Good morning, ladies and gentlemen. Welcome to the BRP Inc. FY '21 Fourth Quarter Conference Call. [Operator Instructions]. I would like to now turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschênes.

Thank you. Good morning, and welcome to BRP's conference call for the fourth quarter and year-end results for fiscal '21. 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 the result could differ from those implied in these statements. Please note that the forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult BRP's MD&A for a 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'll turn the call over to José.

Thank you, Philippe. Good morning, everyone, and thank you for joining us. Fiscal year '21 has been a very unusual year, as we went through a period of temporary production shutdowns, followed by a surge of consumer demand for our product, which continued to this day. While this dynamic put pressure on our people, our supplier and our dealers, everyone rose to the occasion to make the most of this opportunity while answering the health and safety of our team everywhere around the world. I would like to thank them for their hard work and dedication throughout this period, which allow us to deliver outstanding results with exceptional retail sales growth and a record normalized EPS. Let's turn to Slide 4 for a more detailed look at key highlights for fiscal year '21. During the year, we proactively managed the impact from the pandemic by protecting our employee and preserving our financial flexibility. We reduced our cost base, we focused our CapEx plan and enhanced our liquidity position. We also deliver exceptional retail growth across all our product lines by supporting our dealer network to a surge of customer demand as well as attracted and nurtured an unprecedented level of new entrants to the industry. Operationally speaking, we successfully executed a rapid production ramp-up after the temporary shutdown of our site and managed our volatile supply chain tightly to limit disruption and deliver on our plan. And we can forget the wind down of the Evinrude outboard engine product to refocus our time and investment on our boat brands. In parallel, we continue to invest in our future growth. We broke ground on the construction of a new side-by-side manufacturing facility in Mexico, introduced multiple models across all our product lines and invested a record amount in R&D. All in…

Thank you, José, and good morning, everyone. We completed fiscal year '21 with record results for our fourth quarter as we delivered on our production plan and continued benefiting from a lower sales program environment, and a richer product mix driven by the very strong consumer demand for our products. Our revenues reached a record level for fourth quarter at $1.8 billion, up 12%. Our normalized gross profit margin ended at 27.8%, representing a 410 basis point increase, driven by higher volume and richer mix of products sold, and a favorable impact from pricing and sales programs, which were partly offset by unfavorable foreign exchange rate variations. Driven by this strong improvement in our normalized gross profit, our normalized EBITDA ended the quarter up 41% to reach $313 million, and our normalized diluted EPS was up 63% to $1.82. This resulted in a very strong free cash flow generation of $198 million for the quarter, bringing the total to $674 million for the year. Also, just after the end of the year, we took advantage of our solid liquidity position with $1.3 billion of cash to deleverage our balance sheet by USD 300 million, and significantly reduced the overall interest rate on our debt, leaving us with a much lower interest expense and a very robust balance sheet that provides us with the flexibility to sustain our investments in the business, all the while continuing to return capital to our shareholders. Turning to Slide 15 for a look at the key drivers of our normalized gross profit margin improvement for the year. Our normalized gross profit margin was up 190 basis points for the year to reach 25.9%, driven by a positive impact from volume, mix, pricing and sales programs for 440 basis points, which was partly offset by negative…

Thank you, Sebastien. Before I conclude, I would like to briefly discuss the announcement we made this morning regarding electric vehicle. We have always said electrification was not a question of if, but when. Today, we are very excited to unveil more detail of our plan of delivering market-shaping product that will enhance the consumer experience by offering new electric options for our products. This announcement builds on previous investment we already made in the space over the years. For instance, recall that we introduced electric kart for racing in 2017, and for our Rotax Max Dome facility in 2019. More specifically, we are developing our own Rotax modular electric power pack technology, which can be leveraged across our product line and provide us with a more cost-effective solution just like we do for our combustion engine. There will be 2 poles of development, one in Gunskirchen, focusing on the torque side, the inverter and the high-performance electric motors and another in Valcourt, which will focus on the energy side: the charger, the battery pack as well as the complete integration into the vehicle. As a result, we will be adding many resources to our team in Austria and in Canada. We intend to invest $300 million over the next 5 years to electrify our existing product line by the end of calendar 2026. In fact, you can expect the first product to be introduced to the market within the next 2 years, followed by a rapid rollout across all our product lines. With the engineering know-how and innovation capabilities of our team, we've been working hard to define the best strategy for our electric power technology. While our current product portfolio is very strong and exciting, our objective is to expand our offering with electric option for each product…

[Operator Instructions]. Your first question comes from the line of Craig Kennison from Baird.

Congratulations on the performance. Excellent work. I had a question on the longer-term, I guess, plan for infrastructure around electric vehicle charging. Obviously, it's not -- these are not products that are on roads. And so you're going to have to invent the infrastructure as well. Are you going to rely on homeowners or ranchers? Or is there a plan in place to ensure, I guess, charging infrastructure?

Yes. Craig, no, there is no immediate plan for the infrastructure. Obviously, like you just said, the usage of our product is mainly on road -- off-road, sorry, then it's very difficult to develop that infrastructure everywhere in the world. That being said, the product will be -- you will be able to charge a product at home. You will be able to charge a product in any car charging station. But the plan for the charging station off-road is not finalized at this point.

Got it. And then maybe you're not prepared to comment on this, but I think you alluded to some modular construction to your battery packs. That would suggest maybe you could buy a multiplicity of these packs and then charge them as you're operating the vehicle and then replace a dead battery with a charged one. Is that the right mindset?

No. I think the way you should see it is -- I give you an example, we've been -- I think we are good to design product with a modular approach, and I gave you the example, the 900 ACE engine, we are able to use it on snowmobile, on watercraft, on 3-wheeled and on side-by-side. And it's a basic same engine with 3 different applications, different transmission systems. And that's what we meet when we talk about modular approach. We're designing a few modules of different components that you can combine them differently to be applied to all product lines. And I will conclude on this. The EV challenge is to balance the range, the weight and the cost. You can have longer range, but it will affect the weight and the cost, then we need to find the right balance that is acceptable for the customers, and to be able to have a great customer experience.

Your next question comes from the line of Brian Morrison from TD Securities.

I understand that you can make up some of the capacity in the second half of the year as your new facilities come online, but I'm a little bit more curious on the existing facilities right now. And on Slide 9, you talked about the ramp in capacity. So I'm wondering can you give us comfort how you can optimize your current facilities to keep up with the retail demand in the first half of the year until you get additional capacity coming on in the back half.

Yes. Brian, as of now, I mean, we are running our plants at full capacity. And we do expect that we'll be able to meet retail demand, especially for the seasonal products. So personal watercraft, 3-wheeled. So we are well positioned in the boats as well. So that's obviously positive. And we are running at full capacity on our ORV plants because obviously, demand continues to be strong, even better than expected in February and early March. That being said, we'll still be unable to build network inventory in the first half of the year. We believe that we will meet demand, and that's it. And it's more going to happen in the second half of the year and more as well, as I said in my prepared remarks, in fiscal year '23. So it's still going to be tight in terms of offering. Consumers will not necessarily have the full choice that they're used to have 2 or 3 years ago.

And were side-by-side, were they retail -- were they constrained in Q4 by available capacity?

Yes. Yes. Inventory is very lean, and yes, we're still constrained.

And then last question, just in terms of leverage, you're well below your ceiling set. And I'm wondering if you would consider potential accelerated return to shareholders such as you've done before.

Yes. Well, obviously, you probably saw we were active with the NCIB in the end of the fourth quarter and we continue to be. And the share count reflects that. Obviously, these are discussions we are having with the Board. We do have ample financial flexibility. So all the options are open for now.

Your next question comes from the line of Robin Farley from UBS.

Great. I know you talked about your shipments that you would probably only be able to meet demand in the first half. Can you give us a sense of the cadence? I guess I'd like to sort of try to be able to back into kind of what retail growth rate your planned shipments could support in the first half?

Yes. Well, maybe if I give you my -- let's say, some expectation on how I see retail progressing, let's say, going forward. Q1, again, is off to a good start. So we believe that retail is going to be up, probably high single digits in the first quarter. We are lapping, obviously, a strong quarter in Q2. Retail was up 40%. You might remember that our plants were closed during -- for Q1 and part of Q2 as well. And therefore, that retail growth came from inventory replenishment, which is a lever we don't have this year. So my expectation is that retail will be down in the second quarter, maybe high single-digit to low teens. And then as the year progresses, we expect probably retail to be flattish to low single digit, again, depending on the quarter. But as I said, inventory is going to be lean. And so we don't have that big lever that we had in fiscal year '21 for -- to drive retail.

Okay. Great. That's helpful. And then I'm also curious, your guidance assumes that kind of promotional activity comes back in the second half, and yet everybody seems to be fairly supply constrained. So I mean I don't know if that's -- if you're just being conservative there. But can you -- I don't know if I missed if you said in your opening remarks, what ASP was in Q4 and for the full year, just so we can kind of think about what we're comping now without having a lot of promotional activity?

Yes. When I look at fiscal year '21 and the impact of the favorable promotional environment, it brought about 200 basis points of a favorable lift to the margin. Q1 was a tough quarter, where we did -- we were more intense in terms of promotional activity. So our expectation is that for next year, that 200 basis points should be there. So continue to be favorable in Q1, Q2 and probably a bit more, we'll call it, more conservative in our planning for Q3, Q4, which brings it to about 200 basis points for the full year.

Okay. Great. And just my last quick one. Can you get to the top end of your range kind of with current supply chain, the rate at which you're getting? Or would the top end of your range kind of need the supply chain to improve?

No. I mean the way -- and the guidance has a wide range because of the supply chain. We believe the demand will be there this year. Obviously, like every OEM in the world, I think right now, there is a challenge on a daily basis. Then if we are able to not interrupt the production, we could be on the high range of the supply chain -- the range, sorry. But if, obviously, there is more interruptions than we're planning, we could be on the low range of the guidance. That's the way to see.

Your next question comes from the line of Benoit Poirier from Desjardins Bank.

Congratulations for the strong finish. Could you talk a little bit about the contribution of key strategic initiatives that will be kind of impacting your revenue going forward? And I'm especially referring to the Project M and Project Ghost in terms of what we could expect beyond fiscal '22 in terms of revenue contribution from key strategic initiatives.

Yes. Benoit, maybe the way to position it is, we don't believe in fiscal year -- we believe that in fiscal year '22, the demand will remain strong until the end of the year. The question is to manage the supply chain. And this is why we have a wide range in our guidance. If I look at fiscal year '23 and beyond. Obviously, we're investing -- Juarez 3 will be up and running on the back end of Q3, then it will be operating only -- it will be in ramp-up in Q4 and will be fully operational next year. Project M will start delivery late in Q4, then big impact will be in fiscal year '23. We're also adding additional capacity for watercraft in Querétaro, 30% that will come fiscal year '23. Then all those key strategic initiatives will benefit more '23 than '22. But basically, we're quite optimistic about the demand for '22. And '23 -- I mean it's too early to call, obviously. But '23, we're preparing to be ready if the demand remains.

That's great color, José. And how should we be thinking about the contribution specific to Project M and Project Ghost in the long term from a revenue standpoint?

Well, obviously, it's part of our pillar from M25, which we shared with everyone now 18 months ago. Obviously, we have strong ambitions for the Marine business. It is a big industry, over $20 billion. And so we believe that we have the ability of getting to take share of that. Project M, you saw some bits of it. It's about creating an entry-level product that brings value to consumer and leveraging the know-how that we have. And so we believe that could be a good driver of growth for us. And obviously, with our innovation abilities on Project Ghost, and with our Marine brands, again, who knows where we can bring it. But again, our plan for Marine is quite ambitious as you saw when we presented the Mission 25.

That's perfect. And my last question, with respect to electrification, you provided great details about the strategy going forward. I would be curious to have more color about the assembly line, whether you need a separate assembly line, whether there's been -- there will be some cannibalization or the revenue would be incremental to your current product line, and whether it would be margin accretion or accretive or dilutive at the beginning? And how you see the overall margin impact from electrification?

That's a loaded question, Benoit. No. I mean the assembly line -- the plan is to assemble the product in the same line then where we're assembling combustion engine vehicle. Then every line will be upgraded, I would say, to assemble the new electric vehicle, then this is one. The other thing is, the whole strategy about the electrification, it's to attract a new set of customers. I give you some example. A person that uses an ATV to go hunting for a week, he will not be attracted to electric ATV because there is no charging station where he goes in the world. Then we want to create, in each product line, a new product category that will appeal to some of our existing customers, but also to new customers because there is an appeal riding electric vehicle. And we believe we will be able to grow the industry in a different way. The other thing -- the last thing I would say about cannibalization. My philosophy on this, I prefer to cannibalize ourself than let someone else cannibalize us. And that's why, for us, going electric, it's a normal evolution in the technology.

Your next question comes from the line of Mark Petrie from CIBC.

And I'll echo the congrats, from others. I just want to come back to the dynamic of new to industry. Wondering if you can just provide some more context about how that evolves through the year and more detail about how that varied by product?

Yes. Mark, then like I said in my remarks, we ended the year with about 30% of buyer -- of people who purchased our units that are new to the industry versus about 20% in the past. And if I look product-line-by-product-line, snowmobile typically has a very, very low ratio of new entrants. And this year was 3x, but it's still high single digit. Watercraft this year, half of the people who purchase our product were new entrants, 3-wheeled, 2/3 were new entrants. And for off-road, there were about 20%, 25% new entrants. But what is amazing, and we've done a detailed survey in the last few weeks. If you survey a customer, those new entrants right now, 90% say that they want to stay in the industry for long term. And this is quite amazing ratio. The other thing that is interesting, and I believe we are well positioned because of our experience on Spark and Ryker, we are well positioned to talk to those new entrants and keep them in the power sport industry. I mean we improved the quality of the shopping experience. We launched specific initiatives like Rider Education Program, the women mentoring program, the Uncharted Society, then we -- and we have a lot of digital tool to talk to those people. Then I believe we are extremely well positioned to make them lifetime consumer, but more to come, and we are ready to do the best to convert as many as we can.

Okay. Great. That's helpful. Also, I just wanted to ask about your expectations for OpEx through the course of fiscal '22. Obviously, there's lots of noise in fiscal '21. You've talked about wanting to invest specifically in the initiatives around electric vehicles. Could you just give us a sense of sort of how to think about fiscal '22, I guess, specifically on selling and marketing and G&A?

Yes. Mark, if you look at our Q4 results, our OpEx was up about 13% versus a year ago. We expect that trend to be -- to continue in terms of absolute increase next year. OpEx should increase at the same level as revenue growth. As you mentioned, last year was a funny year with a lot of noise. But obviously, we have a lot of growth initiatives that we are investing in R&D will continue being an area where we want to continue to invest. So ballpark, OpEx should follow the trend of revenue growth.

Your next question comes from the line of Martin Landry from Stifel GMP.

My first question is with regards to pricing. Commodity costs are increasing. You also have additional costs related to logistics and supply chain inefficiencies. So I was wondering, have you taken price increases this year to offset these additional costs?

So far, no. You need, Martin, to balance the short term and midterm. In our product -- our products are not commodity. I mean if you buy a snowmobile at a high price, and the year after, the OEM reduce the price, then you stuck with the retail sale -- resale value that is lower and it's very sensitive. Then right -- in a typical year, we increase pricing of about 1%. That's the average of the last few years. And we're, right now, monitoring, obviously, the cost increase for commodity and everything and even our efficiency. This is a lever that we have but so far, we didn't do it, and we will continue to monitor the overall situation. But it's something we will consider if things get very, very difficult, but we didn't do it so far.

Okay. And my second question is more longer term. COVID and staycations have been a really good driver for the industry. And wondering in your longer term plans, what do you think is going to happen to demand when travel returns to normal? How do you see things evolving?

Obviously, that's not our field of expertise. But if you read more and more articles or expert regarding traveling, vacation, the cruise, airline, people believe it's more 2, 3, 4 years before we go back to the old normal, I will call it that way. And that's why we believe people will probably travel more in the time, but we don't see the trend that we're going right now through going from on and off. It will take some time to taper down and that's why we like the challenge to convert those new entrants to the our industry.

Your next question comes from the line of Gerrick Johnson from BMO Capital Markets.

So year-round revenue was up about 8%, right, in the fourth quarter. And I think the back half, call it, 9%. By my estimate, ORV was probably up 12%. And sorry to bring them up. Polaris grew off-road by about 23% in the back half. So you lost some wholesale share there. And it looks like you lost some side-by-side retail share, not a lot, but a little bit in the quarter. What is your ability to reclaim that wholesale share with the capacity you have now? That's one. And number two, how dependent are you on the new side-by-side facility to achieve the guidance that you have? I realize it's a 3Q, 4Q ramp, but how dependent on a, let's call it,10, it's a perfect ramp up and 0, it's an abject disaster. What level does that have to be between 0 and 10 to achieve your numbers?

Gerrick, I gave you some numbers about our side-by-side growth over the years. From fiscal year '16 to fiscal year '20, every year, we grew between 25% and 35% retail. Then we used to grow and chase capacity. And since the Defender and Pro back in 2015, we delivered on our plan. Right now in '21 -- fiscal year '21, we grew 40%, then an incredible momentum. And the volume we delivered in '21 is 5x in unit what we we're delivering before Defender, then significant growth. Then for us, we might lose a few share a quarter and gaining back the following quarter. But when you look at the big picture and the long-term trajectory, I'm very confident that we can achieve our objective of 35%-plus market share in the time line that we have said before. Then for me, obviously, I don't like to lose 1 point in 1 quarter, but I can live with it because I believe our plan is very strong to achieve our long-term trajectory. Now in terms of the facility, obviously, and you know us, we've been ramping up new facility a lot of time in the last few years. We never missed a beat. Right now, Juarez 3 construction is on plan. Then obviously, we depend on Juarez 3 start-up to deliver on this year guidance. But -- I mean we have some flexibility, we always put some cushion. But overall, we depend on the Juarez 3 to deliver on the year-end guidance.

I think the area, which is the risk for all OEMs, Gerrick, is more on the supply chain stability. As you see in the news, it is very fluid every day, every week. This week is the Suez Canal that's clogged up. Next week, who knows what's going to happen. And that's probably an area where in terms of risk factor is much higher versus our ability to start-up the plant -- the new plant.

Yes.

Okay. And I'm still waiting for my barbecue grill that I ordered 2 months ago. But, José, I've got to say since I've known you since 2013, you've basically achieved everything you set out to achieve. So I applaud you for that, and I put faith in the numbers that you put out there.

Thank you. More pressure.

Your next question comes from the line of Fred Wightman from Wolfe Research.

Just a quick follow-up. Seb, in one of the earlier responses for the retail outlook, did you say that you were expecting 1Q retail to be up high single digit? Or did I mishear that?

No. You heard correctly.

Okay. Could you just sort of touch on what would drive that number relative to what we saw this quarter, just given sort of the commentary you've had on quarter-to-date performance, and the fact that compares aren't too much tougher until next quarter. So sort of what's driving the slowdown in that outlook?

Well, listen, obviously, inventory availability is one of the factors. Delivery of units to the network as well as another factor or side-by-side deliveries will be higher in the second quarter than in the first quarter. So it's obviously a combination of factor. And personal watercraft really kicks up in terms of retail, usually in the second quarter. Can some retail of personal watercraft be accelerated in the first quarter? We'll see what the next few weeks reserve, but that's our current read.

Okay. And then just to sort of tie that with Gerrick's question. I mean understand over time, market share generally is up and to the right and really positive. But given some of that product tightness and the comments for the retail outlook, should we expect some choppiness on the market share side here for the next few quarters until some of that capacity comes online in the back half of the year?

We're not -- again, we don't believe that our competitors have that much excess capacity versus us. I think everyone is facing the same challenges of ramping up supply chain, et cetera. So again, there might be a bit of choppiness. But as José mentioned, our long-term plan is very solid. Our product lineup is also very solid. And so our target of being a leader in the side-by-side industry as we are today and even growing is still very, very valid.

Your next question comes from the line of Cameron Doerksen from National Bank Financial.

I guess a question on the M25 plan that obviously you're achieving well ahead of schedule. But you did mention that you still have some of these tailwinds from some of the cost initiatives that you laid out in that plan. Can you just maybe go through what's left to be done on that front? And what we should expect from, I guess, from a margin tailwind from those costs and leaning out initiatives?

Yes. Well, we're still very early in our M25 plan on the cost initiatives. And honestly, obviously, with COVID priorities were shifted from our operations team to manage the day-to-day. As we said, it's a $300 million saving that we want to achieve. That is going to provide a big lift to the margin improvement. And the other one is the volume growth, our objective of growing our side-by-side market share. We're still at 20% market share for side-by-side. That better asset utilization coming from the volume growth is also going to be a big driver of our margin improvement down the road.

Okay. That's helpful. And just a question on cash flow in 2022. What should we expect from working capital? I mean, obviously, there was some -- fiscal 2021 was, again, a pretty weird year. But what's your expectation for working capital usage in fiscal 2022?

Yes. The inventory, we finished the year quite lean, down about $185 million of inventory compared to the previous year. So obviously, our objective is to rebuild that yard inventory. So we're looking at a potential working cap investment in fiscal year '22, ranging from $150 million to $200 million.

Your next question comes from the line of Jaime Katz from Morningstar.

I hope you can just clarify whether or not there's any left over Evinrude flow through in Marine this year? I'm just trying to think about what that base stand-alone Marine business can look like, or whether we are pretty much completely through that?

We are completely through that. No -- there's no units left in inventory at the end of the year.

Okay. And then I think I heard you guys say that the gross margin would be flat in 2022, and that 200 basis points were gained from lower promotions. But basically that if the promotional environment picks up, it will not happen until next year, and that's when some of that might give back not this current year that we're in now. Is that correct?

Yes. That's correct. So if I compare, obviously, fiscal '22 to '20, there is a -- so that's 2 years. There is a lift coming from the promotional activity, about 200 basis points. When I compare '22 to '21, the promotional activity should be flattish in terms of margin impact.

Okay. And then lastly, because this is a pretty high year of capital spending for you guys project-wise. Is it right to think about CapEx longer term in that $300 million to $400 million range? Or is there a better number for that?

There is a better number, which would -- is higher than the $400 million range. Obviously, as the business grows as we continue investing in technology because we believe that is a big part of being successful in our business, that requires CapEx investments. And so we expect meaningful dollars of investments going forward, yes.

Your next question comes from Derek Dley from Canaccord Genuity.

Congrats on a strong quarter and really strong outlook. This might be a bit early to ask this question, but I'm just wondering what you guys have seen with some of the new customers that came into the sport or into the space during COVID. Have you seen these folks look to perhaps upgrade their products or buy additional products. Just wondering how their activity has been.

Yes. Like you say, Derek, it's a bit early to try to pinpoint any trend. I can tell you that those people are typically younger, the ratio of women are higher than it used to be. And the dealers even say that they see customer that they've never seen before in their dealership. Then it's a different profile of customers, but it's difficult to say where they will go next time. The only thing we survey in the last month was, are you happy with your Powersport or your product, and do you intend to remain into the industry. And again, 90% said, yes, we intend to remain in the industry.

And when they come in for the first time, are they typically looking for more of an entry-level product? Or are they just kind of buying whatever they can get their hold their hands on at this point?

No. I think your assumption is right. If I look at the number, in last year, 50% of watercraft sold was to new customers and for 3-wheeled to turn and that's where we had the Spark and Ryker, then your assumption is totally right. That being said, what we developed as a strategy is to talk to them often. When they come to the industry, they don't know where to ride. Then you need -- that's why the women mentorship is important because it's a woman who purchased a unit, who speak to the new entrant to say, hey, come to ride. There is a club there. There is a nice ride there. Then what is important is that the minute they purchase the unit, they know what to do with it. And this is a big learning that we had from the Spark and the 3-wheeled, and that's what we're trying to implement everywhere into our other product lines.

There are no more questions. I will turn the call to Mr. Boisjoli to close the meeting.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.