Q3 2018 BRP Inc Earnings Call
Dec 01, 2017 AM EST
DOO.TO - BRP Inc
Q3 2018 BRP Inc Earnings Call
Dec 01, 2017 / 02:00PM GMT
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Corporate Participants
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* José Boisjoli
BRP Inc. - President, CEO & 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
* 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
* Gerrick Luke Johnson
BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst
* Jaime M. Katz
Morningstar Inc., Research Division - Equity Analyst
* Jean-Francois Lavoie
Desjardins Securities Inc., Research Division - Associate
* Marc J. Torrente
Wells Fargo Securities, LLC, Research Division - Associate Analyst
* Mark Robert Petrie
CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst
* Robin Margaret Farley
UBS Investment Bank, Research Division - MD and Research Analyst
* Seth Woolf
Northcoast Research Partners, LLC - VP & Research Analyst
* Steven Arthur
RBC Capital Markets, LLC, Research Division - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to the BRP Inc.'s FY '18 Third 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, Mauve. Good morning, and welcome to BRP's Third Quarter Conference Call for fiscal 2018. Joining me on the call this morning are José Boisjoli, President and Chief Executive Officer; and Sebastien Martel, Chief Financial Officer. Before I 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. - President, CEO & Director [3]
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Thank you, Philippe. Good morning, everyone, and thank you for joining us. The third quarter is always very busy at BRP, as we changed material lineups for 5 product lines, and we launched new model during our fall dealer event. In addition, this year our snowmobile shipment are returning to a normal cycle. I'm very pleased with our retail momentum, particularly in our off-road and snowmobile businesses. And through it all we stayed focused on our execution in all our operations. I'm happy to report this morning that the team once again did an excellent job and delivered solid results, which put us in good position heading into the fourth quarter.
Let's start by taking a look at our financial result. Our revenue grew 15% versus Q3 last year to reach $1.2 billion, notably driven by the continued strong demand for our Can-Am side-by-side lineup and earlier snowmobile shipment compared to last year. Our normalized EBITDA ended just shy of $200 million, up $2 million from last year third quarter, which was itself very strong, growing 39% from the previous year. Our normalized earning per share reached $1.05, up 13% from last year. While our financial performance was solid, the highlight of the quarter was certainly the strength of our retail sales. We just ranked 25% growth compared to an industry that we estimate was up high single-digit percentage. This strong increase was in part driven by our snowmobile business, as we had better unit availability in the network earlier in the season compared to last year. Excluding snowmobile, our retail sales were up 12%, driven by another solid quarter for Can-Am side-by-side business, with retail up in the low 30%, in an industry that was up high a single-digit percentage. Can-Am ATV also performed well with a high single-digit retail growth, gaining share in an industry that was up mid-single digit. Watercraft and Spyder had the more difficult quarter, as retail was impacted by Hurricanes Harvey and Irma. Spyder and watercraft combined were down 18% in Texas and Florida.
Another high point of the quarter was our annual Can-Am and Ski-Doo club that we held in September. Over 2,800 people joined us in Dallas, Texas for one of the biggest dealer event in our history. It was certainly the most intense in terms of product introduction. Delivering on our commitment to introduce a new side-by-side every 6 months until 2020, the highlight of the club was the launch of the Maverick Trail vehicle. This new 50-inch side-by-side opened a whole new world for Can-Am, since it is the first trail ready side-by-side ever made by BRP. With this superior comfort, agility and handling, we are convinced it will be a success with consumer. Production and shipment have already begun in the third quarter as planned. We also took step to consolidate our #1 position in the watercraft industry. We revealed a whole new platform that completely changed the onboard experience with its industry-leading stability and feature, notably with the introduction of the first OEM-installed fully waterproof audio system. Likewise, we had significant news for Can-Am Spyder. First, we introduced BRP Connect, a digital instrument panel that will enhance the consumer experience by offering smartphone connectivity for seamless apps integration while riding. This new user interface will be available on most of our 2018 Spyder lineup. The other key news for Spyder is the upcoming introduction in the fall of 2018 of an entry-level Spyder family for an MSRP starting at under USD 10,000. Following the success of our Sea-Doo Spark watercraft, we believe this new model will be key to bringing the Spyder business to the next level. Finally, we also strengthened our Can-Am side-by-side lineup with multiple new models, especially adapted to the need of our riders. One of them is the Maverick X3 X rc vehicle with unique and advanced feature that are sure to please the rock-crawling community. Other key models were the mud-ready Defender X mr and the Defender MAX LONE STAR addition, specially designed for the Texas market. Yesterday, we announced the extension of the Maverick X3 family of vehicle.
That Can-Am Maverick X3 900 HO with all the popular X3 feature at the competitive entry level price point and MSRP of under USD 18,000. This is our first non-turbo extreme model, expanding our offering in the mid-hp sport side-by-side market, which is more than twice the size of the high-hp sport side-by-side segment in which the Maverick X3 Turbo R competes. The industry's most powerful and first factory-made turbocharge mud vehicle, the Can-Am Maverick X3 X mr is sure to please the mud lovers who are looking for extreme racing performance and the extension of the industry exclusive SMART-Lok differential on more model of side-by-side making our lineup even more competitive. We will begin shipping these vehicles in January.
Since the introduction of the Defender and Maverick X3 model, our side-by-side retail momentum is performing above expectation. In June, we invested an additional equipment in Juárez 2 to increase our capacity by 30%, which should be operational in the first quarter of fiscal year '19. We are announcing today a second phase of investment to enlarge and add equipment to our Juárez 2 facility, that should be ready in fiscal year '20. The second capacity increase is earlier than originally planned. It was the optimal and most efficient solution to our capacity constraint since the retail momentum of the Defender and X3 model continues. The Maverick Trail was well received and should create more side-by-side demand. We are confident that yesterday's expansion to the Maverick X3 family will increase demand, and we have big plan for upcoming platforms.
This decision is a testament to the strong growth we see with our Can-Am side-by-side business and our commitment to further developing it.
Now let's turn to the product category review, starting with Year-Round Products on Slide 9. Year-Round Product revenue were up 20% in the quarter, driven by a higher-volume and richer mix of side-by-side, as we continued to see strong demand for the Can-Am Maverick X3 and Defender models. We also started shipping the Can-Am Maverick Trail. Now looking at the Retail performance, 4-month into the season, the ATV industry is up low single-digit. For the same period, Can-Am ATV retail is up high single digit. Can-Am ATV is also gaining share internationally with double-digit retail growth in the Western Europe, Brazil, Mexico and Australia, New Zealand. Overall, Can-Am ATV is performing well in both the high and the mid-cc segment.
Turning to side-by-side. Also, 4 months into the season, the North American industry is up low-teen percentage. Can-Am side-by-side continued to outperform the industry in the quarter with retail up over 30%. Globally, the trend is even better with our International side-by-side retail sales, being up over 80% into the quarter. The Defender Maverick MAX model are generating retail growth of over 100%, in multiple markets, most importantly in Mexico, China and Western Europe.
Turning to Spyder. The North American 3-wheel motorcycle industry ended its 2017 season with retail down low-teen percentage. Spyder outperformed the industry for the season with retail down high single digits. As for the 7 states, in which we had dedicated teams, retail ended the season up low single digit, despite the fact that 2 key states were impacted by both Hurricane Harvey and Irma. We are also successful in rightsizing our network inventory level, as we ended the season with inventory down about 40%.
While we are aiming for more, we are pleased with the success we had in these key states. The insight from this past season will be applied to more states over the coming years.
Now turning to Seasonal Products on Slide 10. Seasonal Products revenue were up 18%, driven by earlier snowmobile shipment compared to last year. As you may remember, due to the introduction of our new snowmobile platform last year, we had to ship production to later in the plan -- in the year. We are now back to normal production and shipment schedule. We, therefore, had better unit availability in the network earlier in the year. Looking at retail, although still early in the season, the snowmobile industry is up in the high 20 percentage. Meanwhile, Ski-Doo retail is up in the high 70% range. While our retail growth was strongly influenced by the timing of shipment compared to last year, this performance is in line with our expectation at this point in the season and should normalize as time goes on.
Now turning to watercraft. The industry ended its 2017 season at the end of September with retail up high single digit. Sea-Doo experienced growth in both the traditional watercraft and Spark segment, and ended the season with retail sales up mid-single digits. As a reminder, this is the first season where the Spark model had competition in the entry-level segment, which had an impact on our market share for this product category. We are just starting the season in counter-seasonal market, such as Brazil, Australia and New Zealand, where we are already seeing positive sign for 2018.
Overall, the watercraft industry is in a very good position. Since the introduction of the Spark, the North American industry has grown by 55%, in part, because of the entry-level segment. Sea-Doo continued to gain market share with 3 additional percentage point during the season '17. The North American success is similar to many markets worldwide, which shows that this industry is well positioned to continue to grow. This is why we are investing and increasing capacity in our Querétaro facility by 20%, which should be operational in the second quarter of fiscal year '19. With the strong Sea-Doo brand, the most complete lineup in the industry and more production capacity, we are well positioned to continue to grow in this business category.
Now looking at Propulsion Systems on Slide 12. Revenue for Propulsion Systems were pretty much flat in the quarter. As we have previously explained, the trend of package with boat, over a loose engine, is continuing with the engine-only segment weakening. In terms of retail, 4 months into the season, the North American outboard engine industry is up mid-single digits. For the same period, Evinrude retail is down mid-single-digit percentage. We attribute this in part to our belief that we were not aggressive enough in our promotion this quarter.
On November 1, we've launched our 10-year warranty coverage promotion that should last until next April. We are already seeing positive result to date. We also had great news for Rotax Propulsion System business, where we introduced our first-ever Rotax electric power pack for carting. This new Powerpack provides a new customer experience with extremely good performance and unique feature, such as the boost function to pass competitors, low noise and low emission. It represent an important step into electrification for the karting business.
Now looking at Parts, Accessories and Clothing. Revenue of Parts, Accessories and Clothing increased by 5%, resulting from higher-volume of side-by-side accessories and snowmobile parts sold.
Accessories are a significant part of the customer experience and with the new Maverick Trail, this experience was enhanced with the development of 125 accessories available at launch.
And with that, I will turn the call over to Sebastien and will return for closing remark.
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Sebastien Martel, BRP Inc. - CFO [4]
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Thank you, José, and good morning, everyone. We are pleased with our results, which have been very solid so for this year, with year-to-date revenue growth of 12%, normalized EBITDA growth of 21% and normalized earnings per share growth of 48%. With 2 months to go before the end of the year, the demand for our products remain strong and is allowing us to aim for higher end of revenue guidance ranges for Year-Round Products, Seasonal Products and PAC. And while our guidance implies for results that may come in below last year for the fourth quarter, this is simply a result of a change in timing of snowmobile shipments. Our business fundamentals remain strong. We are well positioned to deliver our guidance and continue our growth path into next year.
Now let's turn to the quarterly financial results. Today, we reported revenues of $1,240,000,000 for the quarter, representing an increase of over 15% over the same period last year. As José mentioned, the growth was primarily driven by higher-volume of side-by-sides and earlier snowmobile shipments compared to last year. Revenues grew across all regions, with U.S. being up 8%, Canada up 25% and International up 20%. We generated $329 million of gross profit, representing a gross profit margin of 26.6%, down 180 basis point from last year's third quarter, primarily due to higher production costs and unfavorable foreign exchange rate impact. We achieved $199 million of normalized EBITDA, and a quarterly normalized earnings per share of $1.05, an increase of 13% over last year. Finally, we generated $156 million of free cash flow, an increase of $27 million over last year. On the term loan, we successfully completed USD 100 million increase as well as reduction of 50 basis points in pricing, providing us with additional financial flexibility to invest in our growth plans.
Looking at Slide 15. Our normalized net income was up $5 million in the quarter, primarily driven by a positive impact coming from volume and mix, resulting from incremental shipments of our Can-Am SSV lineup as well as the new snowmobile platform. Partly offsetting this gain were a slight negative impact from pricing in sales program for $15 million, driven by a strong growth in the retail sales, higher production costs and operating expenses for $44 million, and a negative impact from foreign exchange rates for $16 million.
Now turning to Slide 16 for a look at our network inventory, which ended the quarter up 9% versus last year. Overall, the level and quality of our network inventory remains very healthy. The growth continues to be driven by our side-by-side business, for which inventory is growing in line with retail demand and by the expanding business with the new dealers we added over the last years.
Our snowmobile inventory is also up slightly over last year and is currently at an appropriate level ahead of the upcoming season. The increase was partly offset by the successful rightsizing of our Spyder network inventory, which we were able to reduce by about 45%.
And finally, turning to Slide 17 for more details about our guidance for fiscal '18. As I mentioned earlier, the strong demand for our products is allowing us to aim for the higher-end of our Year-Round Products, Seasonal Products and PAC revenue guidance ranges. So we are now expecting Year-Round Products revenues to be up 11% to 12%, Seasonal Products to be up 1% to 3%, and PAC to be up 7% to 9%. However, due to the slower-than-expected retail in the quarter for Evinrude, we are reviewing downward the Propulsion Systems' revenue guidance to down 2% to up 1%. The net impact of all these adjustments brings our total company revenue guidance to up 6% to 8% for the year. Other than these adjustments, the rest of the guidance remains essentially unchanged with the exception of the effective tax rates, which we now expect will end the year between 27% and 28%. This change in tax rate is allowing us to increase the lower-end of our normalized earnings per share guidance by $0.02, resulting in a range of $2.25 to $2.35, a growth of 15% to 20% compared to last year's result.
As usual, at this time of the year, we have good visibility on our shipment volumes and our expenses for the rest of the year. Our focus, at this point, is on executing our plans, including the capacity expansion, and on ensuring a successful snowmobile season.
Again, as mentioned earlier, we are facing a very tough comparable in the fourth quarter, as last year was heavier than usual in snowmobile shipments due to the introduction of the new snowmobile platform. For this reason, our guidance implies a fourth quarter that might come in slightly lower than last year. Still, as you can see, with our retail growth, our recent product introductions and our on growing -- ongoing incremental capacity investments, our business remains very strong and we are well positioned to deliver a strong Q4 and continue to grow in the future.
With that, I'll turn the call back to José.
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José Boisjoli, BRP Inc. - President, CEO & Director [5]
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Thank you, Sebastien. To recap. With the exception of our renewed brand, all our business are doing well, and our results for the third quarter are in line with expectation. All new products were well received by the network and media, and we are sure our customer will feel the same. Quarter after quarter, our off-road retail result continued to beat the industry. Our snowmobile momentum is ongoing due to the new Ski-Doo Gen4 model that are creating a lot of excitement. We are building the future with our expansion of the Querétaro facility to support watercraft growth, which will be operational in the second quarter of fiscal year '19. And to support our side-by-side momentum, we have initiated 2 phase of Juárez 2 capacity increase. The first should be ready in the first quarter of fiscal year '19, and the second is planned to be operational in the first quarter of fiscal year '20, which combine more than double our current capacity. In addition, we are opening a regional business hub on the outskirt of Dallas, Texas in February 2018. This will provide us greater proximity to that market and the U.S. at large, allow us to better connected to our dealers and customers there and position us to seize its growth opportunities.
These are some of the highlights that show our commitment to generate growth from launching innovative product to increasing production capacity and transforming our sales operation. I am very pleased with the team's execution in this last quarter, and I'm confident that we'll deliver our year-end guidance, which is 15% to 20% growth of our normalized earnings per share, and we plan to continue this momentum next year.
And with that, I'll turn the call over to Mauve 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 Steve Arthur from RBC Capital Markets.
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Steven Arthur, RBC Capital Markets, LLC, Research Division - Analyst [2]
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Just the first question in terms of the capacity expansions. In the MD&A, you talked about allocating yesterday of $100 million for these expansions. Not really looking for specific numbers on the forward years, but if we look at those CapEx plans, does that tend to keep it in that, kind of, $250 million range that we are seeing this year? Or is this kind of incremental, and we'll likely see higher numbers to support these growth initiatives?
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Sebastien Martel, BRP Inc. - CFO [3]
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Yes, good morning, Steve. Obviously, this year, as you know, we announced capacity increase investments, which -- we adjusted our guidance upward to the range of about, which you see today, $240 million and the $255 million. Obviously, with that $100 million investment, not all of it is going to be next year, but a good part of it is going to next year. And we're still going to continue investing in our lineups and modernizing our other facilities. So yes, I would expect our CapEx to be above the $250 million for next year.
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Steven Arthur, RBC Capital Markets, LLC, Research Division - Analyst [4]
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Okay. And with these kind of investments in the Mexican facility, should we read into that your view of there being likely fairly modest changes to NAFTA? Or if there are changes nothing that would materially alter your manufacturing footprint?
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Sebastien Martel, BRP Inc. - CFO [5]
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Yes. Well, the investment is not only in our Mexican facilities, it's also in our engine capacity as well. So some investments are happening in Austria, some investments are also for supplier tooling. So not all of that $100 million is being put into Mexico. But obviously when you have strong consumer demand for products, the worst thing you can do is not meet that demand. And so we are very focused on making sure that we can meet that demand and satisfy the dealers as well. And our view on NAFTA is it hasn't changed for us. It's the status quo. We run our business as we believe it should be run. And there are many variables that are still pending on NAFTA, and we've shared these variables with the investor community in the past, but maybe I'll just cover them again. The first one is, while what are, if any, U.S. content or NAFTA content adjustments that are going to be imposed. Today, that's a big question. What are the penalties or tariffs that can be imposed if you do not meet those requirements. And also the impact coming from tax legislation in the U.S., that also is -- could influence investment decisions when NAFTA is known. And also the time to be compliant. There is going to be a transition period. So for us, given all these variables and given the uncertainty or the unknown related to these variables, we were just proceeding ahead. And these are businesses or investments, which have a good return, and that's why we believe it's the right decision to make.
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José Boisjoli, BRP Inc. - President, CEO & Director [6]
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Maybe to add Steve to the comment on NAFTA. We cannot wait for the government to agree to run our business. And we are running our business. And if there is some change, we have the agility to adapt and move forward.
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Steven Arthur, RBC Capital Markets, LLC, Research Division - Analyst [7]
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That makes good sense. Just one final one from me. You both mentioned looking for continued growth momentum into next year, I expect you'll offer more formula look with the Q4 results in a few months. But any commentary related to the kind of anticipated growth rates, margin improvement, any deviation in higher or lower from what you previously talked about with your 5-year longer-term plans?
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Sebastien Martel, BRP Inc. - CFO [8]
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Yes, as you said, we'll give you full disclosure on guidance at the fiscal year-end '19 in March when we report on our fiscal year '18 results. But I've been looking -- obviously, we are planning for next year, so our financial planning is underway. And in the recent days, I look what the market is expecting for next year in terms of EPS growth. And I feel comfortable that we'll be able to deliver that next year. And that would be, if you look at the midpoint of the EPS, the range that we have in our guidance this year, we are above 15% EPS growth for next year as well.
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Operator [9]
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Our following question is from Anthony Zicha from Scotiabank.
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Anthony Zicha, Scotiabank Global Banking and Markets, Research Division - MD, Special Situations and Special Situations Analyst [10]
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José, could you please provide us a bit more color on your snowmobile sales? And looking into fiscal '19, which areas do you have the least amount of visibility?
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José Boisjoli, BRP Inc. - President, CEO & Director [11]
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Yes. On the snowmobile sales, let's say -- I would say, if you look at our retail curve, this year is similar to what we had in fiscal year '16, not '17; then we are back to a normal curve, plus or minus a week or 2. Then it was planned like this, and we are very happy because so far we are tracking to the normal cyclical curve of snowmobile. And I would say a bit early to celebrate, but so far, the snowmobile season seems to have a good start. I'm talking yesterday, one of our board members is going to ride snowmobile up north over the weekend. And it's a bit earlier than we typically do, but like we say, we won't celebrate right away. In terms of fiscal year '19, obviously, we have order on our hand for the Spyder model year '18, the first half of the season; watercraft, we have order on the hand; snowmobile, we'll take order for next year at our February event, finalize the order booking in April. And ATV and side-by-side, we are taking over on a monthly basis. And right now we know exactly how much off-road it will deliver till the end of January, till the end of this year. Then, but the momentum with off-road, to be honest, it's going extremely well. And we're very pleased to upbeat the market quarter-after-quarter. Then overall, if the global situation remains as is, we are quite confident about the capacity to continue our retail momentum.
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Anthony Zicha, Scotiabank Global Banking and Markets, Research Division - MD, Special Situations and Special Situations Analyst [12]
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Okay. Great. And then one last question. Could you give us a bit of a perspective on the M&A outlook? If you're looking at a deal, like, how large would you consider a deal and what would be the maximum amount of leverage you'd be comfortable with?
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Sebastien Martel, BRP Inc. - CFO [13]
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Well, obviously, when we announce something, we will be announcing it to the general public at large. But for now, there is nothing new to announce. The teams are still looking at opportunities. We're having discussions with the board as to where could be our next play, and so that's ongoing. And in terms of leverage, well when we IPO-ed, we were slightly below 3x leverage and that's the place we were comfortable at IPO time and it's a place we could be comfortable operating as well, if we were to do an acquisition and needed to lever up.
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Operator [14]
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Our following question is from Seth Woolf from Northcoast Research.
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Seth Woolf, Northcoast Research Partners, LLC - VP & Research Analyst [15]
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Two quick questions for me. First, José, on the product portfolio, big news getting into the entry-level market is obviously much bigger than the premium market you started within the sport category. But just what are your thoughts on the price point considering you've got some competitors that have lower price points? And do you feel like over time that's an area that you need to address as well? Or do you feel comfortable with where we are at?
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José Boisjoli, BRP Inc. - President, CEO & Director [16]
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I assume you are speaking side-by-side?
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Seth Woolf, Northcoast Research Partners, LLC - VP & Research Analyst [17]
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Correct.
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José Boisjoli, BRP Inc. - President, CEO & Director [18]
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In the side-by-side, I think we are -- I mean, obviously, when you start -- when you're launching a new platform and with the DNA of Can-Am, you start at the high-end of the spectrum. And in time, you are going in the lower-end of the spectrum, it makes a ton of sense. And what we're doing right now is just continuing to expand or to leverage the investment that was made in our 2 key platforms, the Defender and X3. In Defender, if I look at the base, Defender HD5, we're very well positioned versus the competition. And when I look at the Maverick X3 900 HO no-turbo charge that we've launched yesterday, we're extremely well positioned with some plus and minus versus the product of our competitor, but exactly at the same price point than the biggest seller into the industry. Then, overall, we're continuing to expand to leverage the investment we made in our 2 key platforms, and we are extremely well positioned. The new one, the Maverick Trail also extremely well positioned in pricing. Then we're just starting to be honest to expand our lineup in those entry-level price points. And you can expect from us to continue to expand in more model, more variation in those price points.
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Seth Woolf, Northcoast Research Partners, LLC - VP & Research Analyst [19]
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Okay. I appreciate it. And then real quick, Sebastien, you may have touched on it, and if you did, I apologize for the redundancy. But looks like the sales and marketing, the rate of change kind of accelerated a lot? Is there something, a timing event or onetime that's going into that? And how should we think about that going forward?
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Sebastien Martel, BRP Inc. - CFO [20]
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Yes. We shifted this year, we shifted our marketing dollars from Q1 more towards Q3 for ORV. And so that's why you have an increase of about $13 million, $14 million in marketing spend this quarter. And it's something that I would expect to continue going forward. Retail period for ORV is big in the fall and making sure that we are out there being seen is essential, and that's why we're going to likely continue that strategy.
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Operator [21]
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Our following question is from Cameron Doerksen from National Bank Financial.
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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [22]
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Wondered if I could maybe just ask a kind of a bigger picture industry question, and that is, you've got I think very strong sort of economic indicators out there, consumer confidence is at, like, a 17-year high. So it seemed that the sort of underlying dynamics in the industry, certainly in North America, would be very positive. I was just wondering if you can comment on what you're seeing out there? Maybe some commentary about what markets geographically are particularly strong and then what ones are maybe lagging a bit?
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José Boisjoli, BRP Inc. - President, CEO & Director [23]
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Yes. Obviously, North America is doing well, and I think it's positioned to continue to do well. If I look at the big picture, if you take APAC -- and that's the beauty of BRP, it has a general statement. Right now, we're growing in every country in the world. And APAC is having a constant stable growth. China, for us, is growing as a fast pace small number but going at a fast pace. But I think the highlight of the last or the beginning of the year is Latin America. We see Brazil, Chile coming back. We have very strong -- we put Mexico and Latin America. We've put Mexico very, very strong momentum in Mexico, particularly on off-road. Then -- and if you look at Europe, the Western Europe is continued growth, not the fast pace that you see in other country but constant continued growth. Scandinavia, and now we are starting to see some positive sign of Russia. I mean, we still are in the 25%, 30% of what it used to be, but we started to see some positive sign from Russia. Then when you look at the big picture, what I'm very pleased with the 6 product lines we have are extremely competitive. And on top of it, there is always plus and minus managing our business. But there is right now a good momentum in most of the region in the world. Then we believe, as the global economy don't change, we are pretty well positioned to continue to grow in the few years.
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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [24]
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Okay. Excellent. Maybe just a quick question on the, I guess, the Q4 guidance items. Just, I guess, a couple of things I wanted to ask is, first on the CapEx, in Q4, sort of the guidance sort of imply that Q4 is going to be significantly higher than what we've had in the previous quarters. So maybe if you can just comment on that? And sort of the same question on depreciation. It seems like there is going to potentially be a big increase in Q4?
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Sebastien Martel, BRP Inc. - CFO [25]
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Yes. Q4, historically has always been a big quarter in terms of CapEx investments. And this year, similar to last year, it will be the same case. Well, as this year, our CapEx is obviously much higher than last year. That's why you're seeing a bump in Q4. And in terms of depreciation expense, same phenomena as last year. We had higher investments coming in. You'll see that impact on depreciation being reflected as well in the fourth quarter.
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Operator [26]
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Our next question is from Mark Petrie from CIBC.
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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [27]
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I actually just wanted to follow up quickly on a couple of the topics that you've already touched on. José, when you're speaking about the regional sort of commentary, could you just give us a sense of how Western Canada is performing for you guys?
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José Boisjoli, BRP Inc. - President, CEO & Director [28]
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Western Canada is still below Eastern. I would say, it stabilized in the last, I would say, since the beginning of the year. But we see a better momentum in the east than we saw in the west. They say, I would call it stable, east is still better.
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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [29]
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Okay. And then, Seb, with regards to your comments around NAFTA, obviously, you guys have grown quite a bit since you last gave us the sense on in terms of the dollar shipments moving from Mexico into the U.S. and from Canada into the U.S. Could you just give us a sense or a range of where you guys sit today?
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Sebastien Martel, BRP Inc. - CFO [30]
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Yes. The growth has happened mostly in -- between U.S. and Mexico. Last year, we were talking about $1 billion of trade happening between those 2 countries. Today, we're looking more at $1.2 billion of trade. And now if NAFTA were to be, let's say, abolished or what are the consequences of -- then we'd fall to pre-NAFTA free-trade agreement that existed between Can and the U.S. that could be unlikely outcome. And as we had talked 12 months ago, then you're probably looking at WTO tariff's between Mexico and the U.S. and that could be in the range of 2% to 2.5% on a total trade volume of, let's say, $1.2 billion. Obviously it's something -- it's not a scenario that we would prefer. We would prefer the status quo. But if it were to happen and if we're talking about, let's say, a $25 million to $30 million impact on our results, it's something that we could most certainly manage and that would be addressed through either supplier reductions or increases over to the consumer or do as we do every year. We optimize our business, and 1% to 2% optimization every year is something that we target. So it's something that we could absorb.
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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [31]
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Okay. That's helpful. And then just with regards to the additional capacity expansion with Juárez 2, I think the Spyder ask is going to be produced there, if I'm not mistaken. Could you just help us sort of think about how that investment supports potential growth for that product?
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José Boisjoli, BRP Inc. - President, CEO & Director [32]
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Yes. The investment we're announcing today is only for Juárez 2. You visit the site, and right now it will be -- we're investing for more side-by-side in Juárez 2. The project ask will be assembled in Juárez 1, and still there we have ATV and the Commander. The Commander is still assembled in URS 1. We cannot -- because of the configuration of the vehicle, we cannot bring it to Juárez 2. Then -- all the investments we've talked this morning is Juárez 2.
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Operator [33]
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Our following question is from Jaime Katz from the Morningstar.
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Jaime M. Katz, Morningstar Inc., Research Division - Equity Analyst [34]
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I'm curious if you guys can talk a little bit about announced inventory. It looks like total inventories have grown a little bit faster than top line, but I think a lot of that is work in process as inventory and not finished goods. So I just want to make sure that is to facilitate new products rather than anything else.
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Sebastien Martel, BRP Inc. - CFO [35]
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Yes. One of the items that impacts inventory as well is as we will -- as we're building capacity, obviously, we're building raw material inventory for shipments in January and Q4. And also, the personal watercraft business, which is growing, growing in International and the lead time to get the vehicles in market to International are a bit longer. And that's why we -- as that business is growing, that's why we have additional inventory.
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Jaime M. Katz, Morningstar Inc., Research Division - Equity Analyst [36]
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Okay. And then can you give us an update on how you think about sort of dealer programs going forward? How that might impact gross margin ahead, whether you think you can sort of take the pedal off that a little bit? And whether or not maybe some of Arctic Cat's old inventory has been sort of cleaned out of the channel, so there is not so much promotional cadence to get that stale inventory out sort of helping the health of the entire industry?
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José Boisjoli, BRP Inc. - President, CEO & Director [37]
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Yes. We don't plan to change drastically our program. If things continue to go as is going right now, we don't plan to change drastically our program. Obviously, we keep every end of the season of a model -- like Snowmobile, at the end of the season will be out in February-March 2018. If depending on how the retail goes, we could adjust. But except those end of season adjustment, we don't plan major change into the program. Obviously in the Q3, some of our competitor were very aggressive with program, and we didn't follow. We decided to keep the course. Definitely, despite our 30% upgrowth for our off-road, we were able to deliver that growth without following our competitor. But we believe and we hope right now that most of their model year '17 is retail, and it will come back to a more normal, I would say, situation. But we are very pleased with our momentum in Q3 despite we didn't follow some of our competitor.
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Jaime M. Katz, Morningstar Inc., Research Division - Equity Analyst [38]
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Okay. And then lastly, just sort of a housekeeping, I guess, question. First, Ski-Doo, you guys had mentioned that the retail was up in the high 70% range and that the industry was obviously significantly slower than that. Can you remind us what percentage of sales happens this early in this season, just to sort of get a perspective on what the read-through for that might be?
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José Boisjoli, BRP Inc. - President, CEO & Director [39]
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That's a good question. We might have to come back to you. But I would say, probably 70% -- 60% happen before Christmas, I would say.
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Operator [40]
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Our following question is from Craig Kennison from Baird.
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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [41]
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Clearly, your side-by-side retail strength is a function of your own share gains. But I'm curious, to what extent you're saying improving trends in agriculture or rural markets? We certainly seen some companies in that universe begin to perform better and maybe there is some percolating demand in that market.
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José Boisjoli, BRP Inc. - President, CEO & Director [42]
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Yes, I think, there is -- all the product that the OEMs are introducing are better. Our product have more feature than 5 years ago and the ride betters and better performance. And I think this is generating this renewal cycle that we're looking for. Then I think the side-by-side market right now is healthy, because there is a lot of good product that offer by OEM, and this is what keep the industry growing.
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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [43]
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And maybe just a follow-up on that. In addition to all of the product innovation that you've really led, to what extent do you think that rural consumers just has more discretionary income to spend and to what extent is that driving any of the upside?
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José Boisjoli, BRP Inc. - President, CEO & Director [44]
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Yes, obviously, -- and this is something I forgot. The utility side-by-side, our Defender category, this is about 60% of the side-by-side market, and that's the segment where we're not there. And right now, every quarter, we're growing in the Defender category at a good pace. And this is, for us, a very, very important white space that we're trying to continue to benefit as much as we can. Then again, depending on the quarter, there is ups and down. And we see that the utility segment, the farmers, the utility, the company that are buying those products, this is a more stable purchase with less variability than the sports segment or the trail segment.
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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [45]
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Great. And then with respect to your move into Texas with an additional headquarters there, maybe you could just develop the rationale behind that move and maybe cover whether there are any tax implications that are material from that move?
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José Boisjoli, BRP Inc. - President, CEO & Director [46]
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No. It's more a business decision, and that decision was taken about a year ago, I would say. The situation is this, more and more you need to have the national tactic in country, but you need to also to have regional tactic. And we have -- we're doing here from Canada the national tactic, but we believe that being based in Dallas, in the southwest, an area where we need to get a bit better, it will be easier when the people are sitting there together to define what are the regional tactic. And today marketing is getting more sophisticated. We're trying to do as much as we can, but it's a combination of the national campaign reinforced with tactic in each of the region. Then this is the main reason why we decided to have a business hub in United States, and particularly, Dallas, because this is an area where it's offering a huge potential, and if we believe -- we believe that if our people are sitting in Dallas, in the southwest, they will do a better job to define regional tactic.
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Operator [47]
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Our following question is from Robin Farley from UBS.
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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [48]
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I wanted to clarify 2 things on the offered market. You mentioned in your opening remarks that the industry side-by-side was up high single digits for the third quarter. The presentation shows up low teens for the season to date, which I guess is -- the difference is really just the 1 month. Does that imply that maybe the industry for just that month of October is actually up less than high single digits? It seems like for there to be such a difference between those 2 periods that maybe October -- I am just curious if you could give some color on what's happened just with that more recent trend?
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Sebastien Martel, BRP Inc. - CFO [49]
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Well, we don't necessarily have the month-by-month industry trends with us this morning, and we'll be glad to share in more detail if needed. But obviously, depending on how -- what's being offered in terms of promotion, that's influencing the overall industry demand. But key message is that we're seeing continued growth in the side-by-side industry. Season to date is extremely favorable. The quarter was favorable as well and our performance as well is above industry. So we couldn't be any happier. And obviously, the tactics on product introductions and also expansion of the dealer network is paying off as you see. We can give you more granularity once we get the data.
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José Boisjoli, BRP Inc. - President, CEO & Director [50]
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The thing, Robin, is that the -- there is no industry data in a side-by-side business. And we're doing our own survey to better understand, and we do it on a quarterly basis. And we'll look at it what we have on a monthly basis.
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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [51]
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Yes, just -- I mean, the math of it, right, just based on what you said for the quarter. It seems like the math would suggest that. Great. And then looking at your changes in guidance. So kind of bumping up to the higher end for revenue, but with the FX impact, it kind of implies that you are going above your guidance -- your guidance range would be up more on a sort of constant-currency basis revenue. I just wanted to confirm that I'm looking at that the right way. And then your margin guidance may be sort of -- the implied margin guidance may be down 10 basis points or something. And you mentioned the promotional environment and selling environment contributing to some of the margins being down year-over-year. Is that something that you see ongoing? Or just a moment ago, you made a comment that maybe implied that there is a little bit less aggressive promotional environment in more recent weeks as some of the model year '17 out in the market has been retailed already? So is that -- what are you seeing sort of now that we've gone through November in terms of the promotional environment? Do you think that's something that you're going to continue to see at levels as aggressive as what you saw in the October quarter? Or it sounds like maybe you could see that stabilize a little bit?
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Sebastien Martel, BRP Inc. - CFO [52]
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Yes. Let me try to nail off the 3 questions that I captured from your statement. The first one on the overall -- That's okay. The first one on the revenue versus when we announced guidance back in March, the FX is slightly unfavorable to us with the strengthening of the Canadian dollar, and that's about an impact of 2% negative on our revenue number. So yes, we're still maintaining the initial guidance that we had back in March coming from better volume that we've experienced throughout the year. On the margin side, a bit compressed, yes. The fact that we're running above, what I'll qualify as a design capacity, obviously, makes us incur a bit more cost. On the labor side, we're paying overtime and not all of the hours when you're running overtime, especially 7 or 3 shifts a day, not all the hours that are paid are productive hours. And we're also farming out a bit more work especially on the engine side, in order to allow us to meet capacity. So we're incurring a bit more cost there. On the promotion side, in terms of margin impact, yes, it is unfavorable as our retail is higher than our wholesale. If you look at Q3 for just North America, our wholesale was up 17%, while our retail was up overall 25%. So now, obviously, it means that you are paying or expensing a bit more promotion dollars versus on a unit-per-unit basis. And then on your third question on the promotional activity. I mean, depending on which OEM has inventory and how they are positioned, that influences obviously the promotional environment. We'd had some OEMs that had some inventory issues, that have, I guess, resolved some of that. So there is a bit less promotional activity happening. But the OEMs are still mindful that consumers are looking for discounts and looking for deals. And so that's going to continue going on in the near future, especially on ORV, as a lot of the retail that happens on a given model year or season is noncurrent inventory. And for Seasonal Product, it depends on whether and how OEMs forecast the industry. And if they have too much inventory, then yes, there is -- they'll probably be tempted to push more programs. But it's something we monitor on a monthly basis, and we adjust market conditions and inventory positions. Hopefully, that covered all topics.
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Operator [53]
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Our following question is from Gerrick Johnson from BMO Capital Markets.
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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [54]
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On the promotion question. So you are saying that the impact from promotions is 100% from higher retail sales? And there is no impact from higher levels of promotion on each unit?
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Sebastien Martel, BRP Inc. - CFO [55]
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No. Our promotional level is pretty consistent with last year. Our noncurrent inventory as well is healthy, let's say, on ORV. And we've looked at some -- we looked at some numbers on our promotional activity versus the competition, and we were not more aggressive than some of the other OEMs.
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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [56]
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Okay. And can you talk about the impact that's coming through from rising input cost. I'm not talking about your overtime, but materials and things like that?
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Sebastien Martel, BRP Inc. - CFO [57]
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Yes. We are seeing commodity prices go up. However, the way we have our contract structured with our suppliers, we are -- we will call it, contractually hedged with our suppliers, and therefore, we're not seeing those input costs coming in immediately. If the commodity prices were to maintain at that level, we would see prices go up for next year in our overall production cost. But as of today, we haven't felt the pinch of commodity increases.
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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [58]
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Right. Okay. And then on outboard, you have the new mid-range G2s out there. If you just looked at the G2 alone and excluded the legacy, Evinrude, how is the G2 performing year-over-year in retail?
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José Boisjoli, BRP Inc. - President, CEO & Director [59]
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Yes, the G2 is gaining momentum. Obviously, we enter with the 150 to 100 about a year ago, and we're gaining momentum, I would say, worldwide. But we are in that transition phase where we're still producing the G1 in that category and the G2. And we will drop some G1 in time to come in the next few years, but the G2 is doing quite well worldwide, and we convinced that we will continue to grow that business.
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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [60]
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Okay. And since I'm probably the last guy here, I'll ask a couple of more. I'm surprised PAC wasn't better considering the total SSV and snow was pretty good at retail. Why is PAC not performing better than plus 5?
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José Boisjoli, BRP Inc. - President, CEO & Director [61]
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Yes. Well, PAC, we've done some, what we'll call it, initial order shipments happening in Q2. We're going to be delivering as well increased PAC in the fourth quarter. But it's very dependent on the snow season and the riding. So the dealers finished off with a bit more inventory as well last year following a soft snowmobile season, so they did not need as much replenishment as usual. And that's one factor as well influencing overall PAC sales.
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Operator [62]
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Our following question is from Jean-Francois Lavoie from Desjardins Capital Markets.
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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [63]
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I was wondering if you could circle back a little bit on the Commander market and give us a bit color on this particular vehicle, please?
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José Boisjoli, BRP Inc. - President, CEO & Director [64]
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Yes, good morning. The Commander, this segment is -- I'm going by memory. This segment is about flat -- here, I have the data. The segment, right now, is about -- is growing low double digit year-to-date. And we've lost some market share. We have lost low single-digit market share in the product category. Then, overall, we are growing in that segment because of more competitive product.
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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [65]
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Okay, okay. And on the Maverick Trail, I was wondering, given the action/reaction with this new project, are you kind of looking at the overall market? And is it something that you think could be bigger than initially expected or...
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José Boisjoli, BRP Inc. - President, CEO & Director [66]
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Yes. First, yes, I believe in that product category. There was not any major product news in the last 5 years, and we're coming out with, we believe, a better product than what exists out there. And overall the reception of the vehicle is extremely good by midyear, and we already started some of the retail there. We believe that this is a smaller segment of the industry, but we believe that this segment could get bigger because we believe we did bring to the industry a better unit than what have been introduced in the last 5 years. But it's too early, but that's our feeling at this point.
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Jean-Francois Lavoie, Desjardins Securities Inc., Research Division - Associate [67]
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Okay. Perfect. And maybe a last one on the gross margin side. You mentioned some production cost related to the capacity. So going forward, how should we look at this impact on the gross margin for maybe Q4 or the beginning of next year?
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Sebastien Martel, BRP Inc. - CFO [68]
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Yes, we'll also have some challenges in Q4 and next year as well. We talked about when that capacity is going to be coming into play. Next year, we will be seeing a step in the second quarter in terms of capacity. But we are running, let's say, above design capacity and (inaudible) for the (inaudible). We are running 24/7 in Juárez as well. We're running 24/7 on the fabrication side. And so when you're running at these levels, obviously, you're incurring a bit more cost in order to fulfill the assembly line. And so we will be seeing that trend, as I said, in Q4 and in the beginning of next year as well.
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Operator [69]
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Our following question is from Tim Conder from Wells Fargo.
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Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [70]
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This is actually Marc Torrente on for Tim. You provided some good color on ORV promotions. Just any color you could provide on snowmobile promotions early in the season from a competitive standpoint? And then you guys are also making very good progress on Spyder inventories against your goal. How much further do you have to go? And do you expect to have inventories ready and retail stabilized ahead of the Project S launch?
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José Boisjoli, BRP Inc. - President, CEO & Director [71]
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Yes. First, on the snowmobile front, at this point, I would qualify the retail environment has normal typical level of promotion on noncurrent. And so far our new model there is not much promotion out there, and I would qualify the start of the season for snowmobile has normal. Typical in snowmobile, you have the trend after Christmas. It's rare that before Christmas you see a big gap between the normal situation. On the Spyder, the plan was -- the Spyder inventory, the plan was to deplete the inventory over 2 years. We are right on where we are targeting at the beginning of the season then we have -- we'll continue on this next year. And we believe it will be in very good shape and that was the idea, we believe, we'll be in very good shape at the end of next season, season '18, prior to the Project [S Central]. But we are on plan, basically.
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Operator [72]
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We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschenese.
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Philippe Deschenese, [73]
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Great. Thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again in March for our fourth quarter conference call. Thanks, again, everyone, and have a good day.
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Operator [74]
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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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