Q2 2017 BRP Inc Earnings Call
Sep 09, 2016 AM EDT
DOO.TO - BRP Inc
Q2 2017 BRP Inc Earnings Call
Sep 09, 2016 / 01:00PM GMT
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Corporate Participants
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* Philippe Deschenes
BRP Inc. - IR
* Jose Boisjoli
BRP Inc. - President, CEO
* Sebastien Martel
BRP Inc. - CFO
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Conference Call Participants
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* Jamie Katz
Morningstar - Analyst
* Mark Petrie
CIBC World Markets - Analyst
* Robin Farley
UBS - Analyst
* Benoit Poirier
Desjardins Securities - Analyst
* Mark Torrente
Wells Fargo Securities - Analyst
* Gerrick Johnson
BMO Capital Markets - Analyst
* Martin Landry
GMP Securities - Analyst
* Cameron Doerksen
National Bank Financial - Analyst
* Derek Dley
Canaccord Genuity - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY17 second-quarter results conference call.
I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.
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Philippe Deschenes, BRP Inc. - IR [2]
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Thank you, Maude. Good morning and welcome to BRP's second-quarter conference call for fiscal 2017. Joining me on the call this morning are Jose Boisjoli, President and Chief Executive Officer, and Sebastien Martel, Chief Financial Officer.
Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these.
Also, during the call reference will be made to supporting slides, and you can find the presentation on our website at BRP.com under the Investor Relations section. With that I will turn the call over to Jose.
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Jose Boisjoli, BRP Inc. - President, CEO [3]
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Thank you, Philippe. Good morning, everyone, and thanks for joining us.
As you know, Q2 has always been the smallest quarter of the year in terms of financial results for BRP, and this year was no different. However, the last few months have been big in terms of progress for the Company.
We have been relentless in our pursuit of offering to consumers the best product in the industry, with the introduction of several exciting and game-changing new models at our two Clubs this summer. And we have been flawless in our execution, and we demonstrated our agility as we have rapidly started the production as per plan.
We have also made some important changes that will help us deliver our long-term objectives. We announced early in the summer the renewal and extension of our credit facility that will provide us with the financial flexibility to seize opportunities and deliver our plan while maintaining very favorable terms. We also recently announced changes in our marketing structure, and have filled the position with excellent internal candidates who have shown a high level of commitment over the years, have a strong knowledge of the powersports industry, and have demonstrated their capacity to take on new challenges.
We have promoted Sandy Scullion as head of our global sales and consumer experience division. Sandy has over 20 years of experience with BRP and has most recently been in charge of our Western Europe, Middle East, and Africa division, which has been performing extremely well under his leadership.
We also took the opportunity to announce a new organizational structure for the management of our activity in Europe, where we decided to merge Scandinavia and Eastern Europe with Western Europe, Middle East, and Africa. This structure is intended to strengthen BRP's presence throughout the entire European region and take advantage of synergies arising from the consolidation of activities.
Steve Pelletier, former Vice President of Finance, and who led the global sales and consumer experience division on an interim basis, became our Vice President and General Manager of the new Europe, Middle East, and Africa region. And Thomas Uhr, Vice President and General Manager BRP Rotax, will now oversee all manufacturing and engineering operations for Europe, including Lynx snowmobile production in Rovaniemi, Finland.
I am proud of how our team has stepped up and delivered last year, and I am confident that we have the right people in place to achieve our objectives.
Now let's have a look at financial performance for the quarter, on slide 4. As we mentioned during the Q1 call, the industry is still going through a difficult time, but we remain disciplined and have continued delivering on our plan to end the second quarter broadly in line with our expectations.
Our quarterly revenue grew by 5% to reach CAD856 million, driven by: the introduction of the Defender; the strong momentum we have with our Can-Am ATV business; the strong retail season of Sea-Doo worldwide, which reduced our sales program cost; and favorable foreign-exchange variation. The quarterly normalized EBITDA was down CAD9 million to CAD44 million.
For the first half of the year the normalized EBITDA stands at CAD102 million, tracking in line with our expectation split between the first and second half of the year as we provided to you last quarter. The normalized diluted earnings per share for the quarter was CAD0.01.
Looking at retail, our powersport retail for the quarter was up 4% compared to an industry that we estimate was down low single digits. Our retail growth was driven by the strong momentum we have with our Can-Am off-road products and by another very good season for personal watercraft.
However, this growth was partially offset by a difficult quarter for Spyder, which saw retail slowdown in the quarter, like the motorcycle industry as a whole. I will give you more color on retail trend in just a moment, but for now let's go on slide 5 for an overview of our most recent Club that we held last month in Orlando.
Once again this year we had strong showing from all over the world at the Clubs, with over 1,000 participants in Milwaukee at Club Evinrude and over 2,300 participants at Club Sea-Doo/Can-Am in Florida. In both cases, our new products were very well received.
We added fun, affordability, power, and fuel-efficiency to our Sea-Doo lineup, which strengthened our offering and helped us maintain our market leadership. The highlight of our Sea-Doo introduction is the Spark Trixx, which allows riders to do tricks like pros with ease.
On the Spyder side we have reconfigured the base version of the Spyder F3, allowing us to reduce the MSRP to $16,999 in the US. We have also introduced the new Spyder F3 Limited, the ultimate cruiser version of the Spyder F3, which features a removable top case with integrated passenger backrest that has enough storage for the two fullface helmets.
Another important announcement is that the renewal of the Can-Am NASCAR sponsorship, which brought us great exposure so far, and we are pleased to continue this association for another two years.
But the biggest news of the Club was certainly the introduction of the Can-Am Maverick X3. It is setting the standard in performance side-by-side with more power, more suspension travel, and better handling than any other sport side-by-side in the industry.
The reach of the Maverick X3 is also unprecedented. We started off with a teaser campaign, which generated over 1 million views; and we made sure to reach a vast powersport audience by having well-known ambassadors Ken Block and BJ Baldwin on stage with us to launch the product. They both have an incredible Internet following, with multiple videos counting millions of views.
The product has already made an important statement. Just a few days after its introduction, the Maverick X3 won its first race, the prestigious Best In The Desert Vegas To Reno race, driven by the Murray racing team. It is truly a very impressive vehicle, and we made sure the world hears about it. Production of the X3 has already started on August 22, and deliveries to dealers will start next Monday.
Now looking at Year-Round Product highlights on slide 7, revenues were up 9% for the quarter, mainly driven by shipment of the Can-Am Defender and the continued good momentum of our Can-Am ATV business. Looking at ATV retail trends, the North American industry ended its 2016 season on June 30 with retail down low single digits.
Can-Am ATV had an exceptional season, with retail up high single digits. This success has been driven by the solid momentum of the Outlander Mid-CC family, which since its introduction two seasons ago has seen its market share double. Can-Am ATV now holds the number one position in Canada and Scandinavia, and the number two position in WEMEA and APAC.
For the side-by-side, the North American industry ended the 2016 season with retail up mid single digits. With high teens retail growth since the beginning of the fiscal year, Can-Am side-by-side closed the gap with the industry and also ended the season up mid single digits.
This growth has essentially been fueled by the Can-Am Defender, which has been the highest selling model of our side-by-side lineup at the retail level over the last two months. The Defender is also performing very well in other regions of the world, notably in Australia and New Zealand, where our side-by-side business reached the number-one market position in July, and in Western Europe, where retail is up over 20% year-to-date.
We have made tremendous progress over the last season with Can-Am off-road. And with all the additions made to our lineup, the agility we now have with the Juarez 2 facility, and with the strong momentum with our dealer network, the future of Can-Am off-road looks very promising.
Now turning to Spyder. The last few months have been difficult for the motorcycle industry in general and for Spyder. Now, nine months into the season, the industry retail is down low single digits. The trend is even worse when looking at higher-priced motorcycles, above $18,000 has declined midteens percentage in the last quarter.
Meanwhile Spyder retail is down high teens season-to-date. We are disappointed by the retail performance of Spyder this season.
While the industry trend is certainly not favorable, there are a few other elements that are driving that shortfall, notably our decision to hold back on discounting this season compared to previous years, to better maintain value for the product and the fact that Spyder F3-T potential clients did not perceive strong value in the addition of integrated saddlebags.
We are working on solutions to improve the Spyder business. At the beginning of the season, we have put in place teams in two key US markets, California and Florida, to try different regional approaches to stimulate the demand for Spyder. While we already have a few insights, it is too early to comment on our findings; but we are already preparing for season 2017.
Turning to Seasonal Products on slide 8, Seasonal Product revenues reached CAD[280] million, up 6% from last year, driven by higher volume and stronger mix of personal watercraft sold, but partially offset by lower volume and unfavorable mix of snowmobiles sold compared to last year. As we mentioned earlier this year, snowmobile shipments are expected to come on the back end of the second half of the year compared to last year, due to a later start of production resulting from the introduction of the new snowmobile platform.
As the spring break shipment will occur up to two months later than usual, this is expected to push our snowmobile retail sales later in Q4. So you can expect weaker retail trend for our snowmobile business in the third quarter. Our production pilot run for the new platform has been done mid-August, and we are ready to start mass production at the end of the month.
Now looking at the retail performance for personal watercraft, 10 months into the season the North American industry retail is up high single digits. Sea-Doo retail sales were also up high digits over the same period.
The Sea-Doo Spark continued to grow in its third season on the market, and we've made significant market share gains in the muscle and luxury performance segment with the introduction of the 300 horsepower engine.
Sea-Do is also performing well in international markets, notably in Scandinavia and Western Europe, with over 20% retail growth year-to-date. We are pleased with the momentum of our two product lines in these mature markets.
Now turning to Propulsion Systems on slide 9, revenue grew by 5%, primarily driven by favorable exchange rate. The 2016 season ended on June 30 for outboard engines with the industry retail up mid single digits, while Evinrude retail was down mid single digit. The market share loss is driven by the older generation of engines.
Meanwhile the E-TEC G2 lineup continued to gain traction and building on that momentum. We introduced the new technology for engines between 150 to 200 horsepower at our most recent Evinrude Club in June. We are pleased the G2 performance in the market, and we intend to extend the technology to lower power range.
Parts, Accessories, and Clothing on slide 10. Sales from our PAC business ended the quarter at CAD149 million, down 4% from last year. The decrease is mainly due to lower dealer order for snowmobile PAC resulting from the poor winter we had in North America.
Now, as we always look to improve our PAC offering and generate growth for that business, we did something new with the launch of the Maverick X3. We are offering over 70 accessories right from the launch, many of which have been developed in association with several aftermarket leaders who are well known for their performance inspired products. This allows us to benefit from their expertise and to address markets with specific riding needs.
Finally, before I turn the call over to Sebastian I want to update you on some of the initiatives that are key to the achievement of our long-term objectives. First, our dealer network optimization effort. Things are progressing well on that front.
We had over 30 prospect dealers at the Club this year, and we are on track to achieve our target of adding 45 to 55 new dealers in this year. We are also making great strides in our effort to reach more customers by focusing on a few different initiatives, notably by working at building the Can-Am brand, and we are continuing to progress on that front especially with the renewal of the Can-Am NASCAR sponsorship for two more years and with the very bold and exciting Maverick X3 launch, which reached millions of people.
We are also working on building partnerships with great ambassadors for our products and our brands. This is what we did with Ken Block and BJ Baldwin for the Maverick X3.
And we are putting a great deal of effort in enhancing our digital presence to reach more customers. This is a field in which we are rapidly becoming a reference in the industry by improving the customer experience through the technology.
Another key element of our long-term objective is our manufacturing plan. We took a leap forward in that project with the opening of the Juarez 2 facility. We are now able to rapidly launch product into production and have full model mix on the product line.
This was just a quick glimpse into some of the projects we are working on at the moment. I am proud of the progress our teams are making on these different initiatives, and the early impacts we are seeing on our business are very promising.
On that note, I will turn the call to Sebastien for an overview of our financial results.
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Sebastien Martel, BRP Inc. - CFO [4]
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Thank you, Jose, and good morning, everyone. This morning we reported revenues of CAD856 million for the second quarter of fiscal 2017, an increase of 5% from last year's second quarter. The growth was mainly the result of higher Year-Round Products sales and favorable foreign exchange rate variations.
We generated CAD172 million of gross profits, resulting in a gross profit margin of 20.1%, an 80 basis point decline from last year due to higher production costs and unfavorable currency, partly offset by a favorable product mix in Year-Round Products and lower sales program costs.
Operating income went down CAD53 million in the quarter, primarily due to an unfavorable patent litigation. As you are already aware, we are involved in multiple lawsuits with one of our competitors whereby each party is claiming damages for the alleged infringement of some of its patents.
During the first quarter we had reported compensatory damages related to the verdict in one of these lawsuits. Since then, the trial judge formalized the verdict and awarded additional damages in favor of the plaintiff.
So for the three-month period ended July 31, 2016, the Company recorded as an expense total damages and related costs of CAD43.1 million. Management believes that the verdict and subsequent decisions are unfounded and unsupported by either law or evidence and filed an appeal on August 23.
Now, normalizing for these litigation costs and a CAD38 million loss on our US dollar-denominated debt, normalized EBITDA amounted to CAD44 million for the quarter and now stands at CAD102 million for the first six months of the year. This is broadly in line with our expectations for the normalized EBITDA generation split between the first and the second half of the year.
Now let's turn to slide 14 for our revenues by product categories and geographies. Our product revenue mix was similar to last year's second quarter, with 38% of our sales coming from Year-Round Products, 33% from Seasonal Products, 12% from Propulsion Systems, and 17% from Parts, Accessories, and Clothing.
From a regional perspective, international revenues were up 9% in the quarter, driven by: higher PWC and ATV wholesale in Western Europe; higher PWC and SSV wholesale in Asia-Pacific; and to a lesser extent favorable FX impact.
For the US, revenues were up 1% to CAD406 million, with growth coming from higher volume and favorable mix of PWCs as well as positive currency impact; but those were partly offset by lower Spyder shipments and by lower shipments and unfavorable mix of snowmobiles. With the introduction of our new snowmobile platform, shipments have started later this year compared to last year, and they are expected to extend later in the fourth quarter compared to previous years.
Finally, Canada was up 10%, driven by higher Year-Round Products shipments, which were also partly offset by the lower shipments and unfavorable mix of snowmobiles.
Turning to slide 15 for a look at the normalized net income bridge, our normalized net income stood at CAD1 million, down by CAD3 million for the same period last year. Benefiting the normalized net income were volume and mix for CAD7 million, pricing and sales programs for CAD6 million, and financing costs and normalized income tax expense for CAD8 million.
These elements were offset by higher production costs for CAD9 million, coming from the opening of the Juarez 2 facility, and higher inventory provisions. Our operating expenses were also higher by CAD15 million, driven by higher investments in R&D and marketing as we continue investing in growth.
Slide 16 for a balance sheet and cash flow update. During the quarter we amended and restated our credit facility as we seized the opportunity to deleverage our balance sheet and improve financial flexibility.
We notably reimbursed $92 million on our term facility, which now stands at $700 million. And we extended its maturity from January 2019 to June 2023, while maintaining favorable terms.
We also amended and restated our revolving credit facility to increase the availability by CAD75 million, for a total availability of CAD425 million; extended the maturity from May 2018 to June 2021; and reduced the cost of borrowing by 25 basis points. In addition, in the quarter we used CAD38 million to repurchase 1.8 million shares.
Now a look at BRP powersports dealer inventory for North America on slide 17. Our network inventory level is healthy, as it is slightly down from last year's second quarter. We saw some increases driven by the introduction of the Can-Am Defender, the continuing ramp-up of snowmobile shipments to the new dealers we added over the last few years, and higher inventory level of noncurrent snowmobiles, mainly in Canada, due to the poor snow conditions last winter and the economic slowdown in Western Canada.
But these increases were more than offset by a decrease in network inventory in the rest of the lineup, most notably for the Can-Am Commander and Can-Am Maverick side-by-side; current model year snowmobiles as we started shipments later this year compared to last year.
Now finally, slide 18 for an update of our guidance for fiscal 2017. Overall revenue guidance remains unchanged; but with half of the year behind us we are updating our product category revenue guidance to reflect the results of the latest seasons and also the positive reception and strong orders from dealers at the last BRP Club in August.
Therefore, we are increasing Year-Round Products revenue guidance by 2%, to up 8% to 12%. Despite lower shipments of Spyder for the second half of the year versus initially planned, we have good momentum in ORV; and the strong orders for the Maverick X3 calls for an adjustment of guidance.
On the PAC side, soft consumer demand for snow business in the first half of the year and dealers needing lesser replenishment of inventories results in adjustment of guidance downward by 2%, for an updated guidance up 3% to up 8%. We have also adjusted net financing costs following the refinancing closed in the second quarter; and the share count has also been updated to reflect the progress we made year-to-date on the NCIB.
So we are increasing normalized net income from up 2% to up 8%, to a guidance of up 3% to up 9%. Our normalized earnings per share guidance is therefore adjusted upwards to CAD1.82 to CAD1.92.
As we have already alluded in previous quarters, our guidance applies for a robust EBITDA growth in the back half of the year and, more importantly, in the fourth quarter. We are confident in our plan for the year, as the catalysts for strong back-half growth are higher volume and richer product mix, driven by initial shipments of the newly introduced products, notably the Maverick X3 and the new snowmobile platform. The reception for these new products has been exceptional, and we already have orders on hand. Production for most of them has already started, and we are expecting shipments to impact the back half of the third quarter and all of the fourth quarter.
With this, I will turn the call back to Jose.
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Jose Boisjoli, BRP Inc. - President, CEO [5]
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Thank you, Sebastien. Once again, I am pleased with our results and where we stand at this point in the year. Looking at the second half of the year, the global environment remains volatile.
The US powersports industry remains weak in certain regions, affected by oil and ag economy, and very competitive in other regions. While the risk of interest rate increase and the presidential election coming up, we do not anticipate things to improve short-term.
In Canada the situation seems to be improving, as we are lapping difficult quarter last year. Still we do not expect significant growth shortly.
We are confident that markets in Europe and Asia-Pacific will continue to grow and provide us with several opportunities. However we are closely monitoring the situation in Russia and Brazil, where economic and political instability has hurt our business.
Despite a challenging global context, we are confident in our plans for the second half of the year. We have several exciting new products hitting the market. We are pleased with the continued momentum gain for the Can-Am Defender in our ATV business, and we will maintain our marketing campaign to continue to build awareness.
Our manufacturing plants are in full operation. And finally, our worldwide distribution network is committed and stands with the right inventory level that positions us well for the back half of the year.
As I have said many times, the uniqueness of BRP and a key differentiator versus our competitor is in its product diversification, its geographic market diversification, and its manufacturing diversification.
In closing, I would like to remind you that we will hold our Investor Day in El Paso and Juarez on September 21 and 22, and all the material presented will be available on our website. On that note I will turn the call over to the operator for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Jamie Katz, Morningstar.
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Jamie Katz, Morningstar - Analyst [2]
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Good morning, guys. Nice quarter. My first question is actually surrounding the refinancing that you did. I'm just curious, with the lower leverage, if you guys are thinking about capital allocation a little bit different; and how you think about either paying down debt or buying back shares going forward.
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Sebastien Martel, BRP Inc. - CFO [3]
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Good morning, Jamie. Obviously the market was good for a refinancing, and that's why we decided to proceed. Extending the maturity by several years, up to 2023 was a good alternative for us. And as part of our overall capital allocation strategy, one part of it is deleveraging, and we did take that opportunity back in July to reduce our debt by $92 million.
Obviously it is our objective to continue deleveraging the business, and we'll be doing it operationally by growth in the business and growth in EBITDA. So we'll get the natural deleveraging there.
But in terms of capitalization priorities for us, when we look at the share price where we are trading, the NCIB is still very attractive and a good way to return capital to shareholders and give them good returns with the trend.
Obviously we are limited by the number of shares we can purchase on an annual basis, the 10% of the float. So that's something that we will continue investigating and most likely pursue going forward it the stock price was to remain low.
But our priority still remains investing in growing the business. We are a business where we invest approximately CAD200 million of CapEx on an annual basis, and we'll want to make sure that we are able to continue that going forward.
That would be in a nutshell how we think of capital allocation.
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Jamie Katz, Morningstar - Analyst [4]
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Okay. Then can you talk about the quality of the parts and accessories that are left in the channel now? It seems like there was some overhang from the snowmobile season and you guys obviously took guidance down just a bit. I'm curious if there's still some inventory that you are working through, or if it's just a timing delay.
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Jose Boisjoli, BRP Inc. - President, CEO [5]
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Yes, good morning. Typically in July we start delivering what we call parts and accessories that dealers repeat, things like oil, belts, runners for the skis. And it seems that with the bad snow season we had last winter, the dealers are still stuck with a lot of those and repeat orders were lower than what we were expecting at the beginning. And that's why our July -- our Q2 PAC were lower and we are lowering the guidance for the end of the year.
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Jamie Katz, Morningstar - Analyst [6]
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Okay. Then lastly can you just talk about R&D spend? It's tracking a little bit higher as a percentage of sales. Can we think about maybe a little bit of a higher run rate going forward than in the past, as you guys spend more on R&D to get those new off-road vehicle models out every six months? Just modestly above maybe where it has been, or eventually does this R&D level temper off?
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Sebastien Martel, BRP Inc. - CFO [7]
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Yes, when you look at the overall R&D expense as a percentage of revenue, for sure Q2 the percentage of operating expenses goes up. We finished overall total operating expense 18.5% of revenues. Q2 is a low quarter in terms of overall revenue, and that's why you see a percentage increase.
But as we had alluded for earlier in calls, we are investing more in marketing. We are investing more in R&D. And we will see that trend in absolute dollars continue down the road in future quarters.
And despite the growth in revenue we should be ending in pretty much the same percentage as to where we were last year in terms of overall R&D expenses, in terms of percentages.
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Jamie Katz, Morningstar - Analyst [8]
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Great, thanks. I'll jump back in the queue.
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Operator [9]
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Mark Petrie, CIBC.
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Mark Petrie, CIBC World Markets - Analyst [10]
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Good morning. I wonder if you could just give a comment on the performance of the dealers that you guys have added in the last year. Obviously that was a big number last year and tempering off a bit this year. But just wondering if you could give a bit of a comment.
And is there any segment or category where the new dealers are having a bigger impact?
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Jose Boisjoli, BRP Inc. - President, CEO [11]
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Good morning, Mark. We are on track. Typically when the dealers take our line, I would say to be up and running it takes about a year. Some a bit less, some a bit more, but I would say average one year.
Obviously the area where we had market opening was mainly in the off-road business and the Spyder business. And that would be my takes on this.
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Mark Petrie, CIBC World Markets - Analyst [12]
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And in terms of the initial reaction on the Maverick X3, same sort of consistent theme in terms of the new dealers jumping on board with the new product?
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Jose Boisjoli, BRP Inc. - President, CEO [13]
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Yes, I think definitely the Maverick X3 -- and when you introduce a high-end performance vehicle, it always attracts the attention of the customers and the dealers and the media and all this. Then the X3 is giving us even more credibility to our commitment to have a new side-by-side every six months for the next four years, our commitment for the side-by-side business. And this is definitely helping to attract new dealers in those open areas.
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Mark Petrie, CIBC World Markets - Analyst [14]
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Okay, thanks. Then I just wanted to follow up on Spyder. Obviously some disappointing numbers, as you said. You have obviously taken action in terms of the regular price on the F3, on the new reconfigured model.
But just wondering if you could talk a bit about your approach to the Spyder. I know you tweaked your marketing campaigns; but I wonder if you could just talk a little bit more about what you think needs to happen in order for performance to improve.
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Jose Boisjoli, BRP Inc. - President, CEO [15]
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Yes, two things. The first one, last year we -- typically in early August we launch noncurrent program. The model year becomes noncurrent, and we launch program.
Last year because we wanted to make room for the F3 family, because we knew the F3-T was coming, we started to have discounts in June, two months earlier than is typical. And it was quite aggressive program because at the time we had RS and ST still in the pipeline, and we had a lot of RT.
Then we came out with those programs -- in retrospect probably too early; created like a demand, an artificial demand. And this year we decided not to do it.
This year we said we will stick to normal discount timing period; and the 2016 model became noncurrent in August. Then this -- definitely we didn't have the lift that we had last year in June-July for the retail performance.
The other thing is the new marketing campaign is addressing a broader type of customer, not only the motorcyclist but a broader type of customer. It generated a lot of leads. Very, very successful campaign in terms of leads, in terms of interest.
We had a lot of leads to the dealers. But those customers don't know about motorcycles. They are new to the industry, and we realized that it takes a lot more time than what we expected to convert them.
That we are convinced is the right way to go. We are convinced we need to continue to talk to them; but it takes more time to convert them.
One interesting thing that I said in my notes was we decided early in the year to put two small teams, one in Florida and one in California, to do a regional geographic action. Like in Florida, the motorcycle license for a powersport customer is no problem; but for someone who's never been in the powersport business, this is a bigger obstacle than what we thought. And now we facilitate with the dealers those customers.
But all of this takes time, and we believe there is a lot of learning, plus the repricing of the F3, that we can apply to more states and provinces next year. And we will work on our plan for 2017.
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Mark Petrie, CIBC World Markets - Analyst [16]
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Okay, thanks. Sorry, just a follow-up. What is the state of the Spyder noncurrent inventory today versus last year?
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Sebastien Martel, BRP Inc. - CFO [17]
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That would be similar to what it was last year.
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Mark Petrie, CIBC World Markets - Analyst [18]
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Okay, thank you very much.
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Operator [19]
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Robin Farley, UBS.
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Robin Farley, UBS - Analyst [20]
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Great, thanks. I just wanted to clarify. When you talked about your retail in the side-by-side in April, at that point through the season it was up mid single digit; and then for the full season today you talk about your retail being up mid single digit. But I thought that I maybe heard you during the call say something about your side-by-side sales being up high teens in the quarter.
It just didn't seem -- and I may have misheard, or maybe you were talking about one specific market. But it just didn't seem to square with the up mid single digit at the nine-month and 12-month mark.
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Jose Boisjoli, BRP Inc. - President, CEO [21]
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Good morning, Robin. What happened is obviously -- before the Defender we were participating only in 40% of the industry. Then even if we had decent sales or retail in the sport category and [recruit] category we were absent in the utility. Then what happened with the introduction of the Defender, we had -- and the Defender momentum is growing month by month -- we had a pretty good retail in H1, first year of the Defender, and we were able to catch up overall.
And the industry is growing by about low single digits. And we're growing -- we catch up in the first half and now we are in line with the industry.
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Robin Farley, UBS - Analyst [22]
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So what was your side-by-side retail, then, just in the most recent quarter? Retail growth.
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Jose Boisjoli, BRP Inc. - President, CEO [23]
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I'm sorry. Can you rephrase your question?
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Robin Farley, UBS - Analyst [24]
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Sure, I was just looking for what is the correct -- how would you describe your retail percent change just for your quarter for the side-by-side business?
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Jose Boisjoli, BRP Inc. - President, CEO [25]
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Okay. Then if I give you some colors, the sports side-by-side industry in the first half of the year, H1, the sports side-by-side segment is down low teens. Obviously one of our competitors, the leader of the industry, is having some difficulty.
The recruit category is up midteens, and that's where we we're strong with the Commander. And the utility is up low teens, and we just started the deliveries of the Defender in that category.
Then overall we still believe that the side-by-side industry is a good industry with growth in two of the segments. And right now we catch up with the growth with our entry in the utility.
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Robin Farley, UBS - Analyst [26]
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Okay, great. That was very helpful, thank you. Just a follow-up to that, where would you say your market share is in utility at this point? I understand it's still likely to move up, but just wondering where you think that's tracking.
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Jose Boisjoli, BRP Inc. - President, CEO [27]
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Obviously for competitive reasons -- and we don't have much data on the industry for the side-by-side business -- I will not answer to that question. But obviously we are low right now to our plan, versus our plan, because we have been only acting for the first -- for six months.
But we intend -- again, like I said, with all the new product commitments that we've made, with our entry in the side-by-side utility segment, our intention is to become a strong number two in the side-by-side business midterm, which is two to three years.
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Robin Farley, UBS - Analyst [28]
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Okay, great. Then just a final question. Your full-year EBITDA guidance was unchanged, but it looks like FX got a little bit better over the course of the quarter since your last guidance. So on a constant-currency basis, where would you say the -- is maybe a slight downtick? Just trying to think about -- is that just the Parts and Accessories business being down a little bit more than the Year-Round business is up? Is that the best way to think about that change on a constant-currency basis?
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Sebastien Martel, BRP Inc. - CFO [29]
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Yes, when we issued guidance initially back in March, the US dollar was very strong versus the Canadian dollar, and we had an uptick on the currency of about 2% in our guidance, with about a 50 basis point negative on margin. The currency hasn't fluctuated that much since Q1. US to Canadian is hovering at about CAD1.30.
So how we see currency for the rest of the year versus last year is flat on the top-line and marginal on overall profitability. So no impact on overall normalized EBITDA coming from that currency change.
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Robin Farley, UBS - Analyst [30]
------------------------------
Great, thank you very much.
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Operator [31]
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Benoit Poirier, Desjardins Capital Markets.
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Benoit Poirier, Desjardins Securities - Analyst [32]
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Yes; good morning, gentlemen. Congrats for the quarter. Just coming back on the Spyder, I was wondering: What should we expect in the coming quarter? Would it be a -- should we expect an easier compare as opposed to Q2?
I was wondering also if you could provide more color on whether there's more attractiveness toward trike kit conversion these days, and if customers are potentially awaiting new products or new technologies?
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Jose Boisjoli, BRP Inc. - President, CEO [33]
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Good morning, Benoit. First, as a reminder, the motorcycle industry is down low single digit, but the high end of the motorcycle industry is down high single digits.
Also on the trike kit I still believe that a customer who buys a motorcycle and buys a trike kit -- it's a very expensive purchase. On top of it, the performance in my point of view are not as good as if you buy it from an OEM. This is definitely something that's happening.
Then what we have decided, we decided last year when we came out with noncurrent program early in the season, we somewhat disturbed the normal cycle of trading. It affected the value of the used models, and some customers were coming out to trade their units; but because we had rebates very early in the season they were mad at us.
Then that's why this year we said: Let's go back to the normal cycle. We are reducing our guidance, some shipment in the second half of the year compensated by the X3. Then all of this is factored in, in our guidance.
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Benoit Poirier, Desjardins Securities - Analyst [34]
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Okay, perfect. Could you maybe provide some color around the momentum with the low entry-level you just launched at the Club, Jose?
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Jose Boisjoli, BRP Inc. - President, CEO [35]
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Too early to say, Benoit. Dealers gave us the order for the F3 at Club, but they can adjust their model mix along the years. Typically they don't do much adjustment in the fall; they do the adjustment in Q1 when they see the trend in retail.
But we had good order at booking, but too early to say how popular it will be.
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Benoit Poirier, Desjardins Securities - Analyst [36]
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Okay. Second question: When we look at the outboard engine, the industry is up mid single digits. You were down mid single digits. Obviously you signed a lot of boat builder agreements; it takes time. We know the story around the repower also.
But I was just wondering if you have been also impacted by some engine issues, or it's again the story is all around the repower market.
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Jose Boisjoli, BRP Inc. - President, CEO [37]
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No, it's more around the repower market, like you said. The fact that G2 today is in two -- it's 150 horsepower and up, which is, represents -- I'm going by memory -- but about 35% of the industry.
Then G2 is getting more and more popular. Because of G2 we were able to sign 150 dealers and 35 new boat OEMs; but we still are in 30%, 35% of the mix of the engines.
Then for us, we need to keep implementing the new technology in lower horsepower range, and we should be able to gain traction going forward.
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Benoit Poirier, Desjardins Securities - Analyst [38]
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Okay. When would you expect to provide or grow mostly in line with the industry -- or catch up with the industry I would say?
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Jose Boisjoli, BRP Inc. - President, CEO [39]
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Difficult to say, Benoit. I would not venture an answer to this question. Again, I believe that the 150 to 300 horsepower just started. I mean, we are on plan for production but we're just filling up the pipeline now.
I think we will see more and more at the retail level next year, starting in 2017. And we should be more in line with the industry trend definitely in 2017 and 2016.
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Benoit Poirier, Desjardins Securities - Analyst [40]
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Okay. Last question for me. You give some color about the lawsuits and the patent litigation. Just wondering, what is the next milestone for you guys?
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Sebastien Martel, BRP Inc. - CFO [41]
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The next milestone? As I've said we filed an appeal on August 23. The fact that the judge has I guess rendered final verdict and treble damages does not change our view on the case. We feel that decision is unfounded and unsupported by law.
So we strongly feel that an appeal is justified, and that is going to be the next step for us.
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Benoit Poirier, Desjardins Securities - Analyst [42]
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Okay, perfect. Thanks for the time.
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Operator [43]
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Tim Conder, Wells Fargo Securities.
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Mark Torrente, Wells Fargo Securities - Analyst [44]
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This is actually Mark Torrente on for Tim. Channel inventories appear to be in good shape given, I guess, the dynamics in play.
Could you provide some more color on aging overall? Are there any areas of concern in the network? And then what is your target for year-end?
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Sebastien Martel, BRP Inc. - CFO [45]
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Good morning, Mark. Overall, yes, as you mentioned we are happy with the level of inventory. We are managing it diligently; and the fact that the inventory is flat year-over-year despite the challenging snow season that we had, despite the dealers that we are adding, and also the new product segments that we are entering into.
So we are happy with that, and that's an indication as well as the good retail that we've got over the last few quarters.
In terms of aging, overall inventory above 18 months is less than 5%. So there's no big preoccupation there.
However, as we indicated a bit earlier there is more Spyder inventory in the field than we would like, and that's something that we are going to be addressing over the next 12 months. But in terms of overall materiality of the whole -- we'll call it -- the inventory portfolio, it's not a significant portion.
In terms of outlook for the rest of the year, obviously we're going to be shipping a lot of snowmobiles in Q4; so Q3 I'm expecting overall dealer inventory to be flat or even slightly down. And for the end of the year, with the shipments on Maverick -- and, again, conditional on a good snowmobile season -- we should be flat to slightly up versus a year ago.
------------------------------
Mark Torrente, Wells Fargo Securities - Analyst [46]
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Okay, great. Then could you provide little more color on the promotional environment? Any changes year-over-year or sequentially, and where you've seen the heaviest promotion?
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Jose Boisjoli, BRP Inc. - President, CEO [47]
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If I look at the globally for snowmobile, watercraft outboard engine, I would say the competitive environment is similar to what we saw in the last few quarters. Obviously on the ORV front some of our competitors have a lot of inventory, and there is a lot of a rebate right now going on. Then the competitive environment is definitely higher.
That being said, I think there is more and more dealers who realize that selling an ATV or a side-by-side with heavy discount, even if it comes from the OEM, is not profitable. And I think the fact that we are monitoring our inventory quite tight, they are making more money with our products, and we are able to turn more and more multiline dealers to sell more BRP product.
Then we keep our plan; we try to manage inventory well; and I think the dealers start to realize that they can make more money with our product.
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Mark Torrente, Wells Fargo Securities - Analyst [48]
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Okay, great. Thank you.
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Operator [49]
------------------------------
Gerrick Johnson, BMO Capital Markets.
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Gerrick Johnson, BMO Capital Markets - Analyst [50]
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Good morning. I have a couple questions, please. First, how much did the snowmobile shipment shift impact sales in the quarter?
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Sebastien Martel, BRP Inc. - CFO [51]
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Well, actually it was a big impact. When I look at overall revenue growth quarter-over-quarter, snowmobile is the one with the highest reduction in overall revenue. So we are down in revenues almost 20% quarter-over-quarter. So it is a material impact.
And when I look at overall inventory position, the fact that we shipped less current snowmobiles, that's a reason why the inventory is also down versus a year ago.
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Gerrick Johnson, BMO Capital Markets - Analyst [52]
------------------------------
Okay. I have two more, please. First, higher production costs associated with Juarez, when do those subside, or when do they get better absorbed?
Then the second question on the Defender rollout. Is the Defender now placed where it needs to be placed? In other words, is the channel fill over, or is that still ongoing?
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Sebastien Martel, BRP Inc. - CFO [53]
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For the absorption of the incremental costs of running the Juarez 2 plant, I see the second half of next year as being a period where production will be sufficient in order to offset some of these incremental costs.
We are still, as Jose mentioned we have mentioned, our plan is to introduce new products every six months which will be manufactured in that plant. So we've still got a few months to go. And as we launch these new products and start building them in that plant, we will see those costs being absorbed by a higher number of units.
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Jose Boisjoli, BRP Inc. - President, CEO [54]
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On the Defender side, Gerrick, obviously we are in the utility segment now, but we don't fill all the subsegments of the utility segment. Then you can expect from us in the next few months more utility Defender models; that will fill up every subsegment of the whole utility segment.
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Gerrick Johnson, BMO Capital Markets - Analyst [55]
------------------------------
Okay, I see. Thank you.
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Operator [56]
------------------------------
Martin Landry, GMP Securities.
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Martin Landry, GMP Securities - Analyst [57]
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Good morning. On your OpEx I think, Sebastien, you mentioned that you expect OpEx to be around 15% of sales for the full year. That would imply, according to my calculation anyways, that your OpEx would not increase much in the second half of the year. Is that a fair assumption?
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Sebastien Martel, BRP Inc. - CFO [58]
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No, what I said is that in terms of R&D, our R&D percentage should remain relatively flat to where it was a year ago. But when I look at the overall pace of investment that we are making on the marketing side, last year we finished as a percentage of revenue 15% overall OpEx; and this year my expectation is that we will finish above that, from the range of 50 to 60 basis point increase, Martin, year-over-year.
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Martin Landry, GMP Securities - Analyst [59]
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Okay, okay; all right. Then in your Propulsion Systems you make a good point saying that with your new Evinrude E-TEC G2, you don't target a whole lot of the market with -- I think you are absent in the 0 to 150 horsepower. When do you think you are going to tackle the whole market?
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Jose Boisjoli, BRP Inc. - President, CEO [60]
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Obviously, Martin, for competitive reasons I cannot divulgate our five-year plan. But we will started with the first G2 200 two years ago; this summer we introduced the 150, 200. Then the pace will accelerate going forward because now the plan is very clear, and we know that customers like the G2. But obviously for competitive reasons I cannot answer that question.
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Martin Landry, GMP Securities - Analyst [61]
------------------------------
Okay; that's fair. Then just lastly on the motorcycle industry, you are saying that I think in your opening remarks you were talking about the industry being down high teens, I think, for high CCs, are up at least midteens for high-ticket items. What is in your view driving that decline in the motorcycle industry?
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Jose Boisjoli, BRP Inc. - President, CEO [62]
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What I said, just to make sure we are clear, I said for motorcycle above $18,000 retail in US the industry was down high single digits. Now, difficult to point out -- I think it's more than one element.
Obviously there is a trend right now in the industry where entry-level products are very popular. And we are not in the motorcycle industry, but we see a lot of OEMs introducing very attractive and competitive products anywhere between $8,000 till $12,000. And I think this is the focus of many of them, and they don't maybe focus as much on the high end. And that would be my two cents.
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Martin Landry, GMP Securities - Analyst [63]
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Okay. Okay, that's helpful. Thank you.
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Operator [64]
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Cameron Doerksen, National Bank Financial.
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Cameron Doerksen, National Bank Financial - Analyst [65]
------------------------------
Thanks, good morning. Just two questions for me. Just firstly on the guidance, just wondering if you can maybe update us on the visibility that you have there.
I know you've got -- the snowmobile orders are in at this point, so you've got very good visibility there. And if I read your comments correctly, it sounds like you've got some pretty good visibility on the off-road as well. Is that the right way to look at it, that you've got pretty good visibility in the off-road?
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Sebastien Martel, BRP Inc. - CFO [66]
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Yes, absolutely. We have five months to go from now to the end of the year. At Club we took orders for the X3, and so dealers made firm commitments there. So we have excellent visibility on that.
Snowmobile, as we've mentioned we have orders since March from the dealers, and so a clear pathway there. So that's why we are confident despite the fact that second half of the year is going to be a huge six months in terms of overall profitability for the business.
And I can appreciate that some people can be nervous. But as we say internally, the guns are loaded and the production is humming very well. And so that's why we are confident in our delivery for the second half of the year.
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Cameron Doerksen, National Bank Financial - Analyst [67]
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Is there one particular segment or market that you maybe have less visibility on? Is there anything you can highlight there that maybe is a little bit more variable?
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Sebastien Martel, BRP Inc. - CFO [68]
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One area that could be a bit more variable is the PAC business. There is -- we have some initial orders that we've delivered to the dealers for the upcoming season. They have placed in orders for accessories as well for the snowmobiles that they've ordered.
But they also have what we call a repeat business. So once the snow starts falling, people start riding on the trails, go into the shop for repairs or add accessories. There is some variability there.
So if we were to have a horrible snow season like last year, well, that could create a bit of shortfall on the PAC. and if the snow was phenomenal and we get two feet of snow early November, well, then that would be a great news and we could see an uptick on the PAC business.
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Cameron Doerksen, National Bank Financial - Analyst [69]
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Okay, good. Just a second question, just on the Canadian market, the revenue up 10% year-over-year in Q2. Were you surprised by that?
Maybe you can just talk more generally about what you are seeing in the Canadian market, especially in parts of Western Canada. Have things stabilized there?
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Jose Boisjoli, BRP Inc. - President, CEO [70]
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Let's say that Western Canada is still down, and there is a huge difference between the retail industry between Western Canada and Eastern Canada.
Just to give you a sense for watercraft, obviously watercraft this year in Canada was very good because of the warm summer. But Western Canada for watercraft was down low single digit when Eastern was up almost 20%. Then you can see the discrepancy.
In ATV, Western Canada is down by almost 25% when Eastern is up high single digits -- sorry down high single digits. And you see a discrepancy there.
Then Western is still difficult. That being said, now I think it's stabilizing. It will stabilize in the fall because Western Canada started to (inaudible) last year, but there's still a big discrepancy between Canada and US.
------------------------------
Cameron Doerksen, National Bank Financial - Analyst [71]
------------------------------
Okay. So if I think about the overall Canadian market it sounds to me like the primary driver of the year-over-year growth was on the PWC side.
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Jose Boisjoli, BRP Inc. - President, CEO [72]
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Exactly.
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Cameron Doerksen, National Bank Financial - Analyst [73]
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Okay, very good. That's all for me. Thanks very much.
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Operator [74]
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Derek Dley, Canaccord Genuity.
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Derek Dley, Canaccord Genuity - Analyst [75]
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Thanks, just following up on the capacity commentaries around the new plants in Juarez. Where are you guys in terms of capacity on that? It sounds like there's still a lot of room there to add new lines and new production.
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Jose Boisjoli, BRP Inc. - President, CEO [76]
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Good morning, Derek. The second shift has started this summer. Then right now we are -- the first shift is full operational; the second shift is in ramp-up right now.
Then we are exactly on plan. We have additional orders for the X3 versus what we had planned between now and the end of the year. But the team is putting additional plan to be able to respond to the demand.
Then overall the ramp-up is going quite well and we are able even to accelerate the second shift to answer to the X3 demand.
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Derek Dley, Canaccord Genuity - Analyst [77]
------------------------------
Okay, great. Just in terms of the new dealers that were at the Club event, I think you said it was around 33 or 32 dealers, 30 dealers at the Club event. I know it's early days still, but how is the penetration of signing up some of those dealers going?
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Jose Boisjoli, BRP Inc. - President, CEO [78]
------------------------------
I don't know, Derek. I do not follow that typically. And if I refer to what we have done the last two years, dealers come at Club, I know that some have signed there because they were excited; and quicker you sign, quicker you get deliveries.
I know that a few have signed over there. But the process could take another few months for the ones who are earlier in the process. That's why with the 30 dealer prospect we are very confident with our 45, 55 target for the year.
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Derek Dley, Canaccord Genuity - Analyst [79]
------------------------------
Okay, that's great. Thank you very much.
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Operator [80]
------------------------------
Thank you. We have no further questions to address at this time. Back to you, Mr. Deschenes.
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Philippe Deschenes, BRP Inc. - IR [81]
------------------------------
Great. Thank you, everyone, for joining us this morning and for your interest in BRP. Before we let you go, we want to invite you to join us for our Investor Day presentation that will be held on September 22 and will be webcasted live on our website.
Thanks again, everyone, and have a good day.
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Operator [82]
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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
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