarter?
Like you said, we started shipping the F3 in January in North America, followed by international. We're very early in the season. The dealer in North America had the product since mid-February, and international is just receiving the product now. Overall, very good media and review. Very pleased with all the review that was done. We're starting to have some customer feedback. We've done a survey with a few customers that are owning right now an F3. The customer are pleased. Our statistic on the satisfaction versus is very high. Overall, very good feeling about the F3 potential, but very early in the season.
Okay, thank you. I'll pass the line for now.
Thank you.
Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.
Yeah, good morning. My first question is related to the CapEx increase for FY 2016. Obviously, once you strip out the FX impact, it's still a good increase from last year level. I was wondering if you could provide more details whether the CapEx increase is related to a specific category or the introduction of more products across several lines.
Yeah, I won't necessarily comment on which product line the CapEx is being allocated to. Yes, there's some infrastructure projects next year as well, but we're still heavily investing in product innovation. Again, with the breadth of product lines we have, we'll have a good product pipeline announcement for this year as well, and that's what's going to be driving a lot of the CapEx increase, Benoit.
Okay, perfect. Thank you very much. Just for Russia, could you provide more color on the assumption with respect to the currency? Because it's been reversing, in a positive territory over the last few months. Just wondering what type of level are you currently forecasting for full FY 2016?
We were a bit surprised, Benoit. If you remember about a week after our call in December, the ruble dropped drastically, reaching about 85 rubles per euro.
Exactly
for a period of about two weeks. To be honest, I think nobody could have predict the reaction of Russian consumer, but instead of stopping them to buy, they rush to buy luxury good. To buy it at the lower price because they were imported at a lower cost than 85 rubles per euro. What happened is our dealers in Russia were surprised. They had very good retail in December, January, we replenish dealers with product more than what we had anticipated. This is in a nutshell what happened. I don't think nobody could have predict that. This year, we end up at the end with 25% reduction. For this year, fiscal year 2016, we're planning 50% compared to what we had in fiscal year 2014.
Okay. Perfect. Maybe a third question, just in terms of inventory level. You mentioned a very good color about the reason for the increase. Just wondering what could be the implication in terms of the overall margins. Should we expect maybe higher discount, especially given the higher inventory level, but also given the upcoming introduction of new products? Just wondering whether it should translate into higher discounts for fiscal year 2016.
Actually, Benoit, in terms of inventory level, we are very comfortable with the inventory level today that we have. One of the big drivers of the increase year-over-year is snowmobile inventory levels in North America. Despite the bad snow conditions out west, the inventory levels are comparable to our historical inventory levels that we've had in North America. We're back to normal inventory levels for snowmobile. The other element which drove a bit more inventory is we've delivered Spark in anticipation of the retail season. Those are the two big drivers. Our inventory levels for our ATVs, when you exclude the new models and all that, the standard models are lower for SSV as well. There's no level of discomfort and a need to push more sales program in the network in the near future in order to liquidate that inventory.
Okay, perfect. Very good color. Thank you.
Thank you.
Thank you. The next question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hey, good morning. I just wanted to follow up on Benoit's question about channel inventory. Wondering if we could look more closely at that and if we could get a comparison of prior year channel inventory, how it looks if you look at 2014 off-road vehicle models this year versus 2013 and earlier last year, and then 2015 snowmobiles versus 2014 last year. Thank you.
Gerrick, the inventory in North America is 15% higher than last year. Let's see if we try to give you some color. A third of the 15% is for off-road vehicle. In there is Outlander L entering in the mid-CC and Spyder F3, and two third is on seasonal products, split about half and half. One half is snowmobile. Again, normal inventory for a normal winter. Higher than last year, which was exceptional, but normal. The other half is watercraft, mainly the addition of the Spark.
Okay. Moving on. Arctic Cat was pretty aggressive with snowmobile promotions in season and now with off-road vehicles. Do you think this has had any impact on your business?
If you remember, we had the highest spring break sales in model year 2015 ever. Some of our competitors started to discount their units in December, and we didn't follow. We did follow mid-January out West because of the snow situation, we never had really program in the East where snow condition was good. For the off-road vehicle, so far, we don't believe that this is affecting our retail so much. We're playing a bit. We're more in the high-end product category. So far, we don't believe that this is affecting our retail.
Okay, that's good. You had nice dealer growth in North America. I'm wondering, are you finding deeper penetration of your line with existing dealers? Meaning, are those dealers taking more of your product segments?
Well, in terms of dealer coverage, as we saw in the script or in the presentation, we had a good increase in overall penetration of the year-round products, let's say, line or take rate from existing dealers. Yes, that's one of the big drivers as well of our growth. We're seeing a 10% increase in the Spyder and SSV network coverage compared to a year ago. That's not only driven by the 76 that we've signed, but also by existing dealers taking our lines. When you look at the existing 76 dealers that we signed this year, 95% of them actually took the ORV line. We're extremely happy with the penetration that we're getting.
Great. Thank you, Sébastien.
Thank you. The next question is from Anthony Zicha from Scotiabank. Please go ahead.
Yes, good morning. José, could you give us a bit more color in terms of promotional activity for the first quarter and your expectations for the second quarter? The other part is, when you look at your dealers, you've increased the number to 76. Could you give us a bit of a geographic breakdown? Have some of these dealerships had some challenges with reference to lower oil prices? We've seen consumer confidence go down in Alberta. I'm sure it's the case in the Western U.S. Have you seen any evidence of this?
Okay, let's start with what's going on with the promotion. We are at the point in the season, most of the summer product will end their season end of June, July. You could see at this time of the year, some OEM being aggressive, but so far, I would say except maybe for one. So far, I would say the promotion activity, I would consider it normal. Typically, you will see aggressive promotion coming out more in April and May on the back end of the season, depending of an OEM situation and its inventory. So far, I would quote the promotional activity like normal. In terms of the dealer, just to come back on the dealer, we're very happy because the focus of our new dealers out of the 76, about half were in the South and Southwest, which is only 13 states in United States.
We're happy with the distribution that we've took. Maybe there is one thing that I would like to add. We have had a dealer in the last two years now, but the ramp-up is a bit longer than what we had thought. If a dealer take a line in an existing store, it can be up and running within six months. If a dealer extend his building or build a new building, it can take 18 months.
I would guess our average is about a year. Between the time that you sign a dealer, in average, it takes 12 months that the dealer is up and running with product in his showroom and the staff is trained and the sales is happening.
Okay. With reference to lower oil prices-
Oh, yes
it's clearly impacting Alberta, most probably also Western U.S. Have your dealers seen any evidence of that?
Yes. Sorry, I forgot that last question. Yes, we see mainly Alberta slowing down. All the West in Canada are slowed down. It's reflected into the snowmobile order that we receive. For them, it's a double impact. They had the weak snow season, and on top of it, the economy in out west is so-so. All of this right now is factoring in our guidance for the snowmobile because we have preliminary order on our hand, and also because the adjusting now their order on the monthly basis on all the off-road vehicle, it's also reflected in the guidance.
Okay. Thank you very much.
Thank you. The next question is from Robin Farley of UBS. Please go ahead.
Hi. Thank you for taking the questions. Actually, [Arpin here for Robin]. In terms of guidance of 7%-11% shipment growth in the year-round products, could you perhaps break down side-by-side expectations in that segment? Also, any broad commentary you could give on the retail environment since start of the year and especially through March would be extremely helpful in terms of off-road. Thank you.
I'll take the projection, and I'll have José give you some color on the retail for SSV. As I've mentioned in my remarks, the SSV industry is growing at a very good rate. However, when you look at our product portfolio in the SSV segment, we're not covering all of the segments. One of the segments which we're not covering is the utility segment, which is one of the largest segment, about 60% of the overall industry. Also one of the fastest-growing segments in the industry. Our projections for a year-round product growth is impacted by the fact that we're not necessarily in those high-growth segments in the SSV industry. Therefore, our forecast deliveries is lower than the forecasted industry growth for the segment. I'll have José cover the retail performance. Maybe also to add to Sébastien.
In Russia, obviously the biggest product that we're selling there is snowmobile, but we sell quite a lot of ATV and side-by-side. In Scandinavia, where the economy is also soft, we selling quite a lot of ATV, those two region are definitely slowing down versus what we had planned last year and slowing down the growth in the year-round product. On the promotional side, I would say at this point, the situation, I would consider it normal worldwide. We have good momentum with the mid-CC ATV category. We doing well in U.S., a bit slower than planned in Canada because mainly what's happening out west, but better at the international. Our momentum in the mid-CC category is, I would say, globally worldwide on plan. On the side-by-side, like Sébastien explained, we're playing right now with the Commander and the Maverick families only in 40% of the segment.
It's definitely that something we're trying to resolve in the near future. On the Spyder front, we're planning this year a good retail growth with the addition of the F3. If you remember, we finished model year 2014 with a bit too much inventory at the dealer level, and our plan is to slightly reduce the inventory in the network at the end of the year. We're planning a retail a bit higher than the wholesales during fiscal year 2016. All of this add up to the 7%-11%.
Thank you very much.
Thank you.
Thank you. The next question is from Derek Dley from Canaccord Genuity. Please go ahead.
Yeah. Hi, guys. Just looking at the international market, have you been able to replace some of the sales that had gone to Russia into other markets?
If you remember, the Russia situation started in, I would say in the fall. We have been able to ship some unit in Canada, mainly in Canada and some in U.S., but not too many out of the order because the Scandinavia market is different. Scandinavia and Russia market are different sled than what we use in Canada. Everything we could, we have bring them in North America, but most of the inventory have stayed there.
Okay, thanks. Is Russia still your biggest international market outside of Canada and the U.S.?
Forecasted 2016, again, we're looking at a 50% decline from fiscal year 2014. We'll have other big markets such as Australia, Brazil, that will be fairly close to what we're seeing in terms of numbers in, let's say, we'll call it Western Europe, which is not a country, but a region which will be material as well.
Okay, great. Thank you very much.
Thank you. The next question is from Cameron Doerksen of National Bank Financial. Please go ahead.
Yeah, thanks. I guess question on the capital allocation strategy you've announced an NCIB. I'm just wondering if you can talk about the thought process behind that. Was any consideration given to a potential dividend? How do you think about the leverage? Do you feel like you're comfortable there, or is there, I guess, the next few years, a plan to reduce that?
Good morning. Capital allocation is a recurring topic that we have at the board. When we look at our balance sheet, and when we look at the overall powersport and we'll call it big ticket item, discretionary sector, leverage is zero or minimal. As part of those discussions we have with the board, we look at, well, what are the potential returns that we can generate through investing capital? We have a lot of organic growth projects internally. We look at our debt situation. I'll just remind you that our debt conditions are very favorable, maturing only in fiscal year 2019 with covenant light, at a low cost of 4% all-in cost. When you after-tax that, it's only 3%. Paying down debt today is not necessarily something that is a high priority.
However, when we looked at where our stock price is trading and the potential return it could bring to shareholders by buying back shares, we believe that having the option to buy back shares this year could be a good alternative to give good returns to shareholders. That doesn't mean that we're looking away from a dividend. However, I think we need to strengthen our balance sheet, and deliver the business before we start thinking about a dividend in the near future.
Okay. Maybe just a second question on margins. The guidance sort of implies roughly 12% EBITDA margins, which would be kind of flattish. Obviously, you got some headwinds here with foreign exchange. You're ramping up some new facilities in Mexico, so there's some headwinds. Can you talk about, if we look beyond fiscal 2015, what the margin profile looks like? How do you narrow the gap between yourselves and what some of your peers have, which is higher margins?
Yeah. For sure, FX has been impacting us, we've lost 200 basis points if you compare 2015 to 2014 and then 2016 to 2015. That's a big hit. Also, last year and this year, we are transitioning to new manufacturing facilities. All the cost improvements that we're building into our product design is being offset by some of these initiatives. We are extremely focused on improving margins over the long term, and such initiatives as the transfer of PWC to Mexico will bring improved margins, but that will be in fiscal year 2017. That's, again, part of our ongoing strategy. Yes, we want to focus on increasing top line, and that's going to be a big driver as well of improving margins because your asset utilization is much better.
Also improving the way we build products and the cost of our products will also be an important driver of that margin growth.
Okay, perfect. Maybe just last quick one, just on the PAC up 10%-15% in the guidance. That seems pretty strong. Is there any specific driver of that?
Well, we have an aggressive PAC strategy or a strong PAC strategy where we want to increase the dollar per unit of PAC sales. We've had successes in the past as you've seen our results and our PAC sales grow. That's going to be continuing next year as well. We have a dedicated PAC sales team that are focused on increasing our PAC penetration rate at dealers, and they have key metrics that we follow to make sure that we achieve those targets. These are the drivers that are as part of the retail and the top line growing. We also have some very effective go-to-market strategies that will bring that top-line growth as well.
Okay. Thanks very much.
Thank you. The next question is from Mark Petrie from CIBC. Please go ahead.
Good morning. Just a couple of quick follow-ups, actually. On the ramp-up of the PWCs down in Querétaro, that's CAD 20 million-CAD 25 million. Is that in fiscal 2017 where those savings will be realized?
Yes. That's going to be in fiscal 2017, Mark, that we'll be seeing those savings come in.
Okay. In terms of the actual revenues coming out of or resulting from production out of Juarez 2, will we actually see any in Q4 of fiscal 2016, or is that a ramp-up in fiscal 2017 in facility?
You will see a bit in Q4 of this year, and the ramp-up is going to be happening in 2017. Yes, we will be delivering units, finished goods out of that facility this year.
Okay. Then just in terms of FX, the positioning or some of the commentary that we've heard from you, generally speaking, is net hedge over the course of a year. It does seem that it's going to be having, again, a pretty significant impact in terms of fiscal 2016. Is a lot of that timing and just sort of lapping some of the moves, or how should we think about the FX positioning from a natural hedge perspective going forward?
Well, we believe that in the long term, that's the best strategy because you could do, again, some forward contracts, you're always 12 months let's say, behind the increase. Having costs and offset the revenue in the various currencies for us is the best strategy. Despite the fact that it hurts the margin, on the economic side, on the cash side, it produces the best results and protects us the most. That's a strategy we've had in the past, a strategy we're going to continue having. We're going to refine it for sure. We're going to be looking at certain exposures, how to better manage it, because as you know, certain countries where we export, we have very little cost, but a lot of revenue. Can we do a better job of managing that exposure? We'll look at it.
When you look at the two big currencies for us is the USD, where we have a lot of revenue and a lot of cost, and the euro, where we do have some good revenues, but also some cost because of our manufacturing plants in Europe. For us, that offsetting strategy is the best strategy, despite the fact that, okay, if the U.S. dollar continues going up, it's going to impact margins negatively. As I said, if the U.S. dollar continues going up, as the U.S. is a benchmark for pricing around the world, we feel it's good for the overall business.
Okay. That was sort of actually my just follow-up. In terms of the Canadian dollar, obviously, you guys have a reasonable amount of your costs in Canadian dollars. How do you think about pricing within North America?
The U.S. market is still the biggest market in the world for recreational product, it's somewhat the different country for pricing. We need always to manage cross-border shopping between countries. This is true between U.S. and Canada, but it's also true in Europe, where countries that they don't use the euro currency. Typically you keep a 10% gap between your Canadian pricing and your U.S. pricing adjusted for the currency. So far, we saw some of our competitors increasing their pricing in Canada. That's an opportunity for us. Obviously, this is something that you see more long-term. It will take a few years. If the U.S. dollar continued to gain in value versus the Canadian, you will see pricing in Canada going up, but it's something that is not happening overnight.
It could take a year or two, three years to follow the currency situation.
Okay, thanks very much. Best of luck.
Thank you.
Thank you. The next question is from Craig Kennison from Robert W. Baird. Please go ahead.
Good morning. Thank you for taking my question. Most have been addressed, but I'll follow up on the share repurchase plan. Does your guidance include any share repurchase activity, or would that provide upside? Thank you.
The guidance does not include any share purchase activity, so it's based on a constant share count as where we ended in fiscal year 2015, so 118 million shares. Today it's on a constant share basis.
Thank you.
Thank you. The next question is from Martin Landry from GMP Securities. Please go ahead.
Yes, good morning. Just going back to your Q4 results, they have come in higher than your revised guidance that you gave in mid-December. It would suggest you have had a strong January. Can you talk a little bit about what came in better than anticipated? Was it related to your change in the dealer patterns?
Good morning, Martin. Yes, when you look at the results, especially on the EPS side, we did come very strong and on the EBITDA as well. There are two things which impacted our results, which I will refer to as externalities. The first one is the effects from the revaluation of the balance sheet, the working capital elements on the balance sheet. That resulted in a gain of about CAD 12 million. When you strip that out and remove that is about CAD 0.07 on the EPS and about CAD 12 million on the EBITDA. Also the tax rate we had announced, we had reduced our guidance on the tax rate when we announced the results in Q3, coming from retroactive changes in tax laws that happened in Q3, but new changes also happened in Q4, which impacted our EPS for an additional CAD 0.03.
When you strip out these elements, CAD 0.10 on the EPS and about CAD 12 million on the EBITDA, we are kind of within the mid-range of the guidance, and therefore, nothing extraordinary happened in the quarter, which made us miss or come in higher or lower than expected. As José mentioned, Russia was a bit stronger than what we had expected. That was offset by lower sales of parts and accessories.
Okay. Just to be clear, the CAD 0.10 you're talking about is not excluded from the adjusted CAD 0.98 you reported?
No, it's not excluded.
Okay. Then lastly, on the side-by-side, you do mention that you're not in the utility segment. Any chance you give us some color on how you're faring in your addressable market? Meaning, how are your retail sales doing versus industry and in the markets you're targeting?
Yeah. The Commander play into what we call the Rec-Ut, the vehicle you can use for recreational or utility activity with bucket seat. This segment is slowing down slightly, and we are maintaining our market share. On the sport category, this segment is growing And so far, we're maintaining our market share. The Maverick XDS and XDS Turbo were shipped a bit late, to be honest. I think our team have done an incredible job to develop those high-performance vehicles. In an ideal world, we'll actually have shipped them maybe two months before. They arrive in large quantity in January, and so far we're hearing good things then. Basically, we're maintaining our share in those two segments that we are in.
We believe the Maverick X ds and X ds Turbo could get some momentum, but the disproportion of the utility versus the rest is really causing the market share loss when you look at the overall industry.
Okay. Thank you very much.
Merci.
Thank you. The next question is from Tim Conder of Wells Fargo Securities. Please go ahead.
Good morning. This is actually Mark Terenzian for Tim. Just as a quick follow-up to the FX and pricing questions. Are you actually using the Canadian dollar at all to your advantage to gain share in the U.S.? Could you also provide any additional color on hedging for 2016? How much are you hedged, and at what level?
Yeah. In terms of leveraging the Canadian dollar for U.S. pricing, no. We look at it as two very distinct markets, and the demand for the markets are different and consumers are slightly different. Therefore, we are not taking the, let's say, the potential lower cost from the Canadian dollar when you convert it to U.S. to reduce pricing and gain share. We are respecting the pricing and the market conditions that are there. As I've said, again, when we look at our overall FX position, we look at it globally within the company. Yes, we are benefiting from a strong U.S. dollar on the top line, but because we have a good amount of cost in the U.S. dollar, it doesn't mean that the margins are increasing, as there's an offset that's occurring there.
In terms of hedging strategy, today, the currencies that we are actively hedging with forward contracts are the AUD, the SEK, and the NOK. We do have a policy that allows us to hedge not more than 60% of the next 12 months, and at least 25% for the next 6 months. We are within these guidelines and say we're probably at 30% for the SEK and probably same range for the NOK, and the AUD also probably in the same range in terms of overall hedging.
Okay, great. Do you have any updates on the pending regulatory issues with the CPSC?
All the OEMs continue to collaborate together through the ROHVA Association. We are in discussion with CPSC. Discussions are going on. Nothing to update at this point, but we're following that closely, obviously, and we're confident that we can meet any new regulation that they can come with.
Okay, great. Thank you.
Thank you.
Thank you. The next question is from Benoit Poirier of Desjardins Capital Markets. Please go ahead.
Yeah, just to come back on the Spark. If we look at the industry, it was kind of a low single digit early in the season while the Sea-Doo was overall flat. I was kind of expecting you to gain market share just because of the Spark. Any color on those numbers so far?
Right now, don't forget that we started to deliver the Spark in September 2013. When we introduced the vehicle, we already had produced units, and we shipped to the dealer very quickly, and we had a very good response from day one on the Spark. What happened last year, Benoit, because of the demand was bigger than what we had planned, we extended production from the end of March till the end of June. That gave us the additional volume. This year, because we're planning the industry to be at least what we had last year, we started to ship a bit earlier in this year, in fiscal year 2015, to plan finish production in March to give us the opportunity again to increase production if the retail is there. At this point, it's very low number, huh?
We probably have 5% of the retail of the season done. Right now, the industry is flat versus last year.
I see. Okay. Very good color. Is the mix between traditional and Spark mostly in line with the initial expectation, José?
So far, yes.
Very good. Last question, just with respect to your guidance, does it assume the new products introduction that we might see this year?
Yes.
Okay. Thanks again.
Merci.
Thank you.
Thank you. There are no further questions at this time. I'd like to turn it back over to Mr. Bossé.
Great. Thank you very much, Sébastien. I want to thank all of our participants for today's call. Wish you a very good day, and we'll talk to you when we report first quarter results in June. Thank you very much, and you all have a very good day.
Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.