BRP Inc. (NASDAQ:DOOO) Q4 2023 Earnings Call Transcript

BRP Inc. (NASDAQ:DOOO) Q4 2023 Earnings Call Transcript March 23, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the BRP Inc.’s FY23 Fourth Quarter Results Conference Call. I will now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Philippe Deschenes: Thank you, Judy. Good morning and welcome to BRP’s conference call for the fourth quarter of fiscal year ’23. Joining me this morning, are Jose Boisjoli, President and Chief Executive Officer and Sebastien 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 actual results could differ from those implied in the statements. The forward-looking information is based on certain assumptions 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 Jose.

Jose Boisjoli : Thank you, Phil. Good morning, everyone. And thank you for joining us. Please turn to Slide 4. I am very pleased with our Q4 performance, which was our strongest quarter ever. It allowed BRP to conclude fiscal year ’23 with record sales, normalized EBITDA and normalized EPS. It was a very dynamic year, marked by our ability to respond to continued strong demand for innovative products, while showing tremendous resilience by working to supply chain pressure and a cyber incident. Our teams once again demonstrated its incredible activity. We adapted to evolving market condition and executed diligently in a challenging environment. As a result, we’ve delivered solid retail growth and outpaced competition by recording an exceptional five percentage point market share gain in North American Powersports industry.

During the year, we continue positioning the business for long-term success. We accelerated investment in product development, completed our side-by-side capacity expansion project at Juárez 3. And so there was multiple market shaping product, notably our new Howard winning pontoon generation and completed three strategic acquisitions. As you can see, it was a very busy year. That started to Slide 5 for key financial highlight of the year. With delivered record results on both top and bottom line. Revenues increased 21% from the previous year surpassing the $10 billion mark for the first time in our history. This was driven by higher volume and favorable pricing across the portfolio. Normalized EBITDA grew 17% to $1.7 billion, representing a very strong EBITDA margin of 17%.

Normalized EPS increased 21% to reach $12.05 above the higher end of our guidance. As for retail, our North American Powersports sales were up 6% for the year, or 5%, excluding the Sea-Doo switch Pontoon, compared to a decrease of about 10% for the industry. We ended the year on a strong note, as you can see, with our outstanding four quarter retail performance on Slide 6. In Q4, our North American retail sales were up 21% or 19%, excluding the switch compared to a low single digit industry decline. Our performance was also very strong in other market with retail up 36% in the EMEA, 32% in Latin America, and 16% in Asia-Pacific. In addition to strong demand, the solid performance was driven by our strategy to produce and complete units that were retrofitted at our plant or by dealers when missing components were received.

As the supply chain improved in the second half of the year, we will be able to rapidly convert units to retail allowing us to significantly outpace the industry in Q3 and Q4. You can see this outperformance on Slide 7. We ended the year with nearly 35% market share in the North American powersports industry representing a 5 percentage point increase for the year and a 15 percentage points gained since fiscal year ’16. Our performance was very solid across the product portfolio with important gain in off-road and snowmobile. We also maintained our leading position in three-wheel and personal watercraft, despite shipping more than 22 units at the peak retail season. This performance was driven by sustained strong consumer demand across our portfolio, which demonstrate the strength of our lines.

On this topic, let’s turn to Slide 8. In calendar 2022, we won 16 product awards, one of the best years for BRP. The Sea-Doo switch and the new Manitou pontoons were notably recognized in multiple competition. And just a few weeks ago, our new Rotax S outboard engine with cell technology won the Outboard Engine Innovation Award at the Miami Boat Show. On top of these product achievements, BRP was named Brand of the Year by Strategy Magazine. We celebrated the 100 year of success for Rotax. And we’ve launched a new corporate social responsibility plan with ambitious target. I’m proud of these milestones that show that our innovation mindset is not just applied to product, but also across all areas of our business. With these achievements, we gained further traction with dealer as shown on Slide 9.

Our success stems from our ability to constantly innovate, as we bring new product to market that drive consumer demand and by our unique value proposition which drive dealer to sell our product to maximize their profitability. To such initiative, we have attracted the best dealer and gain floorspace in their showroom. Early in fiscal year ’23, for the first time ever, we become the number one OEM in term of average retail unit per dealer, a position that we further extended in the second half of the year. Achieving this number one position was a great moment of pride for me. When BRP was launched almost 20 years ago, becoming the best OEM in the industry for consumers and dealer was one of my objectives. I can say, mission accomplished. Turning to Slide 10, for a quick update on consumer interests.

Like everyone else, we monitored the ongoing macro concern, but based on our indicator, consumer interests for our product remains healthy. In fact, we’ve delivered our strongest Q4 ever in terms of retail with growth across all our product lines. And looking at demand indicator to trend remain positive. Traffic at trade shows and a dealership continued to trends positively. Early season ’24 snowmobile booking is trending as expected. The influx of new entrants remain high, website visit and Google’s search for brands remain higher than pre-COVID levels. We are monitoring the used vehicle market and value segments that are slowing down. Retail trend also seems to indicate a return to more seasonal patterns. Finally, some OEMs and dealers are beginning to offer incentives on certain models.

But in general consumer interest for industry and more particularly for products remains healthy. Now let’s turn to Slide 11, for a year on product. Revenue were up 47%, reaching $1.2 billion in Q4, driven by strong shipments across all product lines. As far retail sales, Can-Am side-by-side and had its strongest Q4 ever, benefiting from additional production capacity at drive S3 and from an improving supply chain. Our retail was up high 30% in the quarter and season-to-date significantly outpacing the industry. I will get back to this category in a few moments. As for ATV, retail was up low 20% in the quarter driven by the momentum of the Can-Am brand and improved product availability. Looking ahead, we just introduced an all new platform for our Outlander mid-CC lineup.

This long awaited platform is our most significant upgrade in ATV in almost 10 years. It offers more performance, comfort, storage, and ease of ownership for the category at the competitive price. Moreover, we introduced specific pro package that cater to a more utilitarian consumer base for which the men tend to be less cyclical. With this new platform, we strongly believe that Can-Am is very well positioned to gain market share in the mid-CC category, which represents more than 50% of the ATV industry. Looking at three-wheeled vehicle. Although we are in the slow part of the retail season, Can-Am Retail was up over 150% in Q4, driven by improved product availability, following late shipment of model year ’22. We are pleased with the retail trend for three-wheel and we are well positioned for the upcoming season.

On Slide 12, let me come back to side-by-side vehicle which has been a key growth area in recent years. We have been growing retail and gaining market share at the fast pace since introducing the Defender in 2015. During that period, our annual retail volume has increased by almost four times. The Can-Am brand as gaining traction with consumer, as we experienced a significant boost in brand awareness over the past years. Their perception of the brand is also improving. As you can see on the right side of the slide, despite rapid growth and sudden momentum, we still have plenty of market share gains opportunities, especially in the utility segment. We believe our store lined up and had production capacity will support our growth in that profitable business.

Turning to seasonal product on Slide 13. Seasonal product revenue were up 26% from last year, reaching $1.3 billion, driven by higher volume of personal watercraft and the introduction of the Sea-Doo switch. Looking at the retail, our retail of personal watercraft in the quarter was up over 300% driven by late deliveries of Model Year 22 product, most of which were presold to consumers. The trend is also very good in counter-seasonal market, which season-to-date retail about 10% in Asia-Pacific and mid-20% in Latin America. As for snowmobile with most of the season behind us we are pleased with our performance as our retail is up low-single digit, outpacing the industry which is about flat. With this achievement, our global market share now exceed the 65% mark.

Turning to our recent snowmobile news. For model year ’24, we further strengthened our lineup by extending the REV Gen 5 platform to more models and introducing new key technologies, notably the industry-first water injection system for high performance model. These addition were well received, and early trends in spring — in spring unit booking are as expected, which is providing for season ’24. Furthermore, we introduced our initial electric model this Ski-Doo Grand Touring and Lynx Adventure Electric. For the first year, these snowmobile are designed exclusively for guide tour operators. These are the first electric model to be introduced following our commitment made two years ago to launch electric models in each product line by 2026.

We are proud of this first step, which is a testimony of our market leadership. Snowmobile industry experts have tested the product and they were impressed by our technology, the riding experience and the fit for the segment. You can expect more product introduction along these lines in the coming years. Moving on Slide 14, with powersport parts, accessories and apparel and OEM engines. Revenue were up 22% to $378 million for the quarter driven by our growing product portfolio. In our part and accessories growth strategy, every new product is designed to be highly customizable with our accessory portfolio. For example, the recently introduced Can-Am Outlander platform is compatible with 125 LinQ accessories. We are pleased with the performance of this highly profitable business segment.

Moving to marine on Slide 16. As mentioned last quarter marine was the last business unit to restart operations after the cyber incident and combined with some supply chain issue, as impacted production ramp up for the new Manitou into Q4. As a result, revenue were down 8% compared to last year, ending the quarter at $124 million. Looking at retail sales in North America, Q4 is up season for boating with typically less than 10% of the annual retail. While our retail performance suffered primarily due to the supply chain factor, we remain positive about our plan and prospect for that business, as evidenced by the announcement of the new facilities in Mexico. As for Australia, retail was down about 20% in the quarter in line with the industry.

We are excited about the future of our marine business. For instance, our recently introduced Manitou Pontoon and Rotax S outboard engine with cell technology continued to win recognition from the media and the industry and consumer demand is very improvising. With that I turn the call over the Sebastien.

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Sebastien Martel : Thank you, Jose. And good morning, everyone. We completed fiscal ’23 with another record quarter, as we continue to experience solid customer demand for products and demonstrated strong execution in delivering our production plan. Looking at the numbers, our revenues for the quarter were up 31% versus last year, passing the $3 billion mark in a quarter for the first time ever. We generated $788 million of gross profit representing a margin of 25.6%, slightly down in comparison to last year’s level primarily due to inefficiencies related to the ramp up of production of the new Manitou pontoons in some overhead investments. Worth noting however, for the first time in many quarters, the pricing actions that we took over the last few months offset the inflationary costs that we were subjected to.

And we expect this trend to continue into next year. Continuing down the P&L, we generated record normalized EBITDA for the quarter of $528 million, representing a margin of 17.2%. And our normalized net income reached $309 million, resulting in a normalized earnings per share of $3.85 for the quarter, ahead of expectations and resulting in a full year normalized diluted EPS that came in about our guidance range. Supported by the strong results, we ended the year with a robust balance sheet with over $200 million of cash and a healthy net leverage ratio of 1.5 times, providing ample flexibility for further investments in the business and capital distributions. One thing I want to highlight about our financial performance, is the structural improvements we delivered in the recent years that significantly enhanced or normalized EBITDA margin profile.

You can see this on Slide 18, in fact, our normalized EBITDA margin is up 370 basis points over the last three years, primarily driven by sustainable improvements, such as the wind down of the Evinrude outboard engine business, which helped by about 60 basis points. The positive impact generated by volume mix in cost improvements coming from our volume growth, especially as we leverage our Mexican manufacturing footprint. Our richer product mix notably driven by the growth of our SSV business, and the development of our modular design across more models. These elements helped our margin by about 110 basis points. And we gained about 300 points coming from a much more efficient operating structure driven by our ability to leverage our marketing, R&D and administrative spend across more product lines of meaningful size.

For instance, we gain efficiency in R&D by being able to develop technologies, components and engines that will be leveraged across multiple product lines. All of this unlocked by our modular design approach. We do the same on marketing by leveraging our website technologies CRM dealer event and our teams across multiple brands. We gained about 470 basis points driven by the structural improvements bringing our normalized EBITDA margin to about 18%. Now there were also elements that were more temporary in nature that impacted our margin over the last three years, notably, the lower sales program driven by the low product availability and the network and the tight supply chain environment which drove higher inflation and turbulence costs, especially in fiscal ’23.

The net of these temporary elements were the negative impact of about 100 basis points. As these temporary or elements normalized over time, the structural changes will mean that we will be well positioned to continue delivering strong normalized EBITDA margin of at least 17% in the coming years. Moving to Slide 19, for an update of our network inventory situation. Driven by the better utilization of our production capacity, and the improved supply chain environment, we have been able to continue increasing our throughput in Q4, allowing us to further replenish our dealers’ inventory. As a result, we have seen a healthy increase of 66% in product availability at the dealership driven by SSV, ATV and snowmobile. And when you account for a slightly higher than usual inventory for three-wheels and personal watercraft for this time of the year, due to the delayed shipments of model year 22 units of the fall, or overall network inventory is up 130% from last year’s level.

Still, given our significant market share gains over the last few years, our network inventory remains below optimal levels. So as unit availability continues to improve across our product lines over the next quarter, we will be in even better position to serve our dealers and customers and support our market share momentum. Now moving to the guidance, starting with a bit of context on Slide 20. As we build our guidance for fiscal ’24, we are cognizant of the environment in which we operate with inflation remaining above historical levels, and higher interest rates. While it is difficult to forecast how these factors will evolve throughout the year, and how they will impact the industry, based on our current environment, we expect our industry to remain about stable when compared to fiscal ’23, representing a decline of low-single digit from pre-COVID levels.

But despite all the momentum, we have new entrants, and the fact that we were not able to fully meet customer demand over the last year due to limited product availability. Still, in this context, we are well positioned to continue to grow as we enter the year with significant momentum. We’ve gained 5 percentage points of market share in fiscal ’23, driven by the robust demand for our product lineup especially in side-by-side. We have strong momentum with our dealers driven by a unique dealer value proposition which allowed us to reach the number one position in the industry in terms of number of units per dealer. We have key new products such as the Sea-Doo switch switch and the Manitou pontoons that have won multiple awards and are still in the early stage of their growth phase.

And we have demonstrated our ability to adapt and execute in a challenging environment to outperform the industry, although while maintaining strong margins. As such, we are well positioned to continue our growth trajectory in fiscal ’24 with expected revenue growth of 9% to 12%, driven by continued market share gains in our products as we further gain traction with the Can-Am brand, benefit from our increased production capacity for side-by-side, leverage our new mid-CC platform for ATV and sustain our momentum with Record . Moreover, we expect our role to be supported by the first full year of production of the Sea-Doo switch and the Manitou pontoons and by the continued momentum in PA&A and a driven by a growing fleet of units and usage and the continued innovation in our extensive lineup of accessories.

And to put things in perspective, while some may perceive fiscal ’24 to be less predictable than typical, we are comfortable with our guidance given that full year impact of price increases we did last year is expected to contribute to our revenue growth by low to mid-single digit. As usual, we have been conservative in our assumptions for the upcoming snowmobile and personal watercraft season. Over 50% of our expected revenue for the year are coming from more predictable sources, such as utility products, new introduced models, and PA&A. And we also have a strong pipeline of exciting products coming out this year for which initial shipments in our network are expected to support our growth. On the margin side, our guidance assumes a normalization of the supply chain environment.

And as such, we expect the following impact on the normalized EBITDA margin. A reduction in turbulence costs for a benefit of 150 basis points, the positive impact from pricing net of inflation for about 100 basis points, which will be offset to a return of sales program for about 200 basis points, and a slight increase in OpEx as a percentage of revenue for about 50 basis points. As a result we plan to deliver normalized EBITDA growth of 9% to 13% and to maintain our strong normalized EBITDA margin of 17%. Continuing down the P&L, the increase in our normalized EPS is expected to line normalized EBITDA growth due to higher depreciation and interest expense. The increase in both expenses is expected to represent an incremental $1.35 per share.

Still, we believe the fundamentals of our business continue to be very strong as demonstrated by expectation of solid growth in normalized EBITDA, providing us with the means to offset these elements over time. Moreover, fiscal ’24 is expected to be a solid year in terms of cash generation driven by a strong normalized EBITDA in the expectation for solid positive working capital contribution, as we reverse some of the investments we made in fiscal ’23. In fact, we are very well positioned with the flexibility we have to consider multiple capital allocation options in fiscal ’24. Turning to Slide 21, for capital allocation priorities. For fiscal ’24, our priorities remain to continue investing in growth projects and to return capital to shareholders.

As such, we expect to allocate between $750 million to $800 billion to CapEx, focusing our investments on growth projects that have attractive expected returns. Our ability to identify and execute on these projects is at the core of our success, and is what is allowing us to outperform our industry, as you can see from the chart, which shows our track record of delivering very high return on invested capital. Furthermore, we plan on continuing to provide strong returns to our shareholders in fiscal ’24. And as such, we have announced the increase of our dividend by 12.5%. And we are planning to be active or share buybacks as we still have 3.5 million shares available under our current NCIB program. Note, however, that our guidance does not factor in any share repurchases.

Now to wrap things up a summary of our guidance on Slide 22. As mentioned, we expect fiscal ’24 to be another solid year for BRP with revenue growth of 9% to 12% and normalized EBITDA growth of 9% to 13%, sustaining or strong normalized EBITDA margin of 17%. Our normalized EPS is expected to end between $12.25 and $12.75, representing a growth of more than 300% over the last three years, and making continued progress towards our M25 objective of reaching $13.50 to $14.50 of normalized EPS by fiscal year ’25. Finally, while we expect to deliver solid quarters throughout the year, note that a stronger growth is expected to come in H1, notably with Q1 EPS up between 40% and 50%, as we are lapping your quarter that was significantly impacted by supply chain challenges last year.

On that I will return the call back Jose

Jose Boisjoli : Thank you, Sebastien. I am very proud of our team achievements in fiscal year ’23. We are now looking forward to a promising future, and we are well positioned to deliver solid growth in the years ahead. In fiscal year ’24, we will continue to progress on our strategic initiative. We are confident that our investment in innovation in R&D will lead to further market share gain in the marine and powersport industry, more particularly in side-by-side vehicle supported by additional production capacity. Furthermore, in the past two years, we prioritized output over efficiency. Now with the supply chain stabilizing, we are focusing again on execution and efficiency. Over the midterm, we remain on track to deliver our M25 objectives.

Looking beyond we are maintaining our focus on the three addressable market that we have presented last June at our Investor Day. And we are committed to growing sustainably as we make further progress on our journey toward electrifying our product lines. In conclusion, I want to thank all our key contributors to our success. This includes all BRP employees whose dedication, resilience and constant effort are second to none. I also acknowledge the strong support of our dealers and suppliers who helped us get to market the industry leading product that forge our reputation. On that note, I turn the call over to operator for the questions.

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Q&A Session

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

Mark Petrie : Good morning. We’re hoping that you can just shed some more light in terms of the commentary with regards to consumer demand. And I guess specifically, those areas where you are monitoring and momentum and used units and value segments, as well as some OEMs and dealers returning to more typical levels of in incentives. If you could just share a little bit more detail on that be helpful. Thanks.

Jose Boisjoli : Yeah, good morning, Mark. On consumer demand, obviously, like I said in my intro, and I will try to give you a bit more color. There is many, many positive, our Q4 our retail was up high numbers. The traffic shows and dealers are still good and better than what some were expecting. Our snowmobile booking with dealers is as expected and our preorder sales, and we’re looking at the trends on a daily basis is tracking to pre-COVID numbers and very strong and snowmobile, about a third of our production typically is presold to consumers. And our website traffic and Google search are again above pre-COVID numbers. Now, on other element that we’re watching the used market has slowed down. Obviously dealers still own used units that were trade at high value, and dealer — a tendency to maintain their pricing right now then the retail has slowed down on the used unit.

The seasonal pattern is coming back to a more normal, I would say pattern. And some OEM and dealer have started to give some incentive. Then, when you look at all this, there is a lot of mixed signal in the industry, but we feel confident that we can continue to grow despite that macroeconomic situation. And if I could have, the unemployment rate are still very low compared to many years ago. And also access to credit is pretty good.

Mark Petrie : Okay, thanks. So yeah, I wanted to follow up on that last point, you mentioned is I mean, like some of the recent developments in the U.S. around liquidity and access to credit, I’m just curious to hear your perspectives on the availability of financing for your customers. And any views on that in 2023, or maybe any recent conversations with some of your finance partners that you could pass on. Thanks.

Sebastien Martel : Good morning, Mark, it’s Seb. If I look at the Q4 numbers, they were in line with what we were seeing in Q2 and Q3, so no slowdown in terms of availability. What we are seeing quarter-to-date is that the actual number of applications is going up significantly. And so people are curious and assessing what the credit market is. And overall their closure rate that they created is higher than what we’ve seen pre-COVID. So one interesting trend that we see is that yes, obviously interest rates are higher, so the cost is higher. But what we’ve seen is that people have extended the financing term. So instead of doing a 54-month, they’ll go to a 60-month. And we’re seeing that trend across all of the product lines. So some of them are shopping for a monthly payment and the way to achieve their monthly payment with higher interest rates is to extend the financing term. But FICO scores are still trending higher than pre-COVID as well.

Mark Petrie : Yeah, excellent. Okay. Well, thank you for all the comments and congratulations on the great year and the market share wins.

Jose Boisjoli : Thank you, Mark.

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