BRP Inc. (NASDAQ:DOOO) Q2 2024 Earnings Call Transcript

BRP Inc. (NASDAQ:DOOO) Q2 2024 Earnings Call Transcript September 7, 2023

BRP Inc. beats earnings expectations. Reported EPS is $3.21, expectations were $2.15.

Operator: Good morning ladies and gentlemen, and welcome to the BRP Inc.’s FY24 second quarter results conference call. For participants who use the telephone line, it is recommended to turn off the sound on your device. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.

Philippe Deschênes: Thank you Julie. Good morning and welcome to BRP’s conference call for the second quarter of fiscal year ’24. 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 and that the actual results could differ from those implied in these statements. Forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult BRP’s MD&A for a complete list of these. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com under the Investor Relations section. With that, I’ll turn the call over to José.

José Boisjoli: Thank you Philippe. Good morning everyone and thank you for joining us. I am pleased to report that we delivered a very solid quarter driven by continued strength in consumer demand for our line-up and the ongoing support of our dealer network. Solid execution of our plan led to an impressive market share gain and record results for our second quarter. Given this strong performance and our positive outlook for the rest of the year, we are increasing our normalized EPS guidance to a range of $12.35 to $12.85. Let’s turn to Slide 4 for key financial highlights. Revenue reached $2.8 billion, up 14% from the previous year driven by higher volume and pricing. Normalized EBITDA grew 13% to $473 million and normalized EPS increased 9% to reach $3.21.

Turning to Slide 4 for a look at our Q2 retail performance, our product portfolio continued to gain traction with consumers, leading to significant market share gains. In North America, our retail sales were up 41% compared to an industry that was up mid-teen percent. Given our retail performance, this implies that BRP accounted for most of the industry growth in the quarter. We were also very strong in international markets with retail up 23% in EMEA, 36% in Latin America, and 33% in Asia Pacific. Looking more closely at the numbers, we see that demand for products remains robust despite ongoing macroeconomic concerns. We just had our strongest second quarter ever at retail except for the first few months of COVID, where we experienced significant inventory depletion.

Not only was our retail up 41%, but it was up 37% versus Q2 of fiscal year ’20, showing continuous gains. With this strong performance, we reached record market share for side-by-side, ATV and personal watercraft, all of this with retail incentives below pre-COVID levels. We believe those results are driven by the evolution of our customer profile over the last four years. The influx of new entrants remains high at 39%. We also continue to see high FICO scores, and the average household income from our customer survey is 40% higher than pre-COVID at slightly above US $160,000. Those customers are looking for more high end product, which explains our momentum in this category across our line-ups. Bottom line, the typical BRP product buyer remains in very good shape financially.

This puts us in a favorable position entering the second half of the year. Turning to Slide 7 for an overview of key products introduced at our BRP Club held in Atlanta two weeks ago, this year’s club was one of the largest ever with 5,300 total participants in person and virtually. The highlight was the launch of the Can-Am Maverick R, our flagship model in the sport category. It brings a new dimension to riding with an industry-leading 240 horsepower engine, industry-first dual clutch transmission, a unique suspension geometry, and [indiscernible] technology. With this new offering, we are well positioned to gain market share in the high end sports side-by-side category. This was not the only product news, as shown on Slide 8. We improved our entry level offering with the first major evolution of the highly successful Sea-Doo Spark since its introduction.

We also launched many new side-by-side models, notably the Can-Am Defender XT HD7, as well as the Maverick X3 RS Turbo, the industry’s most affordable mid-HP 72-inch wide side-by-side. These models offer a lot of value at price points that reach a wide range of consumers. We also continue to push innovation in the premium segment, which has seen the fastest growth in recent years. We introduced a full range of high end models, such as the Manitou Explore Max 300 HP, a pontoon with dual rotax engine, and the larger Max Deck, the Sea-Doo RXP-X and RXT-X with 325 horsepower and the Sea-Doo Switch Cruise Limited. We also added a touch screen with Apple CarPlay to our Spyder models. These additions represent a historic level of product news, which will help us to gain more market share and grow our addressable market while further improving our margin profile.

All our new products were well received. The order process is ongoing, volume is as expected, the mix is currently trending slightly better. Now let’s turn to Slide 9 for our year-round products. Revenue was up 8%, reaching $1.5 billion driven by strong shipments of side-by-side vehicles and ATVs. At retail, Can-Am side-by-side had its strongest Q2 ever with retail up high 20% and solid growth in all segments and price categories. We also finished the season with a 6 point market share gain to reach the high 20% range in North America. With this performance, we are very close to delivering on our M25 objective of reaching a 30% market share by the end of fiscal year ’25, but of course we will not stop there. Moreover, for the first time ever, Can-Am side-by-side reached the number one position in Canada with a market share in the high 30%.

As for ATV, our retail was up mid-30%. This performance was notably driven by strong growth in the mid-cc segment, reflecting the success of our newly introduced mid-cc Outlander platform. Also, ATV also closed its North American season with the strongest share gain in the industry, passing the 20% mark for the first time ever. We are pleased with the momentum of our off-road business and with recent product introductions, we are in a good position to continue outperforming the industry. Looking at three-wheel vehicles, retail was down high single digits compared to an industry that was up high single digits. While consumer interest remained high, the Ryker’s retail performance was softer in the quarter. As seen across the industry, buyers of entry level product are more hesitant to purchase at the moment; meanwhile, the Spyder F3 and RT models, which are higher end, had solid growth.

With the upgrade on the model year ’24, we are well positioned for next season. Turning to seasonal product on Slide 10, revenue was up 30%, reaching almost $900 million driven by higher volume of snowmobile and Switch pontoons as well as favorable pricing. Looking at our retail performance, we had a very strong quarter for personal watercraft with retail up about 60%, again an easy comparable to a year ago. Remember that we had limited product availability in the network during Q2 last year. Still, this performance was exceptional from an historical perspective; in fact, our season-to-date retail is the strongest in the last 15 years. These results demonstrate the strength of our line-up and our ability to create new segments with models such as the Wake, Fish and Explorer Pros.

These products bring new entrants to the category, which drives industry growth, and with our new product introductions for ’24, we are well positioned to sustain our momentum. As for our Sea-Doo Switch, our retail was up over 200% and we had the number three position in the U.S. pontoon industry over the three-month period ended in May. This is a great example of how we can disrupt categories by developing market-shaping product. Finally for snowmobiles, we are currently in the off-season. We are confident for the peak season with a high level of units pre-sold to consumers. Moving onto Slide 11 with power sport parts, accessories and apparel, and OEM engines, revenue was up 14% to $294 million. We continue to benefit from our growing product portfolio and vehicle fleet in use, which led to higher replacement parts and accessories sales driven by the Link ecosystem.

We expect a softer second half than originally planned for our PA&A business as we anticipate dealers to de-stock inventory mainly for the Sea-Doo pontoon and three-wheel vehicle line-ups. Looking at our recent acquisition, a key highlight was the introduction of Pinion motor gearbox unit, commonly called MGU, which combines a full power electric bicycle motor in our industry-leading gearbox in one compact package. This promising technology got excellent reviews following its introduction in June, notably winning the prestigious Eurobike Gold Award in Frankfurt. Now moving to marine on Slide 12, revenue was down 5% to $125 million, reflecting a lower volume of boat shipments. The revenue decrease is due to the slower than expected production ramp-up of the new Manitou platform, namely because of a supplier issue for an esthetic component which limited product availability.

This issue has now been resolved. Looking at retail sales from an industry perspective, the boat category has seen weaker demand so far this year. Demand was affected by higher financing costs and poor weather in many markets, especially in the Great Lakes region which is key for both Alumacraft and Manitou. In addition, our retail performance was impacted the supply issue for Manitou, and we still had lapping months retailing welded boats for Alumacraft. For Quintrex, retail was down in line with the industry in Australia. Given the slower production ramp-up for Manitou and softer industry trends in the boating sector, we decided to realign our plan for this year focusing on season ’24. While the year has not unfolded according to plan, we are encouraged by consumer reaction to the new boats and we remain confident about our strategy for the marine business.

With that, I turn the call over to Sébastien.

Sébastien Martel: Thank you José and good morning everyone. We once again delivered solid results in the second quarter driven by robust top line growth, fueled by the sustained strong demand for our power sport line-up which continues to translate to market share gain and growing momentum with our dealer network. Our focus on efficiency also paid dividends as we ended the quarter with lower than anticipated turbulence cost and operating expenses. These elements combined with stronger than expected revenue growth allowed us to offset inefficiencies on the marine side to deliver results slightly ahead of plan. Our revenues for the quarter were up 14% versus last year, ending at $2.8 billion. We generated $698 million of gross profit, representing a margin of 25.1%, up 40 basis points from last year primarily driven by the favorable impact of pricing net of cost inflation and lower turbulence costs as we operated in a more normal production environment.

These benefits were partly offset by inefficiencies related to the marine business, increase in sales programs which remain below pre-COVID levels, higher interest rate on floor plan financing, and unfavorable foreign exchange rate variations which impacted margins by 180 basis points in the quarter. Continuing down the P&L, we generated normalized EBITDA for the quarter of $473 million, representing a margin of 17%. Our normalized net income reached $255 million, resulting in a normalized earnings per share of $3.21, up 9% versus last year. Our free cash flow generation was also strong at $387 million, driven by a strong operational performance and positive working capital contribution. With a healthy balance sheet and the expectation for future cash generation in the back half of the year, we are well positioned to continue investing in growth projects for the business while retaining the financial flexibility to continue returning capital to shareholders.

Moving to Slide 15 for an update on dealer inventory, our network inventory is in a good position, striking the right balance between having sufficient product availability all while operating more efficiently with a lower number of days of inventory compared to historical levels. In fact, our network inventory is only up 24% versus pre-COVID while our retail volumes have grown 49% over that period, driven by industry growth, the addition of a new product line, the Sea-Doo Switch, and more importantly significant market share gains. We still have opportunities to further improve availability on ORV while continuing to work through the remaining inventory for summer product as the season is winding down. Looking ahead, we will continue to diligently manage our network inventory to ensure that we are well positioned to seize retail opportunities while continuing to operate more efficiently to limit the cost of inventory for both us and our dealers.

Turning to Slide 16 for an update on our guidance, we are entering the second half of the year in a strong position, having delivered strong financial results and retail performance in H1. With just five months remaining in the fiscal year, we are well positioned to deliver on our guidance, which calls for a solid year for year-round and seasonal products as our line-ups are driving consumer demand, and the positive response to our recent product launches reinforces our confidence and ability to sustain our market share momentum in H2. The competitive and promotional environments remain in line with our initial expectations and we now have better visibility into our shipment plans thanks to a strong booking of pre-sold units in snowmobile and as we will be filling initial dealer orders for multiple new products we just introduced.

As such, we are comfortable re-affirming our year-round and seasonal product revenue guidance ranges. As for power sports, PA&A and OEM engines, we are adjusting our guidance to reflect softer trends in accessory orders as dealers are working through more elevated levels of inventory in the network. Similarly for marine, we are revising our guidance to incorporate our decision to realign our shipment plans for the year to focus on positioning the business for a solid season ’24. Following these adjustments, we expect our revenues to grow between 7% and 10% for the year. Continuing down the P&L, since our last guidance, the supply chain environment continued to improve; consequently, we now anticipate incurring less turbulence cost than initially projected.

This adjustment and an improved product mix translates into an additional 50 basis point improvement in our gross profit margin for the year. Combined with our better than expected Q2 results, this margin benefit offsets the impact of lower than anticipated shipments for PA&A and marine, therefore we are re-affirming our normalized EBITDA guidance with a solid growth of up 9% to 13%. This, when coupled with the benefit of a lower share count resulting from the buybacks we have completed at this point, yields a normalized EPS guidance of $12.35 to $12.85. Additionally, within the context of our realigned marine plan for the year, we have decided to postpone our boat capacity expansion in Mexico by 12 months. This strategic decision combined with timing of investments in other projects allows us to reduce our capex guidance by $100 million, now ranging from $650 million to $700 million.

This capex reduction is expected to further reinforce our already robust free cash flow generation for the year. Finally before turning the call back to José, I want to highlight a couple of elements. First, as evidenced in our normalized EPS guidance bridge on Slide 17, the adjustment in our marine plan for the year has a negative impact of $0.60 on our guidance. Despite this impact, our capacity to elevate our normalized EPS guidance underscores the resilience of our diversified portfolio and our ability to deliver operational efficiencies. Furthermore, as we strategically position our marine business for a strong season ’24, you can appreciate that a successful year for that segment coupled with continuing momentum in power sports could yield substantial benefits for our results in fiscal ’25.

Secondly, our guidance calls for a very strong second half of the year, as you can see on Slide 18. Although our top line growth may appear limited, I would like to remind you that we are lapping a period in which we had about a billion dollars’ worth of inventory replenishment, making it a difficult comparable. Nevertheless, our results for the second half of the year are expected to be very strong from a historical perspective, reflecting the solid momentum of our power sports portfolio and the underlying strength of the demand for our products. In terms of cadence, we expect to generate roughly 45% of the remaining normalized EBITDA for the year in Q3, resulting as usual in Q4 being our strongest quarter for the year. On that, I will turn the call back to José.

José Boisjoli: Thank you Sébastien. I am pleased with our performance so far in fiscal ’24 as we continue to significantly outperform the industry. Our strategy is simple – we focus on delivering industry-leading innovation across a diversified product portfolio and we team up with the best dealers. This gives us access to a wide range of customer base across all markets and regions. Our ability to execute has delivered exceptional results over the past eight years, as you can see on Slide 20. We have gained market share almost every quarter during that period and we are now the number one OEM by a wide margin in terms of average unit retail per dealer. Looking ahead, we will continue to execute that strategy. The record level of new products introduced at Club positions us well to continue to our growth and remain the industry leader.

As for the remainder of the year, we expect demand for our product to continue driving our market share momentum and will stay focused on executing and optimizing efficiencies to deliver a record year in term of top and bottom lines. In closing, I want to thank all our employees for another strong performance this quarter. I also acknowledge the support of our dealers, who made us the leading OEM in the industry. On that note, I turn the call over to the Operator for questions.

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Q&A Session

Operator: Thank you. [Operator instructions] Your first question comes from Mark Petrie from CIBC. Please go ahead.

Mark Petrie: Hey, good morning. Thanks. I wanted to ask first just on the competitive dynamics in the industry. Obviously there’s a healthy rebound in sales volumes versus constraints last year, but I guess just commentary on the competitive dynamics, and then I know the sales programs are higher but still below pre-pandemic levels, so is that just higher than what you sort of initially embedded in guidance or is it just higher from last year? Thanks.

Sébastien Martel: Yes, good morning Mark. I’ll take the question on the sales program. They are trending in line with our expectation. Yes, the floor plan cost is higher because the interest rates are higher, but from a retail incentive point of view, we are trending according to plan. You might recall that we said we would expect about a 200 basis point headwind coming from retail incentives this year, and that is currently the assumption we’re working with, so no changes there.

José Boisjoli: On the other question, Mark, there is not much change in the dynamic into the industry. All OEMs are getting better with the supply chain, and basically what I believe makes us different than the others is our focus on technology and new product and pushing novelty in innovation. On top, what is positive, and we see now more the stability, but the customer profile. As I mentioned in my remarks, the household income of our customer has increased by 40% since pre-COVID, and those customers are shopping for high end product, where we are good at. I think no big change in the dynamic of the industry with the other OEMs, but I think what makes us different is what we’ve been good at, pushing innovation, technology, and coming out with new products in new segments and more premium product.

Mark Petrie: Okay, thanks. I wanted to ask about the strength across the price points, and you called out Ryker as sort of underperforming relative to Spyder, but curious if that’s also the case in PWCs, where obviously you have a range across price points. Is that the same dynamic?

José Boisjoli: It’s a bit different. Those two products are entry level products, but the Ryker customer is more, I would say, a midrange household income. Sometimes those customers are definitely more concerned with the macroeconomic and the inflation and all this. The watercraft Spark customer is more high household income, it’s people who have typically a cottage on the river, the lake, and they buy two watercraft for their family, then it’s a different profile. Same type of product, entry level, but different profile in customers.

Mark Petrie: Okay, understood. Then maybe just one last one, Séb, you mentioned the supply chain as sort of a 50 basis point tailwind in the second half. Is there still an opportunity for this to be a tailwind in next fiscal year, or will you be lapping stability by that point?

Sébastien Martel: Obviously this year, we are getting a huge benefit from a better supply chain, and I’d say also the teams are very focused on coming back to more normal operations and they’ve outperformed our expectations. We have solid people running all our plants, and so most of the benefit is going to happen this year. I might expect a bit of a benefit next year, but a significant part is being materialized, which is good news, this year.

Mark Petrie: Yes, understood. Okay, thanks for all the comments. I’ll pass the line. All the best.

José Boisjoli: Thank you.

Operator: Your next question comes from Robin Farley from UBS. Please go ahead.

Robin Farley: Great, thanks. I wanted to ask a little bit more about the sales promos that you highlighted kind of being tied to interest rates, that partially offset some of the margin improvement. Can you give us some color around the mix of your buyers that are paying cash versus financing and how that kind of compares to pre-COVID?

Sébastien Martel: When we look at the overall trends from our financing partners, there is not a significant change in terms of proportion of who’s financing versus who’s paying cash, so we’re still in a range of with our partners about 30%, but we know that dealers have arrangements with their local credit unions and banks, and another 30% is being done through retail financing there as well. About 60% to 65% is done through retail financing, the other is cash, but we are seeing higher FICO scores versus pre-COVID and that obviously is being highlighted, as José said, through the household incomes that are higher as well. But the acceptance rates are in line with pre-COVID and with COVID, and we don’t feel that our retail partners have tightened on the credit as well.

Robin Farley: Thank you, and then just one follow-up. You talked about the higher demand, your higher customer income level, and obviously a lot of demand at the higher end. Can you talk a little bit about what’s happening at the entry level and whether it is a share shift to maybe some lower priced OEMs, some other imported product, or is it, do you think just overall, just less entry level; in other words, is it more of a share issue or a size of the pie issue at the more entry level? Thanks.

José Boisjoli: I think it’s–obviously the inflation that we’ve been through in the last 18 months and the pressure on the macroeconomic and the uncertainty is scary for people who are buying entry level product, could be scary. But you know, our job is to make sure that we are competitive in the entry level, and we’re focusing a lot on the premium because that’s where we shine, but we still have Sea-Doo Spark and Ski-Doo MXZ below $7,000. We have many side-by-side models in Commander and Maverick between $13,000 and $16,000, and the Switch, which is an entry level pontoon below $24,000. What we’re trying to do is always keep good offerings in the value product and pushing, again, technology and innovation for the high end product.

We want to have a wide portfolio of product to make sure that we please everybody. A positive thing, like I said before on the previous question, is the trend of the customer change in the last few years, and it’s benefiting us right now.

Robin Farley: Okay, great. Thank you.

Operator: Your next question comes from James Hardiman from Citi. Please go ahead.

James Hardiman: Hi, good morning. Thanks for taking my call. I wanted to dig into the inventory situation a little bit. Obviously you talked about your inventory being up 24% versus 49% increase in retail. It sounds like you’re comfortable with where you are. I guess why is that, and ultimately why is there not a greater opportunity to replenish inventories? Then I guess sort of a second part of that question, in the prepared remarks, you talked about how some dealers were working through elevated levels of inventory – it sounds like it’s not your inventory that’s elevated, but help us sort of connect those two comments.