BRP Inc. (DOO) Q1 2021 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to BRP Inc. FY21 First Quarter conference call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Go ahead. Mr. Deschênes. Philippe Deschênes: Thank you Julie. Good morning and welcome to BRP’s conference call for the first quarter of fiscal year ’21. 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 that are subject to a number of risks and uncertainties. I invite you to read BRP’s MD&A for a listing of this. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com. With that, I’ll turn the call over to José. José Boisjoli: Thank you Philippe. Good morning everyone and thank you for joining us. About two months ago when we presented our year-end results, we were on a roll. We had incredible momentum with every product line worldwide and were anticipating another great year ahead. Like the rest of the world, we were faced with the sudden impact of the COVID-19 crisis which brought rapid changes that significantly disrupted our business and operations and forced us to quickly adapt our plans. It began when our dealers had to close their business as the situation worsened in China in January. Closures followed in Western Europe in February where local governments enforced severe containment measures. As you can see on this slide, retail in North America had been strong until mid-March, was negative for one month, and once dealers started to reopen retail has been strong since mid-April. Our manufacturing has reopened or is in the process of reopening, and we are adapting to the present reality. With retail tracking better than expected, we are now focused on getting production back to capacity globally. I am proud of the team’s swift actions taken to limit the potential impact of the crisis on our business and protect our financial flexibility. Among others, we deployed global protocols to ensure that our employees can work in a safe environment and reduce risk. We adjusted our production plan in line with government health regulations and expected market demand. We implemented price mitigation measures, notably temporary layoffs, salary reductions, and an exhaustive review of discretionary spending resulting in overhead savings of up to $450 million for the rest of the year. We focused on liquidity preservation, notably focusing our capex investments on key projects with high impact returns, resulting in a total capex target of $220 million to $250 million for the year, representing a reduction of about $130 million to $160 million from last year’s levels, and we were successful in extending our term loan B by USD $600 million and maintained our covenant-light condition. As a result of these efforts with our cash on hand and $700 million of revolver availability following the completion of the term loan transaction, we have about $1.3 billion of finance flexibility. While we remain cautious about the future, we expect that these different initiatives will allow us to navigate through these uncertain times while allowing us to continue investing for the long term growth of the company. However, these measures do not come without sacrifice and one of the toughest decisions we had to make, as we announced yesterday evening, is the discontinuation of outboard engine production. As you have witnessed over the last few years, despite its innovative technology our outboard engine line-up has been losing share in a market that was already difficult. Our strength was in the power segment while the industry growth was driven by the package sector, which led to continued share erosion. Given this trend, our outboard engine had fallen behind in terms of profitability and cash generation potential. As the current situation forced us to reduce our investment plan and reviewed downward our growth expectations for the business, the path to profitability improvement for outboard engine was too long. It became apparent that we had to discontinue production. For our Evinrude employees, let me say that I am very proud of the part they have played over the past years, and in particular their efforts over the past 18 months. Although we have made progress, the impact of COVID-19 has left us no choice. I wish to thank them for their dedication and commitment in helping us create the marine group. This decision will allow us to refocus our marine investment on higher expected returns and sustainable projects, such as innovative technology and enhancing our boat offer. We remain committed to our marine strategy with an evolution to our approach. Along with the announcement last night, we also announced a global supply agreement with Mercury which is securing access to engines and is expected to support our dealer network development efforts. Our strategy has always been about building a strong marine business by offering customers a superior boating experience through product innovation. The discontinuation of outboard engine production does not change that objective. The development of Project Ghost and Project M are progressing as planned and we are confident that they will be game changers in the industry. Before we get into the quarterly results, I wanted to provide you with an update on our manufacturing operations. As you know, we suspended or slowed down most of our operations starting in late March until mid-May, responding to local government containment measures. This obviously limited our ability to ship products in the first quarter and impacted our financial results. The good news is that we have been able to take extensive measures to protect our people while resuming capacity. Production has restarted or is ramping up in most of our facilities and we are set to be operational everywhere starting next week. As mentioned, our results were significantly impacted by mandatory closures of plants and dealerships; however, our retail performance was solid given the current context with North American power sport retail being up 4%, or 10% when excluding snowmobiles. Contributing to that strong retail performance was our focus on supporting our dealers as we strive to continue delivering the best-in-class dealer value proposition in the industry. Ensuring the health of our dealer network is a key priority and we made sure to find solutions to ease the financial burden on our dealers, notably as we extended floor plan support until the end of June, adjusted performance targets until the end of July to account for potential reduced demand, we proactively adjusted dealer orders and we extended warranties for all our power sport products. We also implemented measures to simplify business processes for dealers and to drive consumer demand. The response from our dealer network on these initiatives was very positive and should help us to continue to gain momentum. Now taking a closer look at the North American quarterly retail performance on Slide 10, our product portfolio performed above our expectations during the first quarter. We continued to outperform the off-road industry with side-by-side retail growing about 40% and ATV retail being up high single digits, driven by a strong first half of the quarter and very strong second half of April. The three-wheel vehicle category is suffering the most in the current context since the confinement measures taken have had the most impact on this category with the closure of riding school and cancellation of demo tours, two key projects that support the growth of this sector. I will explain more on this in a moment. Finally, while both are down for the quarter, personal watercraft and snowmobile outpaced their respective industries. As summer is approaching, there appears to also be a clear trend that people will be staying at home for their vacation, or as they say a staycation, which would work in our favor. We added this slide to give you some color on our retail analysis that we did, showing that our retail performance was very strong in a region where access to power sport dealers and playgrounds remains more available during the containment period. You can see a clear difference between the U.S. and Canada where the provinces of Quebec and Ontario were completely closed for six weeks. The middle graph shows the data taken April 15, and as you can see, the gaps in the retail between the dealers that were open versus closed, and on the right between rural and urban dealers. Retail was up 20% when dealers were open for most of the month of April and up 24% in rural areas. When dealers are open, sales remain strong. This bodes well for our industry as gradually enter the confinement stages in many regions around the world. Now let’s turn to Slide 12 for the year round product highlights. Revenue was up 2% driven by a strong start of the quarter, partially offset by the impact of the crisis. On the retail side 10 months into season 20, the side-by-side industry was up high single digits. The demand for our Can-Am side-by-side was very strong and our retail was up low 40% season to date. Can-Am side-by-side was also performing well in international markets despite the situation, with retail for the quarter up over 40% in Latin America and up over 20% in EMEA and 20% in Asia Pacific. Under the current context, these are incredible results. Turning to ATV, the North American ATV industry was also 10 months into the season and retail was up low single digits. For the same period, Can-Am ATV retail was up low teens percent, notably gaining share in the mid-cc segment. We are pleased with the performance of our off-road business, which had a very strong end of April, and the positive trend continued in May. Now looking at three-wheeled vehicles, early in season 20 the North American three-wheeled vehicle industry was down low 30%, while we were down low 40%. There are a few factors to note. First, we are lapping an excellent quarter due to the launch of the Ryker last year. As I mentioned, the on-road industry suffered the most from containment measures due to the closure of riding schools and license issuers and the cancellation of demo tours. We also had to cancel our marketing efforts since we had no projects to support new entrants into the market, a key driver for this category. We have now launched a new marketing campaign that is adapted to the improving situation. As schools are reopening, demand for classes is growing and we are confident we will regain traction. Turning to seasonal products on Slide 13, seasonal product revenues were down 14%, primarily driven by lower shipments as many dealers were closed. Now looking at retail, the North American snowmobile industry ended its season 20 on March 30, with retail down mid-single digit percentages. Our Ski-Doo line-up continued to drive strong consumer demand, resulting in retail that was up mid-single digit percentage and ended the season with the highest market share in its history. In Scandinavia 10 months into season 20, the snowmobile industry is down mid-teen percent driven by unfavorable snow conditions last winter. Ski-Doo and Lynx outperformed all over brands with retail only down high single digit percentage. Our complete line-up and new product introductions, notably the new Summit snowmobile, have put us in a very favorable position in the industry with continued market share gain potential. Although we had to cancel our demo tour, we are encouraged by the level of spring certificate units sold to customers. Our performance is very similar to last year, which is testament to the strength of our Ski-Doo and Lynx brands. Now turning to personal watercraft, it is still early in the season and North American personal watercraft is flat, with Sea-Doo retail up low single digit percentage. Given the current situation which halted manufacturing, plus a cold spring, our retail was affected and we reduced our model year ’20 production plan by 18% compared to last year. However, we decided to advance the cutoff of model year change and we will be ready to ship model year ’21 units starting this summer. May retail so far for watercraft has been very encouraging and with our production adjustments, we will be ready to supply the demand as needed. Continuing with a look at power sport parts, accessories and apparel and OEM engines, revenues were down 15% as a result of dealer closures due to the pandemic. Parts orders, which represent an important portion of our PA and A business are directly correlated to the ability of dealers to service units, and as a result suffered the most from dealers being closed. As dealerships started to reopen, we saw an improvement in parts sales. Finally looking at our marine business, revenues were down 26% due to a lower volume of outboard engines and boats sold, partially offset by the impact of the acquisition of Telwater during last year. At the retail level, Alumacraft was down over 20% resulting from weak industry trends in key markets, while Manitou performed well with retail up low teen percentage. With the confinement measures lifting and spring weather getting better, we see retail improving for both Manitou and Alumacraft. With that, I will turn the call over to Sébastien. Sébastien Martel: Thank you José, and good morning everyone. As mentioned, we had a very strong start to the quarter, continuing our growth trajectory from recent years until the COVID-19 pandemic led to global containment measures resulting in dealer closures and suspension of production in most of our sites starting in late March. This impacted our ability to ship products, resulting in revenues that were down 8% from last year and normalized EBITDA down 16%. Our normalized EPS ended the quarter at $0.26. As part of our initiatives to preserve our financial flexibility, we reprioritized our capex plan for the year resulting in investments of $43 million in Q1, down $9 million from last year. We managed working capital leading to $100 million of positive working capital contribution and $169 million of free cash flow for the quarter, and as José mentioned, following the end of the quarter, we secured a USD $600 million term loan with a covenant-light structure that matures in 2027. With the added Term B, we have significantly strengthened our liquidity position, allowing us to focus on managing the business through these uncertain times and continuing investing for the long term growth of the company. As I mentioned, our revenues were impacted by our ability to ship in certain markets. Our retail remained strong in the United States as many dealers were able to stay open, allowing us to continue shipping products which resulted in Q1 revenues that were up 5% for the region. However, the situation was different in other key markets where a higher proportion of our dealer network had to close, leading to retail decline and lower shipments. This was particularly true in Europe where we had a very strong start of the year, but the trend worsened early in March as containment measures were more comprehensive and were put in place much earlier than in North America. Our gross profit margin was also impacted by the situation, notably due to the closure of our manufacturing sites in late March and all of April. On a comparable basis, our gross profit margin was up 10 basis points from last year as the negative impacts from volume mix, pricing and sales programs, and production costs and depreciation were more than offset by favorable foreign exchange rate variations. However, COVID-19 had a 350 basis point impact on our margin primarily driven by less efficient fixed cost absorption due to production shutdown and higher yard inventory depletion. Turning to Slide 19, our quarterly normalized income was down $30 million compared to last year driven by negative impacts of $62 million coming from volume mix, pricing sales programs, and $16 million from production and distribution costs which were partly offset by lower overhead resulting from our cost mitigation efforts offset in part by higher depreciation, for a net positive impact of $38 million, lower net financing costs and normalized income tax expense for $3 million, and a favorable foreign exchange rate impact for $7 million. Also, given the impact of COVID-19 on the outlook for our industries, we took a $171 million non-cash impairment in the quarter for our marine business, which is facing more challenging industry dynamics compared to when we acquired them. This amount accounts for the revaluation of the boat companies we have acquired over the past couple of years and the impact of the decision to discontinue the production of outboard engines. This amount has been excluded from our normalized metrics. Now looking at network inventory on Slide 21, our network inventory was up 7% over the same period last year, well positioned despite the current situation as we experienced better than expected retail trends across most of our product lines. The increase is primarily driven by three-wheeled vehicles as it was the most impacted product line within our portfolio due to the closure of riding schools, demo tours, and more dealers being closed in urban areas. The industry was also up as we had positioned the network inventory early in the year for the expected continued solid retail growth. This allowed us to support the strong consumer demand we experienced with retail being up over 40% for the quarter despite that we had to suspend production due to the pandemic. Our number of days of inventory are lower than usual for both SSV and ATV, which may lead to certain models being difficult to access in certain regions, but with our operations restarting, we expect to be able to sustain the continued strong consumer demand for our line-up. Our network inventory growth was partly offset by a lower level of inventory of PWC due to the production shutdown. Still, we believe the level of inventory is appropriate for the expected demand, and as José mentioned, we will be able to produce and ship model year ’21 earlier than usual if there is additional demand. Lastly for snowmobile, we ended the season with a healthy inventory position, allowing us to start the next one in a good place. Finally turning to Slide 22, the coming weeks and months will be determinant in how our fiscal year ’21 will play out. As many regions of North America and Europe are de-confining and restarting their economies, we will get greater visibility on the potential impacts of the pandemic on consumer demand, which will be impacted by the severity and length of the economic uncertainty; the agility of the global supply chain and its ability to adapt and resume operations in a safe and sustainable manner; and people’s confidence, which will undoubtedly be linked to the evolution of the virus and will impact both demand and workforce availability across multiple industries. Given the uncertainty related to these elements, we are not in a position to provide guidance for fiscal year ’21 at the moment; however, we are sharing with your our high level view on how we expect the year to progress. This outlook assumes the restart of our manufacturing operations as scheduled, no further closure of operations at our factories or suppliers in our dealer network, and continued positive consumer demand in North America but lower year-over-year overall demand in other regions of the world. Based on this, we anticipate a challenging second quarter as revenues are expected to be down about 40% due to the production suspensions across most of our sites during April and May and then a progressive ramp-up to resume full capacity and replenish yard and dealer inventories, and the impact of the discontinuation of outboard engine production. We expect the trend to progressively improve for Q3 and Q4 as we complete our production ramp-up, however revenues are still expected to be down year-over-year 10% to 20% in the second half of the year due to the anticipated lower demand for our products in international markets and the impact of the discontinuation of outboard engine production. We expect capex for the year to be $220 million to $250 million, depreciation of about $265 million, net financing costs of about $135 million, and the effective tax rate to be between 26% and 27%, and finally end the year with a diluted share count of about 89 million shares. While our results for the year will suffer from the pandemic, the fundamentals of our business remain solid as we continue to outpace our industries and gain market share. Furthermore, our ability to secure our financial flexibility is allowing us to continue investing in our growth initiatives to put the company in a solid position for the rebound in years to come. With this, I’ll turn the call back to José. José Boisjoli: Thank you Sébastien. These are not easy times, but what makes me happy and proud is the agility and resilience of our employees, suppliers and dealers. I would like to thank them for their efforts and continued dedication. [Audio interference] committed to ensuring a safe working environment for our employees globally and now more than ever. We are also focused on staying agile. Our agility allowed us to react quickly to the crisis and now to successfully ramp up again, while making sure our dealer network is healthy and ready to be back in action. We will maintain our market leadership through our best-in-class marketing, go-to-market and retail strategy. There has never been a better time to promote the customer experience riding our products. Now to prepare for the future, we need to continue our growth objectives adapted to this new reality. Although we reduced our capex, we are protecting our key growth projects and initiatives to maintain our momentum in the industry. To do this, we will need to rethink now how we do business and add that to the new normal in our operations, our strategy and our mindset. We believe this new reality will give us opportunities to demonstrate our leadership as things will continue to evolve. For example, we believe the way people purchase has definitely changed with more interest than ever in ecommerce. With global travel remaining restricted in the short term, more staycations, prolonged social distancing and fewer large gatherings and events, consumers will look for activities that can be practiced closer to home. With our products, our know-how and our solid financial flexibility, we are well positioned to navigate through the crisis, respond to new trends, and emerge stronger than ever. Lastly, I would like to remind you we make the ideal product for social distancing. On that note, I will now turn the call to the Operator for questions.

[Operator instructions] Your first question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead.

Yes, thank you very much. I’m wondering first if we could just get a little bit more color on what you’re seeing with some of the retail trends into May. In the U.S., it sounds like a strong recovery started in late April and continuing, but just any comments on what you’re seeing now with dealer traffic levels, the restrictions that they’re working through and such in the U.S., and also the patterns that you’re seeing emerging now in Canada and Europe. José Boisjoli: Good morning Steve. Obviously for competitive reasons, I will not give you all the data that we see, but I will give you some. First, our dealers right now, about 90%of our dealers are reopened in the United States. There are still some states in the east and in California that are closed, but 90%-plus are open. In Europe, where everything was closed for a period of time in Germany, France, Italy and Spain, about 80% of our dealers are operational. I won’t give you the detail by product line or by country, but since the beginning of May we are up about 35% worldwide between all product lines and all countries. We don’t know how long this will continue, but that’s definitely a trend that is positive for our type of product.

I guess just squaring that, if retail into May is that strong versus an outlook for down 40% in Q2, is the difference there just a lag in terms of production versus retail, since production’s been down for six weeks? José Boisjoli: Yes, for sure. That’s for sure.

Okay. Secondly just in terms of the production ramp, I guess at your primary facilities in Mexico, it sounds like they’re ramping up now. Any comments on the level of utilization you’re at now and how you see that ramping? [Indiscernible] whether it’s local restrictions or supply chain, or just matching demand? José Boisjoli: In Mexico the government gave us the okay to restart on June 1, which is next week, and we’ve been working on the ramping up the production for the last two weeks. We’re allowed to let our people in and prepare for the ramping up. That’s what we’re doing right now, because you don’t just flip the switch on us, but we will be fully operational in our three factories starting next week. Obviously we expect to have some difficulty here and there with suppliers because we’re managing about 550 key suppliers around the world, and I think we will go through some difficulty overall for the rest of the year. But as we speak right now, everything looks good that everything will be operational next week.

Okay, and just a final one - thank you - final one on operating costs and overhead savings. It sounds like you’ve been pretty aggressive with that, looking at a $450 million reduction. Presumably as things start to ramp back up, some of those costs come back online, but any sense of how much of those savings might be permanent or structural in the business now and therefore support longer term margins? Sébastien Martel: Yes, good morning Steve. What we’ve communicated is we have plans in place to reduce our expenses up to $450 million versus what we were planning initially for fiscal year ’21. Obviously we’ll remain agile and adapt our plans. We’ll see how things are trending. One thing I can tell you is with the discontinuation of the outboard engine business, that’s a reduction of about $80 million of overhead, so that’s going to be recurring year-over-year. As things evolve, we’ll be nimble as we’ve been in the past, in the last few months, and we’ll balance the short term financial priorities with our long term aspirations, so the good news is we have flexibility to adjust accordingly.

Okay, thank you very much.

Your next question comes from the line of Craig Kennison with Baird. Please go ahead.

Hey, good morning. Thank you for taking my questions. Seb, I think you just mentioned some metrics regarding the engine business that you’re exiting. Could you share with us the annualized revenue and margin profile of that business, so we can try to exclude it from future results? Sébastien Martel: Actually on the OE business, there’s actually two components - there’s the unit business and there’s the parts business. The parts business is a business that we’re going to be continuing. Obviously we’re going to be servicing our dealers for warranty but also for our consumers that are no longer under warranty but need service, so that business is going to keep going on. As José mentioned, the unit business, so the actual engines, was a business that we were subscale. We’ve been losing market share over the last few years, and from a margin perspective it’s a business that was almost breakeven. From a profitability, it was a business that was actually at a loss position, and that’s why we took the decision to discontinue it. When you look at OE in terms of the whole portfolio of our marine segment, the engine business is about 45% of total revenues, so if you carve that part out, it should give you a good appreciation of what the remaining business is.

What would you estimate your market share to have been in that? Sébastien Martel: Oh, in the mid single digits.

Thanks. Then going back to the comment on May retail trends, which appeared to be really strong, is there any way to look at that data and deconstruct it for whether you’re seeing an influx of first-time buyers or there may be some kind of catch-up demand from earlier periods where dealers were closed? Just trying to get a real feel for the extent to which this outdoor theme is really capturing new eyeballs. José Boisjoli: Yes, we’ve done some surveys about the customers who purchased our units in the last month, and we see more new entrants than typical. Typically, we have about 20% of our sales is to new entrants. Fro our survey, and again it’s a small sample, but we are more around 30% right now, and there is definitely a trend there where some people who were not considering our type of product, we see them entering into our type of industry and this is very positive. There is obviously a lot of money in the system, a lot of governments investing in the economy, and with again the staycation and the social distancing, cancelling vacations and travel restrictions, there is definitely hype there. This phenomenon is there, we can see it, we can feel it. On the other hand, we cannot ignore that the unemployment rate is going up, consumer confidence is low, and housing starts have reduced. All of this at one point will catch up, and we feel pretty confident for the next few months; but how this will play on the second half of the year, that’s a bit difficult to predict.

Great, thank you.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Hey, good morning guys. A couple questions. First, you’re talking about lower demand in the rest of the world. Why aren’t folks elsewhere looking for outdoor recreational products just like we’re doing here in the U.S. and North America? Is this just a North American phenomenon? José Boisjoli: I think there is some timing, like LatAm right now is down, but the COVID hit Brazil and Mexico later than in Europe and in Canada and the U.S. I think it’s just a question of timing. Those countries were [indiscernible] later than North America--than Canada-U.S., sorry, and now they are in the middle of it, and I think it’s only a question of timing. I think the phenomenon is exactly the same.

Yes, but aren’t your markets bigger in Europe and Asia compared to Latin America? What about those markets? Sébastien Martel: Yes, what we’re seeing is that the confinement measures were more--I don’t want to say drastic or severe, and so there is a bigger aftershock event there for the consumers. We’re not seeing the pick-up that we’re seeing in the U.S. in terms of retail.

Okay. Going back, say, two years ago, would you have acquired these boat brands if you did not have the Evinrude business? José Boisjoli: Absolutely. I mean, you saw the few presentations we’ve done about the boat strategy, but BRP is a diversified company and we are--I think this is one of our strengths, and we needed to diversify outside power sport. Marine is a good complement to what we do, and you see how many customers buy ATVs, Sea-Doo or snowmobiles are buying boats, and we see a big opportunity in the boat industry. Obviously our thinking is about creating new experiences by pushing innovation and technology, and that’s what we’re doing right now by redesigning the complete line-up of Alumacraft, Manitou and Telwater boats. For us, it’s a bit sad that we discontinued the production of the Evinrude, the outboard engine, but we will continue to invest in new technology and the new boats because we believe that our long-term strategy makes a ton of sense.

Okay, so Project Ghost was not reliant on you having the outboard engine technology? José Boisjoli: Project Ghost, and I won’t tell you the details about it, but Project Ghost and Project M are ongoing right now.

Okay. I’ll leave it at that. Thank you very much. José Boisjoli: Thank you.

Your next question comes from the line of Robin Farley with UBS. Please go ahead.

Great, thank you. I have two questions. First on the off-road business, you mentioned--well, I guess you didn’t give specific product line, but you mentioned sales up very strongly so far in May, and we’re assuming a lot of that in off-road. But with the restart just taking place next week, how long--or do you think that retail from here going forward is going to be lower than it would have been; in other words, is there not enough product that it’s going to impact your retail negatively in the next months, and then is it by six weeks from now that you feel like you would have enough inventory in the system to be able to meet the level of retail demand, or how long will that period last? Thanks. Sébastien Martel: Well, as you saw, Robin, at the end of Q1 our inventory was up in the network, about 7%, and part of that was driven by side-by-side, so year-over-year side-by-side at the end of Q1 was up mid-teens, and so we had a good level of inventory. Obviously the retail is very strong, but we had anticipated strong retail when we started the quarter and we had, I guess, filled the network with some inventory. It might be tight for a few models in some regions, but the retail in May continues to be strong and, as José mentioned, next week we’re going to be in full production and we’re going to be starting shipping units to dealers again. Obviously we’ll be shipping the units that are in high demand, so we believe that we’ll be able to meet consumer demand and continue driving strong retail in the second quarter as well.

Okay, I guess just looking at side-by-side inventories at mid-teens, but in theory retail is pacing--seems to be pacing up 40% still in the month of May, is that--and I know those are on different bases, right? The retail pace and the inventory base are different numbers, so do you have enough inventory? Is the mid-teens increase at the end of Q1 enough to support that kind of retail through Q2? Sébastien Martel: It’s enough to support strong retail. We’re going to finish Q2 probably with inventory down year-over-year. As I said in my prepared remarks, we might run out of certain models in certain regions, so unfortunately some consumers may not necessarily have the choice of color they wanted, but we believe that there is going to be enough inventory in the network to meet the overall demand and as we rebuild our--as we restart production and refill the pipeline, we believe that we’ll be able to sustain that momentum. So are we losing retail maybe in the second quarter? Yes, but we believe that with our production ramp-up, we’ll be able to catch up pretty quickly.

Okay, great. That’s very helpful, thank you. Then just another question, we had felt that the outboard engine business was operating at a loss, and you kind of confirmed that. Can you quantify what addition to EPS you get just from maybe taking that loss out? How much does that add to the bottom line? Sébastien Martel: Yes, good question. When I look back to fiscal year ’20 and I carve out the OE business, I’m looking at a $0.60 to $0.70 negative EPS impact.

Great, very helpful. Thank you.

Your next question comes from the line of Mark Petrie with CIBC. Please go ahead.

Hey, good morning. I just wanted to follow up on two things. First, with operational constraints and social distancing on manufacturing, does that ultimately impact your capacity or throughput, or do you expect to be able to ramp to previous levels? José Boisjoli: Good morning Mark. No. I mean, obviously we were lucky enough to restart engineering in Canada about five weeks ago because we needed to plan the transition from model year ’20 to ’21, and we could not lose the momentum we had. We developed a lot of good measures to make sure that our employees are safe, and right now we are implementing these protocols everywhere where have factories and we believe that in terms of assembly and all the manufacturing operations, we will be as efficient as before. That being said, as Sébastien explained, we need to rebuild the inventory, our own inventory to be efficient in shipping. You need a certain level of product, and we are lucky we have many product lines. Right now when we ship, we have a mix of watercraft, ATV, side-by-side. We’re optimizing the load for key dealers in certain areas. This will take time to rebuild, then in the factories our efficiency will go back quickly. I think it will take a few months before we are overall as efficient as before.

Okay, thanks. Then wondering if you can just give any other comments around the type of demand that you’re seeing at the dealer level in terms of price points and the type of product, and then maybe at least within side-by-side, rec sport utility, how the demand profile or the sales performance varies by those subcategories. José Boisjoli: I would say it’s all over. The demand is strong for every product line. It was a bit difficult for three-wheeled because we had to stop all our different activities to continue our momentum. Even today you cannot have a license or you cannot plate your vehicle because license offices are still closed. But except for three wheel, and now it’s ramping up, I think we will recover the year, but the demand for all the product lines is strong.

Okay, and then just a last one. Seb, you had mentioned the positive working capital flow-through for Q1. Just wondering about expectations of the balance of the year as production ramps up and inventory [indiscernible]. Sébastien Martel: Yes, I’m expecting Q2 to be a consumer of cash on the working capital side as we pay off suppliers, we rebuild inventory, so that’s going to be a negative probably in the range of $100 million. Then for the back half of the year, I’m expecting things to stabilize as they were in prior years and prior quarters.

Okay, thanks a lot, guys. All the best. José Boisjoli: Thank you.

Your next question comes from the line of Tim Conder with Wells Fargo Securities. Please go ahead.

Thank you. Good morning gentlemen. A couple of items. Just wanted to clarify and confirm a prior question here. Seb, you said that for fiscal ’20 the impact of the engine business that you’re discontinuing was about $0.60 to $0.70 in earnings? Sébastien Martel: Yes.

Okay. Then gentlemen, can you talk about the potential incremental investments you may be making in ecommerce, either at the company level or with the dealer network that have maybe, as you’ve said you’re re-examined things through coming through the trough of COVID and now on, hopefully, the continued positive slope of recovery, to say we maybe need some more additional investments on ecomm here, both again at the company level or at the dealer level? Sébastien Martel: Yes Tim, it’s more rebalancing our portfolio of IT investments. Obviously we believe that there might be a continued phenomenon of people working from home, of people preferring to--obviously everyone has seen the trend of people shopping online, so how do we make sure that we have the best tools for consumers or dealers, so it’s shifting of money but it’s not a huge capital investment that we’re talking about. It’s more reprioritized.

Okay. Then José or Seb, whoever wants to take this, the pricing and promotions, is there any way to bucket what you saw in q1 and are expecting here over the balance of the fiscal year into what may be, let’s call it normal promotions ex-COVID, and then COVID-related, which you’re having to because of COVID? It’s maybe a difficult question, but any way to sort of parse that? José Boisjoli: Yes, it’s a difficult question. Let’s say that promotion was quite aggressive on non-current, like it’s always do. Off-road, obviously everyone wants to benefit of the situation. On current, I would say it’s about similar to what we see from some of our competitors over the last few years. I would say no big change before and after COVID - non-current very aggressive, and some although on the current. We were aggressive on a retail promotion for consumers with a very good financing offer - zero interest for five years, and that definitely helped the retail because two or three weeks ago, we didn’t know how this would play. Overall, off-road, watercraft, I would qualify it as normal and three-wheel as normal. Going forward, it’s very difficult to predict. I think right now, if OEM are chasing capacity and want to make sure to ramp up, then most likely people will be maybe a bit less aggressive on programs, but very difficult to predict what will happen in the coming months.

Okay, helpful. Then two last questions. One, do you see any furtherance of a working relationship with Brunswick outside of the supply agreement on the marine side? Then lastly, your thoughts on the potential of when you could potentially return to fiscal ’20 levels in terms of revenue or--I would think profitability may have a quicker ramp given at least the $80 million of structural savings on the engine side that you’ve eliminated? José Boisjoli: On your question about Brunswick, Brunswick obviously is the perfect partner for us because they don’t compete in power sports, then it’s a very good complement. We obviously are happy with the Evinrude--the outboard supply agreement that we have with them, and we could in the future exchange technology, but we’ll see how this will play in the future. Sébastien Martel: On your question, obviously I’d love to give you an answer this morning, to you and the rest of the organization at BRP. There is obviously, as you can appreciate, there’s still a lot of uncertainty how things will pan out, how the economy will react to massive job losses, and so today I’d say it’s much too early to call when we believe things will come back to normal. The good news is, again, at BRP I believe we are in a much better position than we were back in ’08 and ’09 with the Great Recession. You guys understand well the leadership position we have in all our brands, and we believe that that momentum is going to continue, as we are seeing it continuing when things come back to normal. So do we believe we’ll come back to fiscal ’20 levels someday? Absolutely, but today it’s too early to give any outlook.

Thank you, gentlemen.

Your next question comes from the line of Benoit Poirier with Desjardins. Please go ahead.

Yes, thank you very much, and good morning gentlemen. With respect to the engine contribution in fiscal ’20, was this $0.60, $0.70 on EPS was positive or negative contribution? Sébastien Martel: It was negative, Benoit.

Okay, perfect. Now with respect to the Ghost project and the Project M, I understand the timing is unchanged and everything, but could you talk more specifically about who will be responsible of providing the engine and whether there is exclusivity or is Mercury--does Mercury need to build the new engine for this particular project? José Boisjoli: Good morning Benoit. Obviously, Benoit, for competitive reasons I cannot go into detail of your question. The only thing I can say is Project Ghost and Project M are ongoing and we are confident about our reoriented strategy. Sébastien Martel: But it will be an internally sourced technology, Benoit.

That will be manufactured by Mercury, or manufactured-- Sébastien Martel: We won’t go into the detail, but it’s--again, our partnership with Brunswick is for the supply of traditional outboard engine, and our plans for Ghost do not change and our plans for Project M do not change as well.

Okay, perfect. That’s great color. José, you mentioned that capex will come back and will be reduced obviously, and spending will be made on key projects. Would you maybe share some color on what you would consider as key projects right now, and maybe if you could share some discussions you had with the dealers following the announcement around the electric bikes last fall? Thanks. José Boisjoli: Benoit, we had before COVID an incredible momentum with all our product lines around the world, and in those reductions that we made, we did make sure to protect as much as we can our five-year line-ups for all product lines. There is some adjustment here and there, but globally we are very confident with what we’re planning for the years to come. A lot of capex was related to plant maintenance, equipment turnover that we will slow down for a period of time, but we protected our five-year line-up. Electrification is ongoing, and again we didn’t disclose when those products will be offered, but we’ll see how all of this will play and how fast we can come back to the level that we had before the COVID-19.

Okay, perfect. Now when we look at your kids’ line-up, could you let us know how these product lines are doing these days, and how would you compare your kids’ product line-up against your peers’ right now in terms of product offerings? José Boisjoli: You’re talking which product line, Benoit?

I’m talking about the kids’ line-up, so the DS9E, the DS7E, 225 I believe, so you have on the ATV side. You don’t have your snowmobile for kids anymore, but just wondering whether you’ve seen more momentum around the kids’ products and whether you have the good offering as opposed to peers. José Boisjoli: I think we have a competitive line-up in every segment that we are competing, and we decide to compete and overall--I mean, we didn’t see any drastic change with what happened in the last month and a half for those product lines. Like I said before, right now the surge in demand is touching every single product line, every price point, low and high end, and we didn’t see a surge on the youth products, products for youth people.

Okay, perfect. Last one for me-- Sébastien Martel: Ben, we need to move to the next caller on the line. We’re running--

Okay, perfect. Thanks. Sébastien Martel: Sorry, thanks.

Your next question comes from the line of Greg Badishkanian with Wolfe Research. Please go ahead.

Hey guys, good morning. It’s Fred Wightman on for Greg. Just one quick one from us. If we look at the share gains in side-by-sides in the quarter, that was a big acceleration versus what we’ve seen over the past few quarters, so how should we think about that gap going forward, and what is driving that? Is it really just product availability in the channel, or is it something else? José Boisjoli: Again, we have--I believe we have very good competitive products and the Can-Am brand is more and more known. The [indiscernible] is improving. People like the quality of our product and how they ride, and I think it’s all those things that are happening. Again, good product, dealers making good money, better margin with our product line, and it’s a combination of all this that created the momentum.

Great, thanks.

Your next question comes from the line of Derek Dley with Canaccord. Please go ahead.

Yes, hi guys. Just a quick one from me. In terms of your dealer network, have any of them decided not to reopen due to the financial distress that was caused to some of them over the past month or two? Sébastien Martel: We’ve been very lucky. None of our dealers have defaulted on their obligations with either their financial institution or the floor plan partners. Obviously the dealers came into this in a very good financial position because obviously our business with them has been growing and they’ve made a lot of money with us. We’ve been proactive as well early in the COVID-19 by supporting our dealers with extended floor plans, working with TCF also to provide extended payment terms on interest that may be due, so they deferred payments by over 90 days. Now with the retail that we’re seeing, obviously that’s providing good cash flows for the dealers, so as of now, we’re not seeing anything concerning on the dealer health side.

And is that more specific to you guys, the fact that you had zero of them have to close, or what did you see overall in the industry? Sébastien Martel: Well, obviously we know how our dealers are performing, and how other dealers, it’s not--I mean, it’s not a business that we’re looking at closely, but obviously we work hand-in-hand with TCF, they’re very proactive in assessing dealer health, and overall I think, as I said, given that the dealers have made money with us and maybe had a period of two to three weeks where things were tougher, but things restarted pretty quickly. I’m sure that brought a breath of fresh air to a lot of our dealers.

Okay, thank you very much.

Your next question comes from the line of Jamie Katz with Morningstar. Please go ahead.

Hi, good morning. Thanks for taking my question. I’m curious, piggybacking on Tim’s question, since we don’t know when we get back to 2020 levels, are you guys basically tabling the 2025 plan for now and rethinking it, or do you think that there’s enough road ahead of us that we can--that you guys can get back on track to achieve those goals? Thanks. José Boisjoli: No, we don’t know. We are--the pillars of the M25 plan are still there, but before the situation stabilized and the situation--we have a better view on when we’ll go back to what we call new normal, we don’t want to commit on anything. At the right time, we’ll definitely, if there is a need to, realign M25, but for the time being, it’s too early. Sébastien Martel: And Jamie, when we announced M25 last fall, we did get the question, what happens if there’s a recession, and what we said then and it’s still relevant today is, well, if a recession happens, maybe it’s going to slow us down by a year or a year and a half, but the ultimate goal does not change. Today that’s still our position.

Okay. Then at the end of the MD&A discussion, there was some commentary that internal controls for financial reporting were ineffective, and it looks like there no material restatements surrounding that. I’m curious what the timeline for the mitigation of that is, just to sort of get my head around what the timeline of maybe anything down the road that might come up with a restatement. Sébastien Martel: When we listed in the U.S. on NASDAQ, we were obligated to comply with the SOX requirements over the control environment. Related to financial reporting, obviously we’ve always had clean audit opinions, as you have seen, so the quality of our numbers still remains and José and I sign them every quarter and we stand behind them. Related to the material weakness that was noted, is around access controls around our systems. Obviously we have compensating controls, but the nature of the preventative controls need to be strengthened and the timeline to do this is over the next two years. Our objective is for fiscal year ’22 to be fully compliant.

Thank you, that’s very helpful.

Your next question comes from the line of Cameron Doerksen with National Bank Financial. Please go ahead.

Thanks, good morning. Just really one question from me, just with regard to gross margins, when you talked about in Q1 a 350 basis point impact from COVID-19 related stuff. How should we think about gross margins in Q2 with revenue down 40%? I guess maybe also if you could talk a little bit about what the second half of your gross margin profile might look like on lower revenue, but on the offset you’ve got the outboard engine that’s not going to be there. Just some commentary about gross margins in Q2 but also the second half of the year. Sébastien Martel: Yes, I’m expecting gross margins to be impacted quite significantly in the second quarter. Obviously our plants are going to be closed for a month out of the full quarter. Inventory ramp-up should help a bit on the margin side, but obviously with the significant reduction in volume, margins will be hit. When I look at the full year, and I’ll go through probably the EBITDA margin, again if we hit those revenue numbers that I talked about, I’m expecting my EBITDA margin probably to be in the range of what we reported back in fiscal year ’18, fiscal year ’19. Those would be the numbers that I’d expect to meet for the full year, Cameron.

Okay, that’s very helpful. I’ll leave it there. Thanks very much.

Your next question comes from the line of Brian Morrison with TD Securities. Please go ahead.

Thanks very much. I’ll keep this quick. Appreciate your comments on working capital. Just in terms of free cash flow for the year, based on what you’ve given us, Seb, is it fair to say that you’re looking at breakeven to slightly positive? Sébastien Martel: Well, free cash flow, we’ll call it free cash flow from operations, Brian, yes - breakeven, but obviously with the discontinuation of outboard engines, there will be a cash outflow coming with that. The expected cash outflow is about $60 million to $85 million that we reported in our financials, and so that’s going to be a headwind to cash generation, so I’m expecting to burn cash this year with the closure of outboard engines.

Okay, thank you. Then just market share with the growth that you’ve had in side-by-side vehicles, specifically utility, can you update us where you think you are? José Boisjoli: Can you repeat your question?

Sorry, José. Just in terms of your market share with side-by-side vehicles, what you think your current market share is with the growth that you’ve had, and specifically in the utility side? José Boisjoli: Obviously for competitive reasons, we don’t disclose the details, but we are around 20% market share globally.

Thank you very much.

Your next question comes from the line of Brandon Rollé with Northcoast Research. Please go ahead. Brandon Rollé: Good morning. Thank you for squeezing me in here. Our conversations with dealers, actually Memorial Day weekend, indicated a lack of inventory in four to six seat units for side-by-sides, just from a surge of demand of families wanting to get into ORVs. Could you talk about the timing for production ramp-up for those units and any risk you see from maybe families going to alternative, maybe going to boats or RVs, or going away from ORVs because of the lack of inventory of those larger seated units? Thank you. José Boisjoli: Yes, like Sébastien explained, for sure there is some customers who will show up at the dealership and we will not have the exact model that he is looking for. He will have the blue or the red that he’s looking for, no doubt about that. If the customer wants exactly what needs, he might be unhappy. That being said, we try to encourage transfer of inventory between dealerships, and again like we said, we’re ramping up production, we’re restarting production this coming week, and we will try to refill the pipeline as fast as we can. But again, we know that in some areas, some models will be out of some product. Brandon Rollé: Okay, thank you. There was some fears that one of your competitors was ramping up production maybe a week or two before you and they have product in the field. Do you see that as a concern at all? José Boisjoli: For sure. I mean, like Sébastien presented, our inventory level at the end of the quarter as higher than last year, then we feel that we have sufficient inventory and we believe that for restarting the factories, we are all about the same timing because we’re all waiting for government to give us the green light to restart. That may be a week apart, but overall we are in the same situation. Brandon Rollé: Okay, thank you for that color.

There are no further questions at this time. I will turn the call back to the presenters for closing remarks. José Boisjoli: Great, thank you, and thanks everyone for joining us this morning. We look forward to speaking with you again for our Q2 call on August 27. Thanks again and have a good day.

This concludes today’s conference call. You may now disconnect.