Q1 2017 BRP Inc Earnings Call

Jun 01, 2017 AM CEST
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

DOO.TO - BRP Inc
Q1 2017 BRP Inc Earnings Call
Jun 01, 2017 / 01:00PM GMT 

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Corporate Participants
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   *  José Boisjoli
      BRP Inc. - CEO, President and Director
   *  Philippe Deschenese
   *  Sebastien Martel
      BRP Inc. - CFO

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Conference Call Participants
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   *  Anthony Zicha
      Scotiabank Global Banking and Markets, Research Division - MD, Special Situations and Special Situations Analyst
   *  Benoit Poirier
      Desjardins Securities Inc., Research Division - Industrials, Transportation, Aerospace, Industrial Products and Special Situation Analyst 
   *  Cameron Doerksen
      National Bank Financial, Inc., Research Division - Analyst
   *  Craig R. Kennison
      Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst
   *  Derek Dley
      Canaccord Genuity Limited, Research Division - MD and Consumer Products Analyst
   *  Gerrick Luke Johnson
      BMO Capital Markets Equity Research - Equity Analyst of Toys
   *  Jaime M. Katz
      Morningstar Inc., Research Division - Equity Analyst
   *  Mark Robert Petrie
      CIBC World Markets Inc., Research Division - Research Analyst
   *  Martin Landry
      GMP Securities L.P., Research Division - Director and Equity Research Analyst
   *  Robin Margaret Farley
      UBS Investment Bank, Research Division - MD and Research Analyst
   *  Seth Woolf
      Northcoast Research Partners, LLC - VP and Research Analyst
   *  Timothy Andrew Conder
      Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure 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 FY '18 First Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschenese. Please go ahead, Mr. Deschenese.

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 Philippe Deschenese,    [2]
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 Thank you, Valerie. Good morning, and welcome to BRP's conference call for our first quarter of fiscal year 2018. Joining me this morning are José Boisjoli, President and Chief Executive Officer; and Sébastien Martel, Chief Financial Officer.

 Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these. 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.

 So with that, I'll turn the call over to José.

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [3]
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 Thank you, Philippe. Good morning, everyone, and thank you for joining us. The first quarter of fiscal year '18 mark another period of solid growth for BRP. Driven by the strong performance of our side-by-side business and the strength of our lineup across all our product lines, we continue to outperform the industry around the globe. Despite the spring season that was late to come in many of our markets, we've delivered result that surpassed our expectation. The strong performance, coupled with better-than-planned snowmobile spring dealer orders, allow us to increase our guidance for the end of the year. In addition, given the strong momentum we have across our product line and the positive outlook we have for the business, our financial capacity and flexibility has sufficiently increased to deliver on our growth objective, while enhancing the return to our shareholders. As a first step, I am pleased to announce today the initiation of the quarterly dividend of $0.08 per share and the launch of a substantial issuer bid to purchase for cancellation up to 350 million of BRP shares. This is a testament to our confidence in the outlook for our business.

 Now let's turn to financial highlights on the quarter on Slide 4. Our revenue grew 3% to reach $956 million, representing a record level for our first quarter at BRP. The growth was driven by the continued momentum we have in side-by-side and the watercraft, and by the positive impact of our growing off-road business on our accessories. Our normalized EBITDA was up 41% to $81 million, and our normalized earnings per share ended at $0.25, up $0.21 from the first quarter of last year. As a result of this continued momentum in side-by-side, watercraft, the strong sales of accessories and the better-than-planned snowmobile spring dealer orders, we are increasing our EPS year-end guidance by $0.05, which brings year-over-year growth up to a range of 12% to 18%.

 On the retail front, we had seen 2 completely different stories in Canada and in the United States. In Canada, we had the strong end of the snowmobile season, but the spring was late to come, which had a negative impact on most of our industry. Our retail in the country was down 4% compared to an industry that was down 5%. We believe retail will improve when the weather gets better. We've seen much better traction for our products in the United States as the weather was more favorable. Side-by-side and watercraft continued to see significant growth in ATV, and Spyder, outpaced their respective industry. Overall, our retail in the country was up 7% compared to an industry that was down 2%.

 Regarding our retail performance, our team did an excellent job in the first quarter, and we continued to outperform a competitive North American industry, as our total powersports retail was up 4% compared to an industry that was down 3%. On the international front, the Russia market is still tough, but Mexico, Scandinavia and Western Europe are positive overall. Also I continue to witness a solid execution on the part of our team. We remain aligned on our strategic priorities and as a result, I am confident that we will reach our goal for the year.

 Turning to Slide 5 for the Year-Round product highlights. Revenue were down 2% for the quarter, primarily due to lower deliveries of Spyder, as our objective this year is to reduce our network inventory at the end of the season. This headwind was partially offset by the strong demand for the Maverick X3, driving a volume increase and favorable product mix.

 Looking at retail. Our Off-Road business continued to perform well. For ATV, the industry had a difficult quarter, with retail down high single digit. Season-to-date, the industry retail is down mid-single digit. For the same period, Can-Am ATV retail is up low single digit, driven by continued market share gain in the mid-CC segment. It now stands at its highest market share ever season-to-date. Can-Am ATV is also outpacing the industry around the globe, notably in key markets such as VME, Scandinavia and Australia.

 Turning to side-by-side. The North American industry retail is up mid-single digit season-to-date. Can-Am side-by-side continued to perform extremely well with retail up about 30% season-to-date. And just like Can-Am ATV, it now stands at its highest market share ever season-to-date. The Defender continued to gain traction. The excellent quality of our vehicle and our existing lineup is appreciated by dealer and consumer. We continue to gain awareness within the farming and ranching communities, and this has driven market share gain quarter after quarter. The Maverick X3 is also performing very well. The demand is strong and we are seeing very good sell-through. Given the strong performance of the 2-seater X3, we are very excited about the potential of the 4-seater version. The Maverick X3 MAX, which we only started shipping late April, the 4-seat sport side-by-side segment is one where we have lagged the industry in the past, and we believe that the new X3 MAX will turn things around.

 Given the strong demand for our side-by-side lineup, we are investing in additional manufacturing equipment to increase the production capacity at our Juárez II facility. This investment will start this year and will improve capacity in the spring of 2018. The CapEx implications are reflected in our revised guidance. It is important to note that the expansion of the North American dealer network is also having an appreciable impact on our Off-Road business.

 Now looking at Spyder. Still early in the season, the North American three-wheel motorcycle industry is down low-teen percentage. Can-Am Spyder is down mid-single digit over the same period as it was impacted by delayed spring in Canada. Meanwhile, things are trending positively in the key states where we have deployed dedicated teams. We are already witnessing encouraging reaction from customers and dealers in these regions, and we are seeing a positive impact on retail sales. Also we are excited to host nearly 3,000 riders in Vancouver this weekend for the 10th anniversary of the Spyder. We have people coming from all over the world, including some Australian and Russian, who are renting unit in North America and riding to Vancouver for this event.

 Overall, for the Year-Round Product category, we are pleased with the Can-Am brand performance as it has been a performing -- outperforming the industry across all 3 product lines, and we are planning to continue on that trend with the model year '18 Off-Road lineup that we just introduced this morning. This year, again, we are pushing innovation to continue to gain share. Just a few months after introducing the Maverick X3, we are already upgrading it with improved power. The 2018 Maverick X3 and Maverick X3 MAX Turbo R is now delivering 172 horsepower, an increase of 18 horsepower over the previous configuration and serving, we maintain our hedge in the Sport category.

 We are also improving our offering in the utility segment with 2 new Defender packages. The Can-Am Defender MAX HD10 XT Cab, the factory-build, 6-passenger utility side-by-side that come with a full cabin; and the Can-Am Defender MAX HD8, our new entry-level, 6-passenger utility side-by-side. We have also introduced several new features across the lineup, upgraded the Commander with more power and improved suspension and introduced 2 new Outlander models, one specific to northern climate and one to crossover sport truck model. All in all, we continue to improve the depth of our lineup, with the goal of continuing to outpace the industry in season 2018.

 Turning to Seasonal Products on Slide 8. Seasonal product revenue was up 7%, driven by a higher volume and favorable mix of personal watercraft. Let's start with a look at snowmobile retail. The North American industry ended the 2017 season with retail down mid-single digit. Meanwhile, Ski-Doo retail sales were down high single digit. The retail lag versus the industry was driven by lack of availability of noncurrent units compared to the competition, limiting our ability to compete in the noncurrent sector. If you look at the bar chart, you can see that the noncurrent Ski-Doo retail was very small compared to competitor, whose noncurrent retail was nearly 50% during season '17. However, Ski-Doo performed very well in the current unit sales, achieving its highest market share ever. The strong performance was driven by the introduction of the new Gen4 platform that is very well received by consumer.

 In Scandinavia, the season is ramping down, and the industry retail is down mid-single digit season-to-date. Retail sales of both Ski-Doo and Lynx snowmobiles were up low single digit over the same period and as in North America, the sell-through of the current model year unit was excellent. We recently closed our spring dealer orders for the upcoming season, which came in above our expectation and as a result, we have increased our seasonal product revenue guidance for the year. The snowmobile business has always been driven by innovation and our new Gen4 platform is allowing us to perform well despite coming off an overall difficult season for the industry.

 Now a quick look at personal watercraft. The main retail period has not yet started in North America, but the industry is already performing well with an increase of mid-teen percentage season-to-date. Consistent with prior years, Sea-Doo growth for the quarter is slightly behind the industry trend, early in the season, with retail up low-teen percentage. Interestingly, the lineup is very strong and we had good momentum in boat show orders. Overall, despite a late spring, the watercraft season is looking promising.

 I would also add that we are also investing CapEx in additional manufacturing equipment for watercraft that will be operational in summer 2018. Sébastien will provide more details on our overall CapEx in a few minutes.

 Now looking at Propulsion System on Slide 9. Revenue of propulsion system decreased 5%, primarily driven by the lower volume of aircraft engines sold. This market remained weak, but we expect sales to increase as production of the new 915 iS engine start in the second half of the year. Looking at the outboard engine industry, now 10 months into the season, the industry is up mid-single digit. For the same period, even though the retail is up low single digit, slightly lagging the industry growth that continued to be driven by new boat sale.

 Now turning to Parts, Accessories and Clothing. Our PAC team was busy last year. They delivered a record 428 new accessories for model year 2017 and made sure that these accessories were available at the launch of the vehicle, which had a noticeable impact on sales. This performance contributed to some revenue growth of 17% in the quarter and was primarily driven by an increase in side-by-side accessory sales, notably coming from the Can-Am Maverick X3 and Defender model. Also late snowstorm in North America and Scandinavia positively impacted snowmobile PAC sale.

 And with that, I will turn the call over to Sébastien and will return for closing remarks.

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 Sebastien Martel,  BRP Inc. - CFO   [4]
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 Thank you, José, and good morning, everyone. This morning, we reported revenues of $956 million for the first quarter of fiscal '18, an increase of 3% from the same period last year, mainly driven by higher wholesale of side-by-side, PWC and PAC. Regionally, the increase was generated in the U.S. and in international markets, where revenues were up 4%, while Canada sites revenues declined by 3%. The gross profit amounted to $207 million, resulting in a gross profit margin of 21.7%, an increase of 80 basis points from last year as a positive impact coming from a favorable product mix in SSV, and a favorable foreign exchange rate variation was partly offset by a lower volume of Spyder vehicles and by higher production costs. Our normalized EBITDA was up 41%, reaching $81 million. Our normalized net income came in at $28 million, resulting in normalized diluted earnings per share of $0.25, up $0.21 over last year's first quarter.

 Turning to Slide 12 for the normalized net income bridge. Our normalized net income was up $23 million, with a strong net contribution from volume and mix for $15 million. Also supporting the growth were lower financing costs and normalized income tax expense for $4 million while favorable foreign exchange rate variation contributed for $11 million. These favorable elements were partly offset by higher production costs and operating expenses for $7 million.

 Now let's switch to Slide 13 for a look at our network inventory, which ended the quarter up 12% from last year's level. Our network inventory is healthy across most of our lineup. Excluding the inventory growth for snowmobile, our network inventory is up 5% with a good portion of the growth coming from the over 250 new dealers we have signed since the IPO. For Off-Road, the growth in inventory was coming from our new products recently added to the Can-Am SSV lineup, the Defender and the Maverick X3. As planned, we are reducing the inventory for the rest of the side-by-side lineup.

 For other product lines, Spyder is down mid-teen, in line with our expectation as we are working on reducing the inventory in our dealer network. And for PWC, we have the appropriate inventory level to be well positioned with the start of the main retail fee. The only area where we have more inventory than we would like is snowmobile, given the weak riding season we just had, but we have lived through these cycles many times before, and we have a plan in place with our dealers to manage that inventory. Given the good traction we had with spring units prebooking, we are comfortable with where we stand heading into the next season.

 This brings us to our reviewed guidance for fiscal '18 on Slide 14. As José mentioned earlier, we ended the first quarter ahead of our expectation, driven by the combination of our side-by-side business continuing to experience robust growth, our snowmobile PAC sales coming in higher than anticipated due to a few late season snowfalls and the continued tight management of our operating expense. Additionally, we closed our snowmobile spring orders ahead of plan, improving our outlook for next season. Given these elements, we are reviewing upward our revenue guidance for Year-Round Products, Seasonal Products and PAC, resulting in a total company revenue growth of 4% to 8%, up from a growth of 2% to 6%.

 Based on this lift in revenues and the anticipation of a more favorable product mix due to the strong demand for the Maverick X3, we are increasing our normalized EBITDA growth guidance by 3 percentage points and the guidance is up 10% to 13%. Note that compared to previous guidance, most of the incremental normalized EBITDA growth is coming from a stronger first quarter and a better second half of the year. Therefore, our expectation for the second quarter has not changed since the initial guidance. Overall, our normalized EBITDA generation profile is now expected to be slightly more skewed towards the second half of the year compared to our initial outlook.

 Continuing down the P&L. Excluding any impact from the substantial issuer bid, which I will cover later, the normalized net income growth guidance has been reviewed upward, to up 10% to 16% and the normalized EPS guidance is up $0.05 to a range of $2.20 to $2.32, representing an increase of 12% to 18% compared to last year.

 Finally, we have approved the additional investments in machinery and equipment to increase production capacity for both SSV and PWC in order to meet strong demand for our products. These investments require $25 million in additional CapEx, and so our CapEx guidance is now $240 million to $255 million, and it will impact depreciation expense, which is now expected to be at around $155 million. These investments will be made throughout the year and will benefit the production capacity next year.

 And finally, as you are well aware, our business has significantly evolved since we became public around this time 4 years ago. Our product portfolio is stronger and more balanced with Year-Round Products now reaching $1.6 billion in revenue in fiscal '17, up 57% from pre-IPO. Our normalized EBITDA is also up 50% from pre-IPO, reaching $500 million last year. Our manufacturing footprint is also well diversified, and we are better established in markets around the globe with an even greater presence in the biggest powersport market in the world, the U.S. Over the last 4 years, we have generated over $1.4 billion of cash from operation, on which we have invested over $700 million in the business through CapEx and returned $168 million to our shareholders through share buyback while deleveraging the business going from a pre-IPO leverage of 2.9x to a ratio of 1.4x at the end of Q1.

 So given the strength of our balance sheet and the positive outlook we have for the business, we are pleased to announce the introduction of a quarterly dividend of $0.08 per share and the launch of a $350 million substantial issuer bid to repurchase and cancel some of our shares outstanding. We anticipate that the proposed SIB will commence during the next 2 weeks and will be completed before the end of July 2017. Our major shareholders have announced their intention of participating through the SIB on a proportionate basis. We believe that this capital allocation plan will enhance the return we provide to all our shareholders while preserving our financial flexibility to deliver on our growth plan.

 With that, I'll turn the call back to José.

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [5]
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 Thank you, Sébastien. Over the last several years, we have invested considerably in our product and our manufacturing footprint. These investments are now paying off on all fronts as we continue to outpace the industry around the world. The team remains completely aligned on our strategic objective, and its solid execution is a clear contributor to our success. Our strategy of diversifying our product portfolio, our geographic sales and our manufacturing footprint has proven itself again and again over the years, and will continue to do so in the future. While we remain vigilant to ensure external factors do not disturb our current momentum, I am very proud of the first quarter results and I'm confident for the year to come. And on that, 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) Our first question is from Craig Kennison with Baird.

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 Craig R. Kennison,  Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst   [2]
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 I guess, first, José, you mentioned better awareness for the Defender product in some farming and agricultural communities. Do you have a feel for whether your demand there is entirely BRP product division with the Defender or might be there be some signs that the market itself is improving in those markets?

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [3]
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 Craig, the market is still -- I'm just looking for my note, but the market is still quite solid on what we call the utility segment, but you need to understand that with the Commander and the Maverick who were playing in the Rec-Ute and the Sport, and the difference when you introduce a sport machine versus a more utility machine is totally different. When we introduced the X3 because of the Maverick, it was replacing the old Maverick, it came -- the notoriety of the product became known right away, and we had a very good momentum from the start. The situation with the Defender is different, we're talking to farmer, to a rancher, which were not buying any Commander and Maverick, but what we like right now is the quarter-after-quarter, our sales of Defender is improving, and the reorder pattern from the dealer is very, very well -- very well coming every quarter. And overall, we are quite happy with the situation. And if you look year-to-date, the utility segment is about up, high, let's say about 10%. The overall industry is up mid-single digit, and the utility segment is up about 10%. Sport is about flattish. But us, because we are a newcomer, because we have a good product and because also we have improved our dealer network footprint, we continue to grow at a good pace in the utility segment.

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 Craig R. Kennison,  Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst   [4]
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 And then as the follow-up question, in your annual report, you reiterated the 2021 plan, which includes $6 billion in revenue, and I think $350 million in earnings. First, do you need M&A to achieve that goal in the acquisitions? And second, how does the buyback influence that EPS target?

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [5]
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 Okay. First, we believe, depending how the global market will evolve, we believe that with the 6-product line that we have, we could reach the $6 billion. It will be a tight run for the last mile, but we could reach the $6 billion. That being said, as we explained to you, I think when we launched the 2020, we have now a dedicated team that is looking what's next. And again, is it something we do from internal, is it acquisition then we have a dedicated team looking at this. On the EPS, when we've launched our goal of $350 million by 2020, it was not -- it was coming from the operation. Then we'll do the SIB, we'll see how many shares we'll buy back, and we'll restate the $350 million, probably when we have our result in Q2.

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 Sebastien Martel,  BRP Inc. - CFO   [6]
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 Yes, or in the upcoming investor meeting.

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [7]
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 Yes.

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Operator   [8]
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 Our next question is from Mark Petrie with CIBC.

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 Mark Robert Petrie,  CIBC World Markets Inc., Research Division - Research Analyst   [9]
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 I wanted to ask about the capacity growth in Juarez II. How much capacity growth does that $25 million investment actually imply? And then, I guess, related to that, the follow-up production costs, the headwind in Q1, when should we think about that as being a tailwind as we progress through the year?

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 Sebastien Martel,  BRP Inc. - CFO   [10]
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 Yes. Well, the capacity increase for Juarez II in Queretaro is for the side-by-side business and for the PWC business. Obviously, with the strong demand that we're seeing from the market, for both side-by-sides and PWC, and our outlook for next year, which we'll be sharing with everyone early next year, we looked at our production requirement, some of the bottlenecks we had and the anticipated demand we have for some our products, and we felt it was the right thing to do to invest in that added capacity. Obviously, the margins are good as well in our products, as you know, and therefore, the payback on these investments is quite rapid. And so that's why the Board was more than happy to support management in increasing capacity and that comes in line with the guidance increase that we did as well today, Mark. In terms of headwinds, obviously, as you're ramping-up production capacity and you're meeting demand, you have the need -- you need to increase your overheads in your manufacturing plant. Once that stabilizes, it should be a tailwind for us in terms of margin driver on the long term.

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [11]
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 Maybe to add some color, Mark, there is a lot of moving parts, which make our forecasting for the side-by-side more difficult. The industry is very dynamic. And even if the industry is growing mid-single digit, utility is growing at a faster pace or underrepresented in the utility segment then the industry is very dynamic. On top of it, the percent of our product, the Defender family and the Maverick X3 family is very well received by the dealer. And there is a dealer network by itself, more and more we are able to engage multiline dealer in region where we're weaker. And all of this, when you add all the regions around the world is very difficult to plan what's next, and that's why we're reaching right now the limit of our capacity with what we had. And those investments are longer lead time like we released the investment about 1.5 months ago, and it will be operational in the spring. And the capacity increase is in the range of 20%.

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 Mark Robert Petrie,  CIBC World Markets Inc., Research Division - Research Analyst   [12]
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 Okay. That's helpful. And then just a follow-up on the expense side, selling and marketing expenses bounced around quite a bit with sort of quarter-to-quarter was down a reasonable amount in Q1. How should we think about sort of the year-over-year fluctuation for that line, Q2, Q3, Q4?

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 Sebastien Martel,  BRP Inc. - CFO   [13]
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 Yes. If I look at the full year expectation for selling and marketing as a percentage of sales, we should expect the same percentage as we have last year. Obviously, as we have multiple product lines, different product launches as well on these product lines, we can have different timing and marketing expense as we're going to go heavy up on some periods if we're launching a new product. Example, watercraft, if you're launching something, you go heavy up on the spring. ATV Off-Road is going to be much more in the fall. And last year, we had a big program with the Spyder, which this year we focused more on boots-on-the-ground approach versus media approach, and that's why we're seeing some decline in the marketing spend this quarter.

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Operator   [14]
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 Our next question is from Martin Landry with GMP Securities.

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 Martin Landry,  GMP Securities L.P., Research Division - Director and Equity Research Analyst   [15]
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 Maybe just to pull up on the capacity expansion, can you share with us right now what is your capacity utilization in Mexico? And with regards to your capacity expansion, are you adding a shift or a production line? Just more color on that would be great.

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [16]
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 Yes, Martin. First, right now, in Juarez II, we're running the operation -- there is some equipment that are running 3 shifts at 7/24, equipment, not the full factory, but the assembly line is running 2 full shifts and with extra weekend, I mean, a few Saturdays here and there. Then we are reaching the limit. We could add more volume this year. The demand this fall is increasing, but it will be a bit costly because when you do a third shift in Mexico, the efficiency go down, but it's a possibility. And that's why right now we're reaching our limit of our existing capacity, and we decided to invest for next year.

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 Martin Landry,  GMP Securities L.P., Research Division - Director and Equity Research Analyst   [17]
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 So are you adding a production line?

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [18]
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 Sorry, sorry, no. We're adding equipment. The assembly line that you saw when we're in Juarez II has plenty of capacity. Basically, we're adding manufacturing equipment to manufacture the chassis.

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 Martin Landry,  GMP Securities L.P., Research Division - Director and Equity Research Analyst   [19]
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 Okay. And then my second question is on the Spyder. You mentioned that your Spyder inventory is down 15%, I think it was on a year-over-year basis. Perhaps is that a North America number or a global number? And just wondering, are you still working to bring down your inventory levels of Spyder or are you comfortable where it is right now?

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 Sebastien Martel,  BRP Inc. - CFO   [20]
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 Well, obviously, at the end of April, we're still early in the retail season. We're happy because, year-over-year, the increase was material, and that's what we're working towards. But obviously, the second quarter is the key retail season for the Spyder product line, and so we're anticipating further reduction of inventory in the second quarter. But when we look at the trend and we look at our retail versus or the -- actual retail versus our target, we're in line with what we were expecting, a bit softer in Canada because of the horrible weather we're having here, but overall in line with our plan.

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 Martin Landry,  GMP Securities L.P., Research Division - Director and Equity Research Analyst   [21]
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 Okay. And what's the mix current versus noncurrent?

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 Sebastien Martel,  BRP Inc. - CFO   [22]
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 We have a lot of noncurrent in Spyder, and that's why we decided to reduce the production. The anticipated retail mix with the current, noncurrent in the current year is expected to be almost 50-50.

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 Martin Landry,  GMP Securities L.P., Research Division - Director and Equity Research Analyst   [23]
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 Our next question is from Derek Dley with Canaccord Genuity.

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 Derek Dley,  Canaccord Genuity Limited, Research Division - MD and Consumer Products Analyst   [24]
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 Can you just give us an update on your new dealer additions and the response to the performance dealer bonus program?

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [25]
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 Yes. First, this year, as we said at the beginning of the year, we're shifting people from expanding the dealer network to improving the dealer network. Then right now we slowed down a bit, the signature of new dealers. There will be some additions but not massively during the year, but we're shifting our effort to make the dealer better. I don't have any number. It's very qualitative, but I would say one thing. More and more dealers are talking about our value proposition. When you consider the quality of our product and the margin opportunity on the product, now the accessories, we're becoming a lot better to design accessories, well integrated with the vehicle that we ship at the same time of a new unit. When you consider the whole value proposition that we're offering to the dealers between all product lines, we're gaining a lot of traction, and this is a bit difficult to quantify. It's very qualitative in what I'm telling you, but if you talk to dealer, particularly to multiline dealer, they're pretty happy with BRP those days.

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 Derek Dley,  Canaccord Genuity Limited, Research Division - MD and Consumer Products Analyst   [26]
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 Okay. And then geographically, can you just give us some color on where were some areas of strength and weakness during the quarter?

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 José Boisjoli,  BRP Inc. - CEO, President and Director   [27]
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 For sure, the west is more difficult than the east. And for us, it's a bit different the dynamic between U.S. and Canada. We're quite new in the southwest of United States then even some of our competitors say that their sales is soft in the west. For us, we don't see it as much because we have a lot of new dealers. We're entering with the Defender then the west is pretty strong for us. But in Canada, that's another story. We've all been quite strong in Canada, and I will give you some colors. Like the motorcycle industry in the west of Canada is down almost 10%. The east is flattish, then average Canada is minus mid-single digit, but you see a big difference between east and west. ATV, the west is equal to east then ATV is different, and watercraft is down mid-single digit to mid-double digit, minus 15% so far this year and east is flattish. Then you can see that Canada is lagging. The west of Canada is lagging versus the east, and that had affected our retail at Q1, as I said in my -- we -- the industry was down 5% overall, and we're down 4%. But in the U.S, it's a different dynamic.

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Operator   [28]
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 Our next question is from Benoit Poirier with Desjardins Capital Markets.

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 Benoit Poirier,  Desjardins Securities Inc., Research Division - Industrials, Transportation, Aerospace, Industrial Products and Special Situation Analyst    [29]
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 Can you talk a little bit about your dividend policy? Any objective in terms of payout or yield?

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 Sebastien Martel,  BRP Inc. - CFO   [30]
------------------------------
 Benoit, as you saw, it's the first for BRP to announce a quarterly dividend, and the whole discussion of capital allocation has been a recurring topic with the Board, and actually a very positive topic for the Board. And we decided to launch this dividend with a yield of approximately 1%. As the business will be growing and as our profitability will be growing, our objective is going to be to continue to provide good returns to shareholder, and we will be adjusting the dividend payouts in line with the results that we will be delivering. But for now, there's no clear guidance as to how we're going to be creeping up the dividend on a quarterly or annual basis.

------------------------------
 Benoit Poirier,  Desjardins Securities Inc., Research Division - Industrials, Transportation, Aerospace, Industrial Products and Special Situation Analyst    [31]
------------------------------
 Okay. And my follow-up question if we look at the Spyder, retail sales were down mid-single digit in Q1 mainly due to weather in Canada. But can you talk about the progress you are making with your growth strategy and the penetration in the U.S. now that you have Josee Perreault onboard?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [32]
------------------------------
 Yes, Benoit, first, the three-wheel industry was down by about 15% and we're down low single digit then we're quite happy. We're doing better than the 3-wheel industry then we're quite happy with our performance. Now if you look the performance on the 7 states and obviously for competitive reason, we do not disclose those 7 states, but if you look at the momentum we have in the 7 states, it's significantly higher than the rest of the United States. And I think the thing we've discovered that is complicated to resolve but at the same time, per my saying, it's all about the motorcycle license permit. For many par sport person, to get your motorcycle license, it's quite easy. Everyone has a mindset to do it. But for someone who is a none-none, to get a motorcycle license, the product is intimidating to start with. The class are not well adapted then this is probably one of the things that we're discovering, and we're accelerating the pace to open schools in many states. Just to give you a sense, we have 26 dealers in Florida. Only a few schools were giving course on Spyder. Now we have 23 out of our 26 dealers are team up with the school, then that's the type of thing we're doing, and we're showing good results. Then it's a bit early to disclose more information, but we're quite happy with those dedicated resources.

------------------------------
Operator   [33]
------------------------------
 Our next question is from Cameron Doerksen with National Bank Financial.

------------------------------
 Cameron Doerksen,  National Bank Financial, Inc., Research Division - Analyst   [34]
------------------------------
 I guess, a couple of questions for me on the substantial issuer bid. I guess, first, I want to ask you about your comfort level with leverage. Your leverage will go up, I guess, a bit with buying back the stock, at still pretty comfortable level. But if you were to consider doing acquisitions at some point in the future, I mean, what is your sort of comfort level with leverage now?

------------------------------
 Sebastien Martel,  BRP Inc. - CFO   [35]
------------------------------
 Yes. We finished the end of the quarter with a leverage ratio of 1.4x net debt. The SIB should increase leverage by 0.6x so it should bring us in the range of 2. That's on a pro forma basis at the end of Q1. Obviously, this year, our expectation is for growth in EBITDA and cash generations, leverage at the end of the year will be down. If you recall, when we did the IPO, we had a leverage of almost 3x, 2.9x and that's a level where we were comfortable running the business. Our credit facilities and our Term B loan is friendly to BRP with a covenant-light structure and a maturity that is out several years through 2023. And so under these conditions, we're comfortable operating and increasing leverage even further if need be to crystallize an acquisition.

------------------------------
 Cameron Doerksen,  National Bank Financial, Inc., Research Division - Analyst   [36]
------------------------------
 Okay. And just sort of related to the SIB, I mean, obviously, you've got a real confidence here in your cash flow-generating ability with the introduction to dividend and also the SIB. I'm just wondering if you can maybe talk about directionally what CapEx sort of starts to look like after this year, after kind of the -- a fairly heavy year of investment. I mean is this a signal that maybe we'll -- that the biggest part of your investment to support the growth is kind of behind you here, and that may be investments to support new products and CapEx for production is going to sort of trend a little bit lower in the years following this year?

------------------------------
 Sebastien Martel,  BRP Inc. - CFO   [37]
------------------------------
 Absolutely not. If there's one thing that made us successful and we believe that is going to continue to make us successful is continue investing in growth, in organic growth. And so if there's one thing that we're not planning to do is slow down on that strategic pillar of ours. We're a business that's generating significant cash flow every year, and what we're going to be paying or what we've done in terms of normal course issuer bid in the past is using that excess cash flow after CapEx. And so our expectation is not to reduce that pace. And even this year, as you saw, despite that we're launching a dividend, launching the SIB, we've also increased CapEx in our guidance. So that's the strategy, and we're going to continue working that way.

------------------------------
Operator   [38]
------------------------------
 Our next question is from Jaime Katz with Morningstar.

------------------------------
 Jaime M. Katz,  Morningstar Inc., Research Division - Equity Analyst   [39]
------------------------------
 I'm curious about your finished products inventory that's on the balance sheet. It's up pretty significantly, and I wanted to know if there were any different timing differences we should be thinking about? Or whether it's sort of similar to what's increasing the dealer inventory levels.

------------------------------
 Sebastien Martel,  BRP Inc. - CFO   [40]
------------------------------
 Well, actually, yes, when you look at the inventory year-over-year, it's up 14%. One of the biggest drivers of the inventory growth is currency. Versus a year ago, the rates are higher, both the euro and USD versus a Canadian. So that brings about a $30 million increase. Last year, we produced snowmobiles much later in the year. This year, we're producing them as we normally do earlier in the year, and that calls for more raw material and work and process inventory. That's about another $25 million SSV with the growth that we're experiencing is also requiring investments in working cap, around another $20 million there. And then the PWC business, strong growth in PWC this year is driving finished good inventory in international markets and also raw material inventory for about $15 million. So as you take these 4 elements, you're bridging almost the $100 million increase that we have in inventory for the year -- year-over-year.

------------------------------
 Jaime M. Katz,  Morningstar Inc., Research Division - Equity Analyst   [41]
------------------------------
 Okay. And then, I know it's a small component of the business, but I saw you guys had said that the Propulsion Systems suffered from lower volume of aircraft engines sold. Was that something that was planned? Or was it a function of some other industry factor that could be ongoing?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [42]
------------------------------
 The industry is a bit slow for the aircraft engine, but the main thing is we introduced the 9 iS -- the 915 iS about a year ago, and all the OEM right now are working to prepare their plane to fit this new engine, and we'll start shipping in the second half. Then the market is soft for aircraft engine, but on top of it, many people are planning to buy the new one because it's better power-to-weight ratio, longer range, and that's why we believe there is some delay in the regular engine to wait for the new one.

------------------------------
Operator   [43]
------------------------------
 Our next question is from Seth Woolf of Northcoast Research.

------------------------------
 Seth Woolf,  Northcoast Research Partners, LLC - VP and Research Analyst   [44]
------------------------------
 Just a couple of things. First, I want to dive into the capacity. Wondering if you could, one, quantify it. And then, just as we think about it, you said to continue to expect to make more investments to support growth going forward. If you're already running multiple shifts, what made you decide that it was right to tweak the existing facility versus adding a new facility. And then piggybacking off that, I believe at the Investor Day, you said that eventually you need to go into Juarez I and you can make that more efficient. And I was just wondering, if you could remind us the time line on that, and maybe what kind of benefit you get there?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [45]
------------------------------
 Okay. You visit Juarez II, then our facility had capacity on the assembly line. The bottleneck and you saw yourself the facility where you have more investment is on the manufacturing of the chassis and the painting of the chassis, and that's where, right now, we're reaching capacity. Then right now, the best return on investment is to improve adding some equipment into the existing wall. We're adding some equipment to increase our capacity on the manufacturing and the painting of the chassis. And at one point, we could reach the limit. And as you said, today the old Maverick and the Commander are done in Juarez I, those volume are going down. And in time, when Juarez II is totally full, we could consider to move some assembly to Juarez I, but we're not there yet. Then, we still have room to grow, and the building itself was planned to have more equipment. We're enlarging a bit the dock, but it's a very minor enlargement. But the manufacturing area that you visited, we're not enlarging the building. We're just adding more equipment into the space to continue to support the growth.

------------------------------
 Seth Woolf,  Northcoast Research Partners, LLC - VP and Research Analyst   [46]
------------------------------
 Okay. That's helpful. And this is enough to get you to your long-term market share goal, correct?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [47]
------------------------------
 We hope to pass -- right now, we will, definitely with what we're adding, it's helping, but we'll see how things go. Like I said, how high is high into the side-by-side industry? We're quite good in the Commander segment, which is a small segment. We're doing okay in the sport. Now we're doing a lot better in the sport. And the Defender for us, which is a big segment, is going at a fast pace. And again, it's about the industry dynamic, the quality and innovation of our product and the dealer network expansion. And right now, everything is pointing in the right direction. Then we feel we are okay with what we have had for the next 18 months, and we'll monitor accordingly.

------------------------------
 Seth Woolf,  Northcoast Research Partners, LLC - VP and Research Analyst   [48]
------------------------------
 Okay. Excellent. And then, just lastly, just big picture on the market. I was wondering if you look at the Off-Road vehicle market, North America specifically, has the dynamics of the overall market changed since the last time we had one of these calls in -- after the fiscal year was reported? And then, the environment has been very promotional. Have you been forced to match some of the aggressive rebates on the Maverick X3 or have those sharper promotions been limited to the legacy Maverick?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [49]
------------------------------
 Let's say that ATV is a bit different than side-by-side. On ATV, there is less new model coming into the market. And except for 2 OEMs that are very aggressive with rebate, I would say it's quite stable, and it's quite distinct dynamic than when we had our call in March. On the side-by-side, the dynamic is different. I mean, it's a big market. Now the market is bigger than ATV. Everyone is introducing new model at a fast pace. Then, there is more competitive environment in terms of product, and there is 2 OEM are -- who are very aggressive with programs because they probably have excess inventory. Then, the dynamic is quite -- the competitiveness is quite high on the side-by-side market. The beauty of our situation is the extreme sport category is playing into a segment where performance is very, very good. Very important, and we have a good product. And on the Defender side, for us, it's a white space that we're trying to fill fast. And again, our product is well received. Then, we are right now benefiting off investment that has been done and move that we decided a few years ago, and we believe we will continue this momentum or are facing the industry in the year to come.

------------------------------
 Seth Woolf,  Northcoast Research Partners, LLC - VP and Research Analyst   [50]
------------------------------
 Okay. So it sounds like in the X3 category, you're kind of immune to some of the discounting that's going on.

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [51]
------------------------------
 Yes. Right now, the inventory in the network of X3 is very low.

------------------------------
Operator   [52]
------------------------------
 Our next question is from Anthony Zicha with Scotiabank.

------------------------------
 Anthony Zicha,  Scotiabank Global Banking and Markets, Research Division - MD, Special Situations and Special Situations Analyst   [53]
------------------------------
 José, could you give us a bit more color about the new dealers that entered your network that have been operating for at least a year? And are they performing to your expectations, and their expectations, and are they selling a greater proportion of SSVs?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [54]
------------------------------
 I don't have any quantitative numbers, but I'll give you a feel. It's not black and white. Some are doing extremely well. Some are -- it's more difficult than what we planned, but overall, I would say that we are on plan. There is one thing that is sure right now. We're gaining space in multiline showroom store. Since we introduced the Defender, it was a statement. If you remember, I committed to a new side-by-side every 6 months, and it was part of the commitment about the industry. We introduced the Defender. We're launching a new product every 6 months, and the DRC, our new product, the CR value proposition, and we're gaining right now, space into multiline dealership. And this is part of the momentum that we have right now, and that's one of the element why we're outpacing the industry. But I don't have any more quantitative data that I can share with you.

------------------------------
 Anthony Zicha,  Scotiabank Global Banking and Markets, Research Division - MD, Special Situations and Special Situations Analyst   [55]
------------------------------
 Okay. And the second question, over the next 3 years, José, what are the 2 or more catalyst do you see driving future growth, and how important is going to be the success of the Spyder in your plans? I think you've mentioned in the past that you would expect, potentially, to double the sales of the Spyder in a 5-year period. So that's my question.

------------------------------
 Sebastien Martel,  BRP Inc. - CFO   [56]
------------------------------
 Like we said when we met, we believe -- and I answered a question this morning about that, we believe with the 6-product line that we have, we can reach -- if the industry continue like this, and we continue to outpace the industry, we believe we could be very close of the $6 billion that we have put as a target in 2020. That being said -- and Spyder is part of the growth, and we still believe that Spyder has a good potential. And what we're doing right now in the 7 states is really promising, but it's a bit early to try to quantify it. Then, at the end of the day, we will continue to gain -- the 2-big vector for growth is -- right now is side-by-side and watercraft. Watercraft, the industry is doing extremely well. There is not too many OEM in that business, and we have a strong, strong market share. Then this is the 2-main vector, but other than that, offboard engine is positioned to grow. ATV, we're gaining momentum. There is 2 business we believe high potential. There is ATV, snowmobile, and offboard engine, where we still can continue to go, but at a slower pace. And there is Spyder that we believe could, if we find a silver bullet, could make a big difference, but we're not counting on it in our planning. Then this is, in a nutshell, the -- how we view the situation.

------------------------------
Operator   [57]
------------------------------
 Our next question is Gerrick Johnson with BMO Capital Markets.

------------------------------
 Gerrick Luke Johnson,  BMO Capital Markets Equity Research - Equity Analyst of Toys   [58]
------------------------------
 I was just curious about your comments on snowmobile. If inventory is elevated on prior year stuff, yet your spring sales are stronger-than-expected. Why is that? Why are people not buying the '17s and preordering the '18s early? Is it an expansion of the 850? Is it the SHOT? What's the difference between the 2?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [59]
------------------------------
 It's lineup. If you remember last year, we came out with the Gen 4 first year with good model offering. This year, we expanded the model offering, then there is more REV Gen 4. All the 800 are being replaced, and the SHOT was very popular. To be honest, SHOT was more popular than what we had planned. We had a bet internally, and I lost my bet, and it's a good thing. But at the end of the day, I believe that the strength of our lineup made a big difference, and basically we met dealer in February at the dealer meeting. They gave us a booking. The spring order came out stronger than -- we adjusted the order, and that's why we're increasing our guidance.

------------------------------
Operator   [60]
------------------------------
 Our next question is from Tim Conder with Wells Fargo.

------------------------------
 Timothy Andrew Conder,  Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst   [61]
------------------------------
 Just want to follow up on the capacity commentary. José, you mentioned that part of that is being driven by, of course, the success you've had of expanding the dealer network and that currently you're sort of slowing down that expansion to focus on enhancing the existing dealers. So 2 parts to that. One, what exactly are you doing? Is it more enhancing the just-in-time? Is it enhancing the data analytics, CRM that the dealers utilize that you share and work with them? Is that the focus of enhancing the network? And then, the second question is to get to your 2020 goals, will you actively enhance the current dealer base? Will you then hit another second stage of dealer base reaccelerated growth?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [62]
------------------------------
 Okay. First, to your first question, we're working very hard to generate leads. All our marketing campaign is about lead generation, then sending names to our dealer and trying to help them to close the sales. And some dealers are doing extremely well, taking those lead and convert it in trial and closing the sales. And other are not doing a good job, then we have all the data. We know all the data of how many lead we transfer to the dealers from our website, and what the end result of those dealer then that's why we believe right now that we are, probably for the next 2 years, there is more advantage to have lower-performing dealer to become better. We believe there is a better return on investment and time doing this, and it's all around efficiency of -- at the dealership. Then this is the situation. To be honest, we're quite happy with the number of dealers we have right now in North America. There will be always some tweaking, adding 25, losing 25, but we are quite happy. If we continue to outpace the industry, outpace the industry, it could happen probably in 2 years from now that we'll be adding more dealer in the remote area to help our coverage, but we do not factor that in at this point in our plan. It's more about number of dealer we have and making them better.

------------------------------
 Timothy Andrew Conder,  Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst   [63]
------------------------------
 Okay. And along that line, José, is there anything related to, again, your just-in-time inventory system? How is that being enhanced? And how is that part of the equation with the, say, CRM enhancements also?

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [64]
------------------------------
 Yes. This we're quite happy with our system on ATV and side-by-side the dealer order on the monthly. What we do right now, we recommend an order to the dealers, and if they follow the recommended order or pass the recommended order, that is the trigger for the performance bonus. Then, every quarter -- every month, we give them a recommended order for ATV side-by-side, and that's for deliveries in 2 months. And this is working extremely well. And what we like about that system it's adjusting up or down depending of the retail. Then, there is no big bottleneck of certain model into the system. Then, our inventory is quite clean, and we believe we are in the -- we're quite efficient into the industry. With the system that we have, we'll continue to improve it, but no major change planned short term.

------------------------------
Operator   [65]
------------------------------
 Our last question is from Robin Farley with UBS.

------------------------------
 Robin Margaret Farley,  UBS Investment Bank, Research Division - MD and Research Analyst   [66]
------------------------------
 First, I wonder if you could quantify how much is the EBITDA and revenue raise for the year that was driven by FX? And then, I have a couple of other questions too.

------------------------------
 Sebastien Martel,  BRP Inc. - CFO   [67]
------------------------------
 Yes. When you look at the FX rates, despite that we did have a lift in Q1 when I compare the rates when we issued guidance in March, and when we look at the rates today, there's not a lot of variation in the rates. And so there is actually no FX built into our guidance rate, Robin.

------------------------------
 Robin Margaret Farley,  UBS Investment Bank, Research Division - MD and Research Analyst   [68]
------------------------------
 Okay. Great. And then, I think it was at your September Analyst Day, you talked about one of the things that may get you to your 2020 goals would be acquisitions and maybe perhaps the multipurpose motorcycle market. Is announcing the share repurchase today and the dividend announcement, I mean, it looks like you still have free cash flow available to do acquisitions. But are those uses of your free cash flow, should we think of that is making an acquisition less likely in your strategy now?

------------------------------
 Sebastien Martel,  BRP Inc. - CFO   [69]
------------------------------
 No. Absolutely not. For us, it's optimization of the balance sheet. That's why we're looking at doing the SIB and returning capital to the shareholders. We have $255 million of cash at the end of Q1. Obviously, we want to put that cash to work for the shareholders, and that SIB was the best way to put it to work for them. As I mentioned, when I look at the balance sheet, we do have that flexibility to add additional debt if need be, if we were to do a material acquisition. And so that doesn't reduce our abilities to execute on material M&A going forward.

------------------------------
 Robin Margaret Farley,  UBS Investment Bank, Research Division - MD and Research Analyst   [70]
------------------------------
 Okay. Great. That's helpful. And then, when we look at -- when you present Spyder retail versus the industry, I think, in previous quarters to this you would show it kind of versus the North American motorcycle industry overall. I think this quarter -- now you're showing it kind of versus the 3-wheel market. I wonder if you could just give us a little context the way you -- sort of typically have about the change versus the North American motorcycle market overall.

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [71]
------------------------------
 Yes. Since the beginning of this fiscal year, we're following, internally, the 3-wheel market. Obviously, we follow both, but we believe that the 3-wheel market is a lot more relevant for what we're doing than the motorcycle market where you have a lot of entry-level product. Then, if you look at the industry over all season-to-date if you take the all-motorcycle market, it's down mid-single-digit, whereas the 3-wheel market is down almost 15%. And we, right now, are down minus single digit. Then, we're doing as good or as bad as the motorcycle industry, but better than the 3-wheel market.

------------------------------
 Robin Margaret Farley,  UBS Investment Bank, Research Division - MD and Research Analyst   [72]
------------------------------
 That's helpful. Now my last question is, can you quantify where your side-by-side market share is now and kind of versus your goal? I think you had given like a 2 or 3-year goals. So if you could help us think about where your market share is now.

------------------------------
 José Boisjoli,  BRP Inc. - CEO, President and Director   [73]
------------------------------
 Yes. Like we said before, the launch of the Defender, we said that we were about 10%. And we said at the time that with all the new product that we're introducing, that the goal was to become a strong #2, then we are halfway. We said mid-term. We are halfway into this time frame. But right now, we're growing at a good pace. We are about 15% of the industry. And we believe that we are growing at a good pace to be able to meet our goal. But there is, I would say, another 2 years to go.

------------------------------
Operator   [74]
------------------------------
 Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Deschenese.

------------------------------
 Philippe Deschenese,    [75]
------------------------------
 Thank you, Valerie, and thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our second quarter conference call on September 1. Thanks again, everyone, and have a good day.

------------------------------
Operator   [76]
------------------------------
 Thank you, gentlemen. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.




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