Good morning, ladies and gentlemen and welcome to the BRP Inc.'s FY2020 first quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Thank you Maude. Good morning and welcome to BRP's conference call for the first quarter of fiscal year 2020. 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 that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for listing of these. Also during the call, reference will be made to supporting slides and you can find the presentation on our website at brp.com under the Investor Relations section. So with that, I will turn the call over to Jose.

Thank you Philippe. Good morning everyone and thank you for joining us. I am pleased to report that we are off to a good start for fiscal year 2020. Despite challenging weather, especially in Northern U.S. and Canada, our product line continue to drive strong consumer demand, which resulted in another quarter of robust retail growth in most of our market. We continued executing well on our plan, notably as we delivered a very successful launch of Ryker, completed our side-by-side capacity expansion and came to an agreement to acquire Telwater, the leading manufacturer of aluminum fishing boat in Australia. Our financial results came in line with our expectation and we are increasing our guidance by $0.05 to reflect our NCIB done in our strong back sales in Q1. Now, let's get into the highlight of the quarter, starting with the financial results on slide four. Our revenue for the quarter were up 17% to reach $1.3 billion, primarily driven by continued growth in year-round products. All regions contributed to the growth with revenue up 19% in United States, 12% in Canada and 17% for international, primarily driven by a very strong performance in EMEA with a 26% revenue growth for the quarter. Our normalized EBITDA was up 16% to $147 million, resulting in a normalized earnings per share of $0.54, up 4% over last year. Despite unfavorable weather in the northern portion of North America and some dynamic political and economic environment in certain part of the world, such as the Middle East and countries like Argentina and Mexico, we continue to deliver strong retail growth and outpace the industry in most of our market. Our retail sales were down 13% in LatAm and up 14% in North America, 18% in EMEA and 5% in Asia-Pacific. Now on to…

Thank you Jose and good morning everyone. Despite unfavorable weather, we continued our growth trajectory as we delivered solid results for the first quarter of fiscal 2020, notably driven by the continued strong demand for our lineup and the success of our newly introduced product, the Ryker. Our total company revenues came in at $1.3 billion for the quarter, a record for a first quarter and a growth of 17% over last year. Our gross profit margin ended at 22.5%, a decline of 230 basis points from last year's first quarter due to higher production, distribution and commodity costs and an unfavorable product mix, which were partly offset by higher volume of vehicles sold and higher parts and accessories sale, notably driven by the extended riding season for snowmobile. Our normalized EBITDA came in at $147 million, up 15% from last year and our normalized diluted EPS came in at $0.54, up 4% from last year. We invested $52 million in CapEx and generated the same amount in free cash flow. Turning to slide 15. Our quarterly normalized net income remained almost flat compared to last year as it ended the quarter at $53 million. In terms of year-over-year variation, we saw an increase of $54 million, driven by favorable impacts coming from volume, mix, pricing and sales programs and FX. These elements were offset by higher production and distribution costs, higher depreciation expense for a total negative impact of $24 million, higher operating expenses for $25 million dollars, mainly driven by the launch of the Ryker and higher financing costs for $6 million. Turning to slide 16 for look at our network inventory position. Our network inventory position is where we want it ahead of the summer retail. It is up 10% versus last year's first quarter, primarily driven…

Thank you Sebastien. Once again, we are very happy with our first quarter results and solid financial performance. Leading indicators show that the economy is doing well with steady growth, no unemployment and little inflation. During the quarter we had experienced strong retail momentum in North America and in Europe with all our sectors trending positive and we are very satisfied with our year-over-year revenue growth of 17%, even while operating in a dynamic political and economic environment. We continue to outpace the competition and are positive about the outlook for the rest of this year as we are entering the peak of retail season for summer product in North America and Europe. We are confident to meet our increased guidance of EPS growth of 15% to 21% for fiscal year 2020. Given the state of our business, our financial capacity and flexibility, we also pleased to announce the launch of the SIB to purchase for cancellation up to $300 million of BRP share. Our strategy of diversifying our product portfolio, our geographic sales and our manufacturing footprint has proven itself again and again over the years and will continue to do so in the future. Moreover, we are very proud to be able to count on the efforts of our employee at all level of the company, our greatest competitive advantage. On that note, I will turn the call over to the operator for questions.

[Operator Instructions]. Our first question is from Craig Kennison from Baird. Please go ahead.

Hi. Good morning. Thank you for taking my questions. I wanted to go to slide six. You had commented on weather being a factor and how the snow-belt had underperformed. I am wondering, if at some point you should expect snow-belt markets to outperform sun-belt markets as that demand catches up with the weather?

Difficult to say. I would say that our dealer network is more developed in the snow-belt because of our snowmobile heritage than it is on the sun-belt. And I think if the weather turn out, we could see that trend. But it's very difficult to predict. I would be cautious about this.

Craig, when the summer weather picks up in Northern U.S. and Canada, PWC retail will obviously tick up as well here in these regions. And so there might be some lapping that's being done versus the sun-belt on PWC and Ryker as well.

Yes. That helps. I am just trying to understand whether you think these sales have been lost for the season or simply deferred into a future period this year?

Yes. We don't think the sales are lost. We talked to many dealers in the snow-belt who were affected and everyone believes that the customer just delayed the purchase or to take deliveries of their unit.

Thank you. And then secondly with respect to the tariffs being considered in the U.S. and imposed on China. How is BRP positioned on Chinese tariffs relative to maybe other competitors in the powersports space?

Yes. Well, we estimate that the recent price or the recent tariff increase that was announced from the U.S.-China trade dispute not to be significantly material to us, less than $5 million. And so I can understand that there could be question as to why it's so immaterial for us and it's not necessarily a question of manufacturing strategy, but it's much more a question of sourcing and how you source your components. And as you know, we do put a lot of emphasis and pride in designing the best products in the industry, putting a lot of technology and obviously high quality. And in order to do so, we are very diligent in how we source our components. And the factors that we consider in sourcing are obviously supplier know-how, quality, lead times, pricing that we get for those components and also the existing free trade agreements that are out there, NAFTA and EFTA. And therefore because of those criteria, we actually source only a small percentage of our components from China. And therefore, the extent to which we are impacting from the trade dispute has a lot more to do with our sourcing strategy versus where we have decided to establish our manufacturing plants.

Thank you.

Thank you. Our following question is from Robin Farley from UBS. Please go ahead.

Great. I wanted to clarify a couple of things. One is, with your higher EPS guidance, does that include the impact of the $300 million share cancellation or not yet since you don't know the specific terms of that yet? I am just wondering if any of that's factored in yet? And then also, I think previously you talked about a split between first half and second half profit growth that had kind of implied a decline in first half profits just given that the split would be more like your fiscal 2018. You had mentioned that last quarter. I am just wondering if that is still the case with your expectations for this year? Thanks.

Yes. Good morning Robin. On your first question, no, the guidance does not factor in the impact coming from the SIB that we announced this morning. We will adjust for guidance based on the results. That's expected to close in July. So when we talk in August, we will have the final numbers. And on the distribution of our profitability, we are not expecting any big changes versus what we communicated in March when we talked about the Q4 results.

Okay. Great. And if I could ask just one more. Do you have any color you could share on average selling price change for your off-road business? And any color around mix or promotional level that's impacting that change in ASP? Thanks.

ASPs, when I look globally, the ASPs were relatively flat full year side-by-side, a bit higher year-over-year in the low single digit. Obviously Ryker impacting ASPs downward. So year-round product was flat. Ryker offset more than the increase that we saw on side-by-side. And on the seasonal, ASPs were also up. We had a richer mix on personal watercraft and that helped ASP. So overall, we are flattish year-over-year, down year-round and up seasonal.

On the current promotional environment, we would say that the situation is improving. Two, three years ago, some OEM had a lot of non-current inventory and promotion was very aggressive. Right now, the network inventory is in better shape than in the last two years. And I would move at a rate at this point, the promotional and development for off-road vehicle, normal. For watercraft, one of our competitor has some non-current in the South more than we had. But overall, we qualify it as normal

Okay. Great. Thank you very much.

Thank you. Our following question is from Mark Petrie from CIBC. Please go ahead.

Yes. Good morning. With regards to the snowmobiles and the highest level of snow checks in five years, what do you attribute that to? Is it the lineup? Is it the long tail end to the season? Is it the lack of non-current last year? What are the factors that you think drive that?

The three that you just mentioned. No, I think the long season. I mean we have been doing this for many years. Every year that the winter is long, it's like the snowmobilers stay in the snow mindset and they are more interested to learn about the new product and they are excited to, I would say, finalize their purchase for the following season. The other thing is, we launched two quite big product SKUs. In the Summit, the mountain category. we came out with Summit Expert. It's a package that is unique in the industry right now and it was quite popular. And the other one is in the more utility segment, Rec-Utility, I would say. The new platform, all the new line model on the Gen4 platform is replacing models that were 10 years old. And this why we had very strong snow check, like we call it.

Okay. And then on the gross margin, you called out sort of mix as a factor. Can you just walk through the puts and takes there? And then how you expect that play out in Q2 and for the full year?

Yes. The margins were down, as I mentioned, 230 basis points. The volume and mix offset each other and then the other elements impacting negatively. We had currency for about 60 basis point. Depreciation expense was 40 basis point. Production costs, as we talked for the past two calls, were seeing higher increases in commodity year-over-year. Some tariffs, et cetera. So that was about 80 basis points. And as you might recall, we did close the plant down for two weeks in February in February for side-by-side production. And so the whole production ramp-up costs absorption, well for those two weeks period, is about a 50 basis point headwind on the margin.

Okay. Thanks. And then just last one. Seb, I appreciate the comments on capital allocation and shares are, I think as you said, good value, but at the same time there is clearly more uncertainty in the market than it was the last time you employed the SIB and you have been more active on M&A as well. So could you just walk through how you and the Board arrived at the decision of an SIB as opposed to just fully leveraging the NCIB and maintaining greater flexibility?

Yes. Obviously, the strength of our balance sheet is a very high priority of Jose, myself and the Board and that's really the number one factor that we considered. But we do have a strong balance sheet today and the reason why we have strong balance sheet is we have very good capital structure in terms of debt. Our debt matures in six years. It's covenant light. So we are not necessarily restricted, if there was to be an economic slowdown. Also we have a $700 million revolving credit facility and that provides us the necessary cash flow, if needed if an economic slowdown was to happen. So we are comfortable with increasing leverage more to do an SIB, specially where the valuations are yet still having that financial flexibility if there was to be a downturn or a slowdown in demand for products. But obviously, it was top of mind in our decision to go ahead with the SIB.

And how do you think about M&A from here?

Well, as you as you know, we are going to be closing on the Telwater. We should be closing on the Telwater acquisition in the second quarter. We have done acquisitions, but not necessarily seeing significantly material or important, but not necessarily jeopardizing or putting an extreme pressure on the balance sheet. Going forward, we will obviously be proactive and see if there is any opportunities. But we are happy with the assets we have now in North America and in Australia for the marine strategy. And we don't see the need to do any, again, material acquisition in order to execute on that marine strategy.

Okay. I appreciate all the comments. Thanks a lot.

Thanks.

Thank you. Our following question is from Benoit Poirier from DesJardins Capital Markets. Please go ahead.

Yes. Thank you very much and congratulations. First question is on the side-by-side market. Before, at the Investor Day, you were talking about bringing the market share up from 10% to 20%. Now that you are kind of in the middle, what could we be thinking in terms of potential market share target and what would be kind of the time frame you see given the success that you have been experiencing so far?

Good morning Benoit. We are very happy with our momentum with the side-by-side business. If you look at the season-to-date, we are growing high double-digit and we are lapping of a song season 2018 season. We are getting closer to the 20%. But we still have room to grow. We will introduce our model year 2020 lineup next week. And we have continued product news coming and again filling all that the sub-segment that there is into that industry. We will give you more color about our long term plan when we meet you at the Analyst Day later this fall. But for the time being, we are focusing. We just finished the capacity increase in Juarez II. We were missing some product in Q1. We are hoping to catch up by the end of Q2. But the focus is really to fill up that capacity as fast as possible and we will give you more color in October.

Okay. That's pretty good color. And when we look at the three-wheel vehicle market, obviously Ryker very strong performance so far. Could you talk a little bit about how the F3, the Spyder is doing? And whether it's in line with expectation or not?

I would say, at this point, first, very happy with the Ryker. It does everything we were hoping for. It's too early to say that we are repeating the Spark story, but I would say feel good. In term of the RT, F3, definitely the retail was affected by the bad weather in the snow-belt. But we are quite confident while we are early into the season. What we like about the momentum we have with the Ryker is bringing a lot of new consumer into the dealership and some are definitely buying the Ryker, but others are looking to F3, not so much to the RT, but to the F3. And it's too early to conclude anything but we are quite happy with the start of the Ryker retail.

Okay. And for Telwater, could you talk a little bit about the current exposure to Evinrude and also the agreements that Telwater is having with the other engine outboard manufacturers, Jose? And also talk to a little bit about the progress with the Ghost project? I understand it's a long term strategy but if you have any color that would be great. Thank you.

Yes. In Telwater, we know Telwater for many years. We have been a supplier with Evinrude. We have been a supplier to them since we acquired Evinrude in 2001. And we know Paul Phelan, the owner, for many years. And Telwater, with the brand Quintrex, has over 50% of the market in Australia and New Zealand. They have about 180 dealers between in those two countries. And in Evinrude, we have 75 dealers. But the dynamic in those regions is very different than what you have in North America. Telwater is selling boats to those dealers. We have been rigging Evinrude engine on their boat at the factory for the last three, four years. But the other OEMs don't sell directly to Telwater. They sell to the dealer. Then the dynamic is very, very different than what exists in North America where engine OEMs sell to dealers, but also sell to boat builders. And we believe that what happened with two of our competitors in North America can not happen in Australia and New Zealand. And we are very happy. And again, it's not closed. But we are very happy with the agreement we have with Telwater. Maybe one last comment. Like Sebastien mentioned, you know, the boat industry is a very large industry. But we are happy because we are focusing for now on aluminum product where we have know-how. We believe we can bring some synergy between those brands and our know-how. And we believe we have the critical mass to develop a better integrated engine into the boat. Lowrider is unplanned. The Ghost project is unplanned and we will tell you more as we evolve into the next few years.

Okay. Perfect. Thank you very much. Thanks for the time.

Thank you. The following question is from Jamie Katz from Morningstar. Please go ahead.

Hi. Good morning. I just wanted to follow-up on a prior question on Ryker. Do you guys have any insight into what the demographics of that buyer looks like relative to the Spyder and maybe how that has changed?

Good morning. Again, very early into the season but the customer right now is about ten years younger than the customer who was buying an RT and F3. Our target was to attract even younger people, but we are happy so far with the trend. But I would say one thing that is very interesting is, we are attracting a lot more different culture, different nationality around the world with the Ryker because it's a very young image. Our marketing campaign is very upbeat and we are attracting a lot of people who never had any powersport in their life. And so far very happy with the trend but again very early to conclude anything at this point.

Okay. And then on the marine segment, the gross margins, at least in my model, look like they were significantly lower than last year. And I know it's a seasonally sort of smaller quarter. But I am curious how you guys think about where the gross margin goes for that business longer term? Is it closer to a mid-teens pace? Or could you maybe even escalate that gross margin higher than that as you scale?

Yes. The margin this quarter was impacted by lower volume on OEE and higher production costs versus a year ago and obviously with the boat business margin profile of these businesses is lower than, let's say, the engine business. On the long term with the marine strategy, our objective is to bring the marine business at least at par with the powersport business and the strategy behind that is bringing more technology, more innovation to the marine business, having more integrated packages for which the consumer sees value and is ready to pay for it. And that should bring the margins more in line with what we are seeing in the powersports side.

Excellent. And then lastly, I think the two segments that had trailed the industry retail sales on your side were personal watercraft and snowmobiles. Is there anything in particular to call out either discounting or promotional wise that maybe would have impacted or current versus non-current inventory, which I know you had mentioned for snowmobile that made the BRP sales slightly slower than the industry sales.

To be honest, for both the product line is the non-current situation. We ended season 2018 with very, very little non-current compared to our competition and we have lost market share all season in that product category. On watercraft it is the same phenomenon. Last year was our first year of our new three-seater platform and we ended the season 2018 really with no inventory. Some of our competitors had high inventory in that product category and now we are catching up with supply. But the phenomena is somewhat the same. Now, I would be careful to conclude anything. I think the strength of our lineup in those two product lines for us is very, very strong. We have very solid market share. We have a good momentum in both product lines. But you have those seasonality effect from time to time. And again, very happy about our snowmobile season, how it ended and how we are positioned for next year and very happy about our position for season 2019 for the watercraft season that is upcoming in North America and Europe.

Thank you. Very helpful. Thanks.

Thank you. [Operator Instructions]. Our following question is from Tim Conder from Wells Fargo. Please go ahead.

Thank you. Good morning gentlemen. Yes, a couple here. Seb, on the sales guidance, I am anticipating these are rather small numbers but can you quantify the increase from the recent acquisitions? And then from a competitive perspective in off-road and in snowmobiles, over the last several years you have seen several or let's just call them secondary competitors fade even more in share as the industry appears to be consolidating. What would be, Jose, your outlook over the next three to five years for the potential exit of some of those competitors from the off-road and in the snowmobile market?

Good morning Tim. Yes, on the boat company acquisition, we haven't factored in the Telwater acquisition into our guidance. So we will do that when we meet in August. But on the two acquisitions we did last year, Alumacraft and Manitou, both of them would drive about 1.5% to 2% of annual revenue growth for BRP.

Okay.

Tim, this is a very tough question. I mean, obviously for snow and ORV, some of our competitors had a lot of inventory for different reasons in the last two, three years and they were very aggressive for cleaning up the inventory. That being said, like I said in the previous question, the situation right now in network inventory is healthier than in the last few years. Then I think the promotional environment should get better going forward. And for the rest, for the second part of your question, I would not comment on what could happen into the industry. I will let you guess.

Okay. Very diplomatic answer, sir. Okay. Lastly, again I think there's a little confusion in the market on the capacity that you now have available to you in Mexico. So I think you have stated before, but please correct me if I am wrong here, that you feel that that's going to be sufficient for you over the next three years, maybe even a little bit longer. So there's no plans to immediately fully utilize that in the next year or so. Could you just maybe remind us or correct if any of those assumptions are wrong?

Yes. First, let's explain the capacity increase for this year and next year. This year we shut down the factory for two weeks. And on top of it, when we started the production because we didn't want to mess with quality, we started the production at the line rate lower than what we were operating before. But now after six weeks, after we already started after six weeks, we are back to what are the new capacity levels. Then for H1 this year, our additional capacity is about flattish because of that shutdown and that six week ramp up to make sure, again, that we deliver on quality. For H2, we will have full 50% line rate capacity. That means, in average for this fiscal year we have a capacity or volume production capacity increase of 25%. In fiscal year 2021, next year, there will be an additional 25% compared to this year. And I hope this explanation clarifies a bit more where we stand for. In terms of planning in the future and obviously for competitive reasons we have plan, but we already just had 50% of side-by-side capacity. We have a great momentum. Our hope is we will need another increase in the near future. But at this point, we are pretty happy with how we executed that capacity increase and how we are well positioned to continue to grow our side-by-side business.

Great. Thank you gentlemen.

Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschenes.

Great. Thank you, Maude and thanks everyone for joining us this morning and for your interest in BRP. We look forward to speaking with you again on August 29 for our second quarter conference call. Thanks again and have a good day.

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.