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?

Sébastien Martel: The — today, as we mentioned there, when you look at our inventory turns, they’re healthier than pre-COVID. But we want to operate with higher inventory turns than pre-COVID and dealers as well want that. The expectation for this year is that inventory at the end of Q4 will probably be flat to up single digit versus where we are at Q3. Obviously, very dependent on the how the snowmobile season will evolve but it’s off to a good start. Next year, some of the wholesale adjustments that we will do will be as a result of managing the inventory in the network. So if you were to ask me, we said, would you want inventory to be lower at the end of next year than it is today. It’s certainly something that I’d like to see because, as I said, we prefer retailing current products and non-current products.

And so given the current backdrop and the softness in the market, running with leaner inventory is beneficial for us because of less programs and beneficial for the dealers as well because less discount.

James Hardiman: Got it. If I may ask, that was the follow-up. But if I may ask a follow-up. Do you think your peers will see the current environment in much the same way? It seems like there may be risk that if you’re taking a really conservative approach and hoping to finish next year with lower levels of inventory if your peers aren’t doing the same, then you could ultimately, A, lose market share but B, still feel the effects of a dealer channel that feels like it has too much inventory?

José Boisjoli: But I don’t know — I don’t want to predict what the peers are doing or will do. But one thing I can tell you, pre-COVID, we had less inventory than our competitor and we’ve been gaining share since fiscal year ’16. And we’re doing this by protecting the value proposition of the dealers. Then we’re getting €“ we truly believe in our plan that if we are increasing the inventory turn, protect the dealer profitability, this will pay off long term. And this, we had it pre-COVID from fiscal year ’16 to fiscal year ’21, we’re gaining share with less inventory than our peers. And we want to make sure that, again, we’re protecting the value proposition for our dealers and that will be more successful going forward.

Operator: Next question will be from Martin Landry at Stifel.

Martin Landry: I’d like to just get some color on the order of magnitude of your production costs — your production cuts, sorry, for — that you’re making in Q4. Can you give us just an idea of how much you’ve cut your production for Q4?

Sébastien Martel: Well, the best way to read it, Martin, is by looking at the adjustment we made in the guidance. So again, with one quarter ago, we’ve adjusted guidance downward to reflect mostly our production cuts. And so that’s the main driver from a top-line point of view. If you look at — or we’re expecting a strong quarter for year-round products because we’re going to catch up from the Texas-Mexico situation that happened in the third quarter. So there’s probably about 100 — a little over $100 million of revenue coming from that. But also, we have Maverick R’s to ship, the new ATV platform that’s shipping and high-end side by sides as well. So we’ll have a decent quarter there. And we’re delivering the final snowmobiles for which we have preorders from dealers and customers as well. So expecting a good quarter as well for seasonal products.

Martin Landry: Okay. And just trying to understand a little bit what’s your approach to promotional activity. Some OEMs you’ve mentioned are very promotional. So what’s your strategy to protect your market share on a go-forward basis? Do you want to match these promotions? Like how are you thinking about that?

José Boisjoli: First, some of our competition right now are having promotion on model year ’23 and ’24. We have no promotion on ’24 and — but obviously, like normal, we have promotion on ’23. Then we’re trying to be balanced, obviously, again, to protect our brands and our value proposition and to continue our momentum. But it’s a fine line. But at this point, we have more promotion, obviously, than last year but we are still, we believe, in the normal path like we had pre-COVID

Operator: Next question will be from Joe Altobello at Raymond James.

Joe Altobello: I guess first question, I was hoping to get a little bit more clarity on the softer demand and the adjustments in production. It sounds like it’s mostly off-road and mostly marine. But — is it really more across the board? Or is it primarily in those two categories?

José Boisjoli: That’s correct. Off-road and marine is where we’ve adjusted. We’ve also adjusted P&A because same story for P&A versus units. We want to be diligent in managing the inventory in the network as well. And so we’ve made adjustments to the P&A shipment plan based on the current inventory in the network. We do have a bit of visibility there and also expectations on retail in the fourth quarter as well.

Joe Altobello: Okay. And just a follow-up on that. It looks like based on your revised guidance, you’re expecting double-digit growth for year-round products in Q4. And obviously, a lot of that’s the catch up that you talked about earlier from the slowdown at the border. But it also looks like your marine revenue guidance implies double-digit growth in Q4. So help us understand that dynamic given that demand is so soft in that category?

Sébastien Martel: Well Yes. We’re lapping a very easy quarter last year in Q4 for marine. We were in the beginning of the ramp-up of the new Manitou boats. And as you know, it was a challenging ramp up. And so last year, we had very little shipments on the marine side. And so this year, now that the production is running much more smoothly, we are expecting to deliver the new product to the market ahead of — and obviously, dealers need these units for boat show.

Joe Altobello: And just one last one, if I could. The renewal of the NCIB, the timing of that, is that impacted at all by the fact that the Canadian tax on buybacks goes into effect January 1? Or is that not in your thinking?

Sébastien Martel: Well, obviously, we don’t like the tax. We don’t think that — we think that the government missed the mark in putting the tax in play but it’s not impacting our decision whether or not to do buybacks. So 2% tax that they’re putting in place, if you look at what we’ve done in terms of investments over the last 5 years. And that tax is meant to stimulate companies to do investments in the business. But if you see the amount of CapEx we’ve done, the R&D we’ve done over the last 5 years, it’s not because we’ve done buybacks but it has held us back. And so no, not related to anything on timing.

Operator: Next question will be from Benoit Poirier at Desjardin Capital Markets.

Benoit Poirier: Just to come back on the promotional activities, could you mention maybe quantify more color about the impact in the quarter and whether next year you’re going to be trending in line with pre-pandemic level or above in order to maintain dealer inventory at a good level?

Sébastien Martel: For the quarter, the promotional environment was a headwind of 100 basis points in the quarter versus last year. You might recall that when we issued guidance, we said we expect promotional environment to be a headwind of 200 basis points. We got a positive tailwind of during [indiscernible]. The expectation is that we would keep a 100 basis points this year. Year-to-date, we’re running at 190 basis points. So we’re still within our expectations or our assumptions. And I expect the end of the year will probably end at 200 basis points. For next year, again, given that we are diligent in managing inventory, I think that’s going to help us in being less promotional and making sure that we focused on dealer profitability. And as you know, dealers are making more money selling our products. And we think that is what’s going to be driving our retail performance more than discounting non-current units.

Benoit Poirier: Okay. Perfect. And just in terms of capital deployment, you end up the quarter with a leverage of 1.4. I would be curious to get more color about whether you still expect some working capital reversal in Q4? And how does the market softening impact capital deployment with respect to a potential SIB sub product launches or any opportunity maybe to look more closely at M&A over the next 12 or 24 months given the softening market environment?

Sébastien Martel: Those are few followings on that question. But obviously, given the production cuts we’ve done, it is going to impact the tailwind that we were expecting from working cap that we were expecting $400 million. So we’ll probably be short of that but still, we’re expecting a tailwind in the fourth quarter. We’ll be generating over $1 billion of free cash flow this year. And so some of that went through the NCIB. We — as you saw, we just reinitiated our NCIB and so we’ll be opportunistic on that area as well. And as we said, our priority is to continue to invest in the business with OpEx — with CapEx, sorry, because we’re obviously very focused on growing this business and we’ve been successful doing so and we’ll continue focusing on that.

And as for the M&A, again, we’ve always been opportunistic. If it happens, we’ll obviously consider it if it’s strategic to our business. Certainly something that we look at but we’re not necessarily in the market looking for M&A activity today.

Operator: Next question will be from Xian Siew at BNP Paribas.

Xian Siew: Maybe given the kind of softer demand, can you talk about the cost base and how you can kind of maybe places where you can kind of cut the cost to kind of protect the margin. Any thoughts on that?

Sébastien Martel: Yes. Well, it always varies on how soft the market is. First thing we want to be strategic on what we look at when we address costs. We want to be flexible as well. But we want to protect the business for the long term. And so the last thing we want is cut purposelessly in activities such as R&D and key marketing activities that will hurt the business in the long term. But we want to be tactical as well and address short-term headwinds that we might see in the business. So there is room to adjust our cost structure in the short term, yet plan for the long term as well.

Xian Siew: Okay. Got it. And then I think you kind of talked about expectation a little bit for industry retail going into next year. But maybe can you think about the different geographies. Obviously, international is softer in October, does that kind of trend where North America kind of outperforming international continuing to next year, do you think?

José Boisjoli: Well, if you look to our results in Q1, Q2 and Q3, I mean, we saw some weakness since the beginning of the year in EMEA and APAC. It’s a market that fluctuated a lot in the last three quarters. Now obviously, at the end — at the tail end of Q3, it was worse than what we were expecting. United States is still okay but there is some key economic data that we’re following that we need to be cautious. The unemployment rate is still low at 3.9%. The inflation in U.S. at the end of October, the inflation is going down 3.2% at the end of October, the closer to the target of 2. Consumer confidence decline in July — since July from 71% to 61%. And the credit card balance is record high, then there is a sign that the U.S. is also softening. And this combined to the international market, particularly EMEA and APAC. And again, the two conflict in the world, that’s why we prefer to be prudent.

Operator: Next question will be from Jonathan Goldman at Scotiabank.

Jonathan Goldman: On the retail trend, I was wondering if you can discuss the cadence of retail, how it’s trended in November? Did you see the pace of declines accelerate versus October or show any moderation or any color on the cadence would be helpful.

Sébastien Martel: Well, on the — we don’t have industry numbers yet for November but our retail is still up but we expect the industry to be down in November.

Jonathan Goldman: Okay. Perfect. And then second, on the competitive dynamics, the presentation calls out elevated discounting by competitors on new model year units. Do you have a sense if that’s largely a reflection of the worsening industry or weaker consumer or maybe something specific to a competitor strategy, maybe a share gain approach?

José Boisjoli: I think in some industry, we’re gaining significant market share. And some competitor want to defend their position. And this is why particularly ORV discount. What surprised us is discount on model year ’23 but model year ’24 product at this time of the year, it’s quite aggressive but it’s to defend their market share position.

Operator: Next question will be from Jaime Katz of Morningstar.

Jaime Katz: I hope you can maybe elaborate on an earlier question about the marine business because if revenues are turning positive again, then can we assume profitability, at least at the gross profit line has hit a trough? And if so, could it potentially turn positive again in the fourth quarter?

Sébastien Martel: Well, marine had another tough quarter in Q3. Obviously, the longer ramp-up of both and very little shipments because dealer inventory. And that’s the number 1 reason the weaker industry is obviously not helping. In this quarter, we also had a special charge coming from the legacy Evinrude business where we had a special charge on inventory and that impacted profitability significantly. And so our plan is obviously for the turnaround to happen. Some of it we’ll see in the fourth quarter but the expectation is that next year, we’ll see a much improved profitability on the marine front.

Jaime Katz: Okay. And then from a pricing perspective, I think there’s probably some sentiment that it will be harder to raise prices next year. In which case, could there be some pressure on gross margin? And if so, what levers do you guys have or plan to use to mitigate those headwinds?

Sébastien Martel: Well, obviously, pricing is top of mind, especially in this higher inflationary environment and inflation on cost, on salaries is still there. So we’ll be diligent in making sure that we price our products in line with the cost structure that we have. But one of the huge benefits we have is obviously our manufacturing footprint that is the majority of what we produce is in Mexico. And so obviously, we have a better cost advantage that are coming out of the production facilities we have. And also in our approach to designing our products through modularity and what we’ve just recently launched, a new ATV platform is under this new design approach. And so the majority of our lineup is on this modular design. And so that’s obviously helping us drive better margins, I believe, versus the competition. And so it’s giving us a hefty competitive advantage.

Operator: Next question will be from Luke Hannan at Canaccord Genuity.

Luke Hannan: José, I think you mentioned earlier that for three-wheeled vehicles, it was entry-level sales that were a little bit softer. Is that consistent with what you saw for your other product lines as well? And then maybe just following up on that, how have you been able to — can you maybe describe the share capture that you’ve been able to do within the entry-level portion of your broader product lines versus premium, given that there’s been a bit of a wash out of those lower-end OEMs in the market?

José Boisjoli: Yes. If I give you some data that we follow on the value versus premium trend — and obviously, it’s different from one product that get to the other. But on the side by side in Q3 — and this is the industry, the value product were down about mid-double-digit when the premium was up about 20%. And this is definitely helping us. And our numbers for the three-wheeled vehicle because we closed the season ’23 in Q3, the Ryker category which we consider value with our three-wheeled lineup was down about 20%. But the F3 and the RT, the high-end model were up 20%. Then the trend that we saw since the beginning of the year where there is more traction on the premium and consumer that have lower household income are more hesitant to finance the product is affecting the value, then this is continuing.

That being said, overall, if you step back and you look at the big picture, we want to win in each category but we are more skewed to premium product. And I think this is one of the reasons why we’re continuing to gain share in this tougher environment.

Operator: Next question will be from Cameron Doerksen of National Bank Financial.

Cameron Doerksen: Maybe just a bigger picture question around sort of the competitive environment. I know in the past, you made some commentary about dealing with a potential downturn scenario, there might be an expectation that some of the smaller players in Powersports might choose to exit the industry. We’ve actually seen some exits even in a good environment. So I’m just wondering how your thoughts around if we have kind of a protracted downturn in the industry, call it, a year or so? What do you think will happen with some of the marginal competitors? I mean do you think you’d still want to see — still potentially would we see a trend where these companies will be investing less in Powersports?

José Boisjoli: This is very difficult to predict what our competitor will do. But if we’re focusing on our things and the dealers, the dealer right now with the slowdown in the industry, some dealers have at least they have option to decide and we believe that with the space that now our business is requiring, the space in the service shop, that some dealers could be — would make the decision to drop some product line. And this is — we’re seeing from time to time and this could happen in this downturn. Then I don’t want to comment on what the competition could do. But I think there will be some dealer who’ll have to make some call on do they keep everything or they drop some smaller line for them?

Cameron Doerksen: Okay. That makes sense. And just as a kind of a follow-up and sort of related is just thinking about your CapEx as we look ahead to next year, obviously, you’re not in a position to guide at this point. But part of your market share gains here have been you are continuing to invest in new products. I mean just directionally, what do you think CapEx might do in fiscal 2025? I mean do you think you’ll still obviously continue to invest significantly the product line? Or will we see an easing off of that?

Sébastien Martel: We should see a continued investments in CapEx or a number similar to what we have this year is something that would be reasonable to [indiscernible].

Operator: Next question will be from Mark Petrie at CIBC.

Mark Petrie: Yes and thanks for all the comments thus far, very helpful. Just a couple of follow-ups. I guess, specific to the fiscal ’24 guidance implies about 100 basis points lower EBITDA margins for the year versus what you had previously provided. So Seb, I think you said programs are in line with expectations. So is the lower run rate just simply lost leverage on the slower volumes? Or is there another factor?

Sébastien Martel: The majority of it lower leverage from manufacturing side, given the, we’ll call it the short-term production cut that we did. So less time to rebalance our production and be more efficient and the other one is OpEx as a percentage of revenue will be slightly higher because of the cuts in production.

Mark Petrie: Yes. Understood. Yes. Okay. Perfect. And then also just following up on the comments you shared with regards to sort of the demographics of the customer and sensitivity there. Can you just update us in terms of what you’re seeing from the customer that’s active in the business today, who’s new to the industry returning to BRP? And any sort of color you can provide on demographics, that would be helpful.

José Boisjoli: We didn’t see any trend change into the industry. And this is — we don’t have data on this but we’re hearing from dealers that there is more for the customer with lower income, there is more credit reject approval but we don’t have any hard facts on this. It’s more anecdote that we’re hearing from dealers. But except that, Mark, we don’t see any change. Obviously, the household income is still higher than it was pre-COVID. The new entrant, same ballpark but it’s more the entry — the lower household income customer who has more difficulty to finance their product with the high interest rate. And I think the banks are more restrictive than they used to be.

Operator: Next question will be from Tristan Thomas-Martin at BMO Capital Markets.

Tristan Thomas-Martin: Of your kind of your fiscal ’24 guidance for revenue, how much of that is [indiscernible]?

Sébastien Martel: I’m not sure I understand your question.

Tristan Thomas-Martin: I mean how much of that is either incremental, new product launches or channels so…

Sébastien Martel: Well, the — as I said, the inventory — the plan for inventory in Q4 versus Q3 would be the flat to up single digit. The channel fill is going to happen more with the new products that we launched in side-by-side and the high-end side by side. So the Maverick R is obviously something that will be channel fill. The new ATV platform as well is where we’re going to be seeing more deliveries from obviously, there is some replenishment that’s happening on the ORV side. But that’s the main driver of Q4 wholesale.

Tristan Thomas-Martin: Okay. And I just want to follow up to believe with James follow-up as a follow-up. Is just kind of like your playbook is, let’s say, the industry gets a little bit softer than you think or the competitors get more aggressive? Is it fair to assume that you would rather slow shipments then continue to ship and then have to subsequently promote?

José Boisjoli: Yes. I would like to remind that we’ve been through those cycles many, many times and I’ve personally been through a few of those over my 30 years at BRP. And one thing we’ve learned over time is when you see the situation develop, you’re always better to be proactive. And we’ve been gaining share since fiscal year ’16. We have developed an incredible value proposition for the dealers and we want to protect that. And this is what we’re doing. We just proactively — we’re just proactively reacting to a softer demand to make sure that we protect that. And we’re convinced this is the right thing to do for the long term.

Operator: Next question will be from Sabahat Khan at RBC Capital Markets.

Sabahat Khan: I’m just following up on kind of the dealer inventory question from just earlier. I guess you said you wanted inventories to ideally be lower kind of by the end of next year. I guess, can you may be shed a little bit of color on is that really if demand plays out or going to expectations? What are dealers telling you in terms of their plans for fiscal ’25 in terms of do you have a magnitude on how much lower they would like inventories to be, given the floor plan financing costs? And maybe just kind of the follow-up is, are there any incentives or ways you’re looking to help them with the plan financing cost if the current rate environment continues?

Sébastien Martel: Yes. First of all, the situation is not bad in the network. And we’re in better shape than pre-COVID as we talked earlier in the prepared remarks, inventory is up 24%, yet our retail is up 43%. However, dealers have seen price increases, MSRPs have gone up and so the value of the inventory is higher. The mix as well is more richer. So we sell more high-end models from — in all product categories. And the product-mix as well is different. There’s a lot more side by sides with higher MSRPs, more switch as well. And so despite the dollars increasing by 24%, the value is up 50%. And so when you factor in as well a financing cost that is probably increased by 300 basis points for the dealer, they’re seeing the impact of a monthly for [indiscernible] And so that’s why we want to be diligent in managing the inventory, especially in the current economic context.

We do support our dealers with a [indiscernible] plan period and we do support dealers as well when we come out of the season and there’s more inventory. And so we’ve been active in the past to do this and we will continue going forward. And so we’re — we want to make sure that we manage that inventory. So there might be a reduction of inventory in, let’s say, in the low-teen percentage for next year, that would be a nice number to achieve. But again, the situation today is not a disaster. It’s very much — very healthy when you compare it to pre-COVID.

Operator: Next question will be from Brian Morrison of TD Securities.

Brian Morrison: Many of my questions are asked but I want to ask about what you’re seeing in terms of price in the used market? I think the question was posed earlier, I didn’t understand the answer. There’s obviously been some softening this year but are you seeing acceleration in October and November? And if so, what do you see is the magnitude [indiscernible] decline in used prices?

Sébastien Martel: Yes, we do have a bit of visibility on the used market but the used market is still healthier than pre-COVID. The gap of new to use has increased. I mean it was almost zero during COVID. Now it has increased. But someone looking into trade in a used product, will get a good value because MSRPs have gone up quite a bit in the last two to three years. So — and plus, there hasn’t — there’s been a shortening of supply in the last two, three years. So there’s not actually a big used market contrary to what people might expect. And so it’s still very healthy, Brian.

Operator: Thank you. And at this time, Deschênes, we have no other questions. Please proceed.

Philippe Deschênes: Thank you, Sylvie and 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.

Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.