BRP Inc. (NASDAQ:DOOO) Q3 2024 Earnings Call Transcript

BRP Inc. (NASDAQ:DOOO) Q3 2024 Earnings Call Transcript November 30, 2023

BRP Inc. beats earnings expectations. Reported EPS is $3.06, expectations were $2.19.

Operator: Good morning, ladies and gentlemen and welcome to the BRP Inc.’s Fiscal Year 2024 Third 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.

Philippe Deschênes: Thank you, Sylvie. Good morning and welcome to BRP’s conference call for the third quarter of fiscal year 2024. 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 the statements. The forward-looking information is based on certain assumption and is subject to risk 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. So with that, I’ll turn the call over to José.

José Boisjoli: Thank you, Philippe. Good morning, everyone and thank you for joining us. BRP delivered a sound performance in the third quarter as our team continued to demonstrate it’s commitment and resilience in a dynamic environment. We maintain our momentum in gaining market share in the off-road category and delivered financial results that came in close to our expectation. However, like the rest of the industry and despite our continued solid execution, we are seeing signs of softening demand in certain product category, more particularly in international markets. The situation leads us to proactively take a more cautious approach for the upcoming quarters as we strive to maintain a solid value proposition for dealers.

We remain committed to continue to lead our industry and to further grow our market share. We believe that our proactive action will further solidify BRP position for long-term success. Let’s turn to Slide 4 for key financial highlights of the quarter. Revenue reached $2.5 billion below our expectation due to softer demand in international markets and to a lesser extent, a temporary slowdown at the Texas Mexico borders which impacted deliveries of side-by-side and ATV over three weeks, near to the end of the quarter. The situation is now back to normal. With a strong product mix and tight expense management, we still delivered normalized EBITDA of $445 million and normalized diluted EPS of $3.06, both coming in close to our expectation. Turning to Slide 5 for a look at our retail performance.

In North America, our retail sales were about flat with continued solid growth in ORV and snowmobile, offset by decline in personal watercraft, pontoon and 3-wheel due to a different timing of shipment this year compared to last. As you may remember, supply chain issue last year forced us to ship late in these product categories. It resulted in stronger than usual revenue and stronger retail in the third quarter of fiscal year 2023 impacting the year-over-year compatibility. Excluding these affected categories, our retail sales were up 21% compared to an industry that was up mid-single digit. Our performance at retail continue to be strong in Latin America with a 30% growth. Demand was softer in Asia-Pacific and EMEA but we still outperformed the market in the latter.

Also, we are expecting very low shipment in the short-term in the Middle East countries affected by the conflict. Turning to Slide 6, we see that we have continued to gain share since the beginning of the year in the North American Powersports market. Since fiscal year 2016, we have gained 17 points of market share to reach approximately 37%; more than one out of three products sold at retail is a BRP product. We have outperformed the industry in ORV, snowmobile and personal watercraft which shows the strength and the diversity of our product portfolio. Moving to Slide 7. At the beginning of the quarter in August and September, year-over-year growth remained positive in line with the trend observed in recent quarters. However, since October, we have started to see incremental sign that the macroeconomic and geopolitical environment is affecting the industry.

As you can see, if we zoom in, on the ORV market; demand began to soften in our region, with more important decline in EMEA and Asia-Pacific, this trend is continuing into November. Reflecting this situation and considering the macroeconomic environment, we are proactively adjusting our all shipment plan for the coming quarters. This scenario is reflected in the updated guidance that Sébastien will discuss in a moment. Now let’s turn to Slide 8 for a year round product. Revenue were down 8% to $1.2 billion. The decline was primarily driven by the different timing of shipment of 3-wheeled vehicle compared to last year and the temporary border slowdown which impacted ORV shipments. At retail, Can-Am side-by-side had another very strong quarter with retail up low-10% [ph], notably driven by sudden market share gain in the utility segments.

Our industry growth came from the premium vehicle category. This market dynamic is very favorable for Can-Am given our significant market share in higher-end models. As for ATV, our retail was up mid-single digits, led by strong growth in the mid-cc segment, driven by the success of our newly introduced Outlander platform. We are pleased with the momentum of our off-road business. The strength of our lineup puts us in a good position to continue outperforming the industry. Looking at 3-wheel vehicle, we ended season ’23 with retail down low single digit compared to an industry that was up low single digit. The slight decline came from the Ryker. While consumer interest remains high, entry-level buyers have been more hesitant lately. Meanwhile, the Spyder F3 and RT higher-end model have experienced positive momentum throughout the year.

Turning to seasonal products on Slide 9. Revenue were down 15% to $869 million, primarily due to the exceptional high level of shipment last year and previously as previously explained. Looking at our retail performance, we are very pleased with the success of our Sea-Doo product line. We completed Season ’23 in North America with an outstanding performance for Sea-Doo, leading to an all-time high market share. Furthermore, we ended the season with the number 1 market position in all the segments in which we compete and the number 1 position in all province and state. As for our Sea-Doo Pontoon, retail was up over 200% for the season. We ended with the number 3 market position in the U.S. but very close to the first 2 players. In Canada, we estimate that we finished the season with a solid mid-20% market share.

Turning to snowmobile; while still relatively early, we are off to a very good start with our strongest season-to-date retail in the last 10 years. Looking ahead, retail trends for snowmobile are positive and we are well positioned with the strong level of presold unit. Moving to Slide 10 with Powersports, parts, accessories and apparel and OEM engines. Revenue were up 6% to $315 million, notably driven by higher sales of aircraft engine and Pinion gearbox. We also continue to benefit from a growing product portfolio and a larger vehicle fleet in use which led to higher sales of replacement parts and accessories driven by the LinQ ecosystem. We are notably seeing solid trend for the new Maverick R with buyer adding many accessories to their — this trend demonstrates the benefit of developing highly integrated accessories which are available right at the [indiscernible] of the vehicle.

Moving to marine on Slide 11. Revenue were down 6% to $104 million due to a lower volume of boat shipment. In general, dealer have high inventory and with higher financing costs, they remain cautious about accepting deliveries during the off-season. Looking at retail sales. From an industry perspective, we continue to see the category being more impacted by higher interest rates. For Q3, Manitou retail was down low 20% and Alumacraft down mid-30%. As for Quintrex, although it’s still early in the season in Australia, retail was up low single digit. I am proud that our new Quintrex boat, the Freestyler X won a good design award in Australia. This prize illustrates the strong appeal and excellence of our new boat design and technology. This is the main reason why we remain confident about the potential of our marine business for the coming years despite current industry challenges.

With that, I turn the call over to Sébastien.

Sébastien Martel: Thank you, José and good morning, everyone. While our top-line performance for the quarter fell short of our expectations due to lower deliveries resulting from an unforeseen slowdown at the Texas-Mexico border, our continued focus on efficiency and cost management helped us generate solid margins which, coupled with a favorable tax rate, allow us to deliver a normalized EPS, roughly aligned with our projections. Looking at the numbers, we reported revenues of $2.5 billion, a decrease of 9% compared to last year, primarily due to the different timing of shipments and slower deliveries of ORV products as previously discussed. We generated $627 million of gross profit, representing a margin of 25.4%, up 120 basis points from last year, primarily driven by a positive pricing impact net of cost inflation, lower turbulence costs, a favorable product-mix.

These benefits were partly offset by less efficient use of our assets due to lower volume than expected, marine business inefficiencies, higher sales program and unfavorable foreign exchange rate variations in the quarter which impacted margins by 120 basis points. Moving further down the P&L, we generated normalized EBITDA for the quarter of $445 million, representing a strong margin of 18%. And our normalized net income reached $238 million, resulting in a normalized earnings per share of $3.06. Looking at the cash flow, we generated $695 million of free cash flow so far this year, of which we returned $409 million to our shareholders through dividends and by completing our NCIB, repurchasing a total of 3.5 million shares. Moving to an overview of our network inventory on slide 14.

Our network inventory remains balanced at the end of the third quarter, only up 24% versus pre-COVID level, while our retail is up 43% over the same period. Still, despite improved days of inventory in the network, we are cognizant of the mounting pressure that our dealers face, particularly due to high inventory values and increasing floor plan financing costs. In this context and in response to recent industry trends and the mounting macroeconomic pressures affecting our consumer behaviors, we have decided to proactively adjust our production schedules. This decision is aimed at ensuring our dealers’ inventory remains aligned with prevailing market conditions in order to protect our dealers value proposition and make sure that our mutual success is sustained.

Turning to Slide 15 for an update on our guidance. As we look to the fourth quarter, we expect to continue outperforming the industry, especially as we accelerate shipments of the new Maverick R sport side-by-side and the new ATV Outlander mid-cc platform as we sustain our momentum in utility side-by-side and as we progress through the snowmobile season which is already off to a good start. However, given the aforementioned challenging industry and macroeconomic backdrop, we have adjusted our shipment plan for the remainder of the year and are revising our guidance accordingly. For fiscal ’24, we now project total company sales to be up 4% to 5%. From a profitability standpoint, the realignment of our production schedule to this new shipment plan is generating some short-term inefficiencies which, coupled with higher sales program, we expect will impact margins in the fourth quarter.

As a result, we now project normalized EBITDA to be flat to up 2% for the year and normalized EPS to end between $11.10 and $11.35. Note that our results include a headwind of about $1.40 coming from higher depreciation and financing costs over the last year as we continue to invest to generate future growth and we are impacting by higher interest rate levels. As we approach the next 2 quarters with a more cautious stance, we are committed to staying agile and efficient and to continue diligently managing our expense, all the while continuing to set solid foundations for the long-term future of our business. We strongly believe our organization is well positioned to continue outperforming the industry and emerge from the cycle even stronger.

On that, I will turn the call over to José.

José Boisjoli: Thank you, Sébastien. I want to take a moment to share the success of the second edition of our Yellow Day. Last year, we choose intimidation as our global cause. On November 17, we rally our employees, dealers, ambassador, writers and partners to take a stance against all forms of intimidation. Our entire network embrace the cause and join in our global movement which makes me very proud. In conclusion, with the strength of our lineups, we continue to deliver robust market share gain over the last 12 months. However, like the rest of the industry, we are seeing softer demand in certain regions. Although we anticipate a few challenging quarters, we remain positive. We are known to be agile and we will make the appropriate adjustments as needed.

Since we became BRP 20 years ago, we have never shy away from investing in our future, to build a resilient organization that is geared up to respond to market fluctuation. I am confident in our long-term strategy. With our commitment to operational excellence and constant investment in innovation, we are managing the business for continuing success. I am proud of our employees and I thank them for their relentless effort. I also acknowledge our dealers for their support. Together, we’ll continue to deliver market-shaping product and remain the number 1 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. Ladies and gentlemen, we will now begin the question-and-answer session. Please note that out of consideration for all callers today, we ask that you please limit yourself to one question and one follow-up. [Operator Instructions] And your first question will be from Craig Kennison at Baird.

Craig Kennison: So I guess I’m not surprised at all that you’re seeing a slowdown given the macro environment. I’m just curious what you think happened in October and November that wasn’t part of the ecosystem in prior months? It’s just surprising to me that maybe it just happened so quickly.

José Boisjoli: As you know, we’re monitoring constantly consumer demand and the macroeconomic environment and H1 was in line with our projection and it continued in August and September but October, the decline happened in almost all markets but especially international. And the trend is continuing in November, at least with our numbers then. We believe that dealers have adequate level of inventory and you survey dealers often and you know that they have pressure on the higher inventory costs. So considering the macro environment, the European and APAC situation, don’t forget there is two conflict in Ukraine and Middle East and the dealer challenges and the industry trend, then proactively, we decided to adjust the shipment for the coming quarter.

And all of this is in the context of we continue to gain share. We believe we have enough inventory out there in the network to continue our momentum but we want to be more cautious to make sure that we protect the value proposition and we are convinced this is the right thing to do for the long term.

Operator: Next question will be from Robin Farley at UBS.

Robin Farley: I wonder if you have any thoughts about the M25 targets that you have out there, your longer-term targets? And if you see those as impacted or think that they could still be intact.? You had talked last quarter about even if the revenue didn’t get there, the EBITDA still could. So just wondering how you’re thinking about those? And then also, I don’t know if you quantified in your comments there, you definitely talked about the outlook softening. Would you kind of put a ballpark quantifying your expectations for retail in North America in Q4 and into 2024 kind of what your current expectations are now with the reset?

José Boisjoli: First, on the M25, the initiatives are not changing. They are the same. Our focus is the same. But obviously, like I just explained with the recent industry trend in North America and international and the macroeconomic environment, we’re now working with more conservative industry numbers going forward. We want to be, again, responsible and we proactively do shipment to improve the inventory turn. And we believe that fiscal year ’25 revenue could be down next year. And at this point, with the trend we’re seeing, we don’t expect to achieve the M25 target as planned. Now again, I would like to remind you that we’re well positioned with the inventory we have to continue to gain market share and we target to remain the OEM of choice. And on this, I will give the mic to Sébastien, just to give you an idea about the numbers.

Sébastien Martel: Robin, it is obviously still early and we still have a few months to go before we firm up the assumptions for the planning for next year. But generally, we are expecting a softer industry. And from a profitability standpoint, heading into next year, obviously, we expect demand for premium products to remain strong. And that obviously is going to help from a mix perspective. And we do expect our marine business to be stronger as well next year as we’ve had challenges with the ramp-up of production and that impacted profitability. However, despite these benefits, we do expect some offsets, again, with lower volume, less efficient use of assets, probably higher sales programs as well because we are seeing other OEMs running with higher inventory and also higher promotional environment.

And also, again, we invest in the business, so we should expect higher depreciation as well next year. OpEx will probably run higher as well as a percentage of revenue than we did this year. We are continuing to invest in growth projects. So all in all, when you combine all of these elements with a softer revenue, we could lose a point or so of EBITDA margin compared to this year. Again, as José mentioned, the strength of our lineups or brand, we are super well positioned and we expect the fundamentals of M25 to continue generating growth for us, especially market share gains but we believe we are taking the right actions to support our dealer. And also, we prefer obviously retailing current products and non-current products and that’s why we are diligent in managing inventory.

Robin Farley: Great. That’s very helpful color for next year. Thank you.

Operator: Next question will be from James Hardiman at Citi.

James Hardiman: And I think that was really good color on sort of next year. Obviously, nobody is going to hold you to that. It’s pretty early. But I think you mentioned the softer industry for next year. Just to clarify, is that softer than previously expected? Or you actually expect the industry to be down next year? And if so, what does that mean for how you think about your own retail in fiscal ’25?

Sébastien Martel: Yes. Well, as I said, we still got a few months ago before we firm up the assumptions for guidance next year. But given the macroeconomic and political backdrop there, we expect the industry to be down next year but we’ll give you more color when we talk in Q4 on our results in the next year.

James Hardiman: Okay. But to clarify, you think the industry will be down. Could — do you think your own retail will be down? Or do you think market share gains will be more than enough to offset that?

Sébastien Martel: Still early to give any color for next year. We’ll obviously monitor how the situation is evolving in the fourth quarter and that’s obviously going to be a big driver as to how we set up for next year.

José Boisjoli: But we’re confident to continue to gain market share. With the strength of our lineup, with the trend, with the premium, we’re confident to continue our momentum with market share.

James Hardiman: Makes sense. And then on the inventory front, it sounds like days on hand are lower than they were pre-pandemic. Could you maybe quantify what that number was and how that compares to pre-pandemic? Just trying to get a feel for what should we should expect for the end of this year? And whether or not we should be factoring in any sort of inventory corrections as we look to fiscal ’25?