Good morning, ladies and gentlemen and welcome to the BRP Inc.’s Fiscal Year 2024 Third Quarter Results Conference Call. For participants who use the telephone line, it is recommended to turn off the sound on your device. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead. Philippe Deschênes: Thank you, Sylvie. Good morning and welcome to BRP’s conference call for the third quarter of fiscal year 2024. Joining me this morning are José Boisjoli, President and Chief Executive Officer; and Sébastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call and that the actual results could differ from those implied in the statements. The forward-looking information is based on certain assumption and is subject to risk and uncertainties and I invite you to consult BRP’s MD&A for a complete list of these. Also, during the call reference will be made to supporting slides and you can find the presentation on our website at brp.com under the Investor Relations Section. So with that, I'll turn the call over to José. José Boisjoli: Thank you, Philippe. Good morning, everyone and thank you for joining us. BRP delivered a sound performance in the third quarter as our team continued to demonstrate it’s commitment and resilience in a dynamic environment. We maintain our momentum in gaining market share in the off-road category and delivered financial results that came in close to our expectation. However, like the rest of the industry and despite our continued solid execution, we are seeing signs of softening demand in certain product category, more particularly in international markets. The situation leads us to proactively take a more cautious approach for the upcoming quarters as we…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Please note that out of consideration for all callers today, we ask that you please limit yourself to one question and one follow-up. [Operator Instructions] And your first question will be from Craig Kennison at Baird.

So I guess I'm not surprised at all that you're seeing a slowdown given the macro environment. I'm just curious what you think happened in October and November that wasn't part of the ecosystem in prior months? It's just surprising to me that maybe it just happened so quickly. José Boisjoli: As you know, we're monitoring constantly consumer demand and the macroeconomic environment and H1 was in line with our projection and it continued in August and September but October, the decline happened in almost all markets but especially international. And the trend is continuing in November, at least with our numbers then. We believe that dealers have adequate level of inventory and you survey dealers often and you know that they have pressure on the higher inventory costs. So considering the macro environment, the European and APAC situation, don't forget there is two conflict in Ukraine and Middle East and the dealer challenges and the industry trend, then proactively, we decided to adjust the shipment for the coming quarter. And all of this is in the context of we continue to gain share. We believe we have enough inventory out there in the network to continue our momentum but we want to be more cautious to make sure that we protect the value proposition and we are convinced this is the right thing to do for the long term.

Next question will be from Robin Farley at UBS.

I wonder if you have any thoughts about the M25 targets that you have out there, your longer-term targets? And if you see those as impacted or think that they could still be intact.? You had talked last quarter about even if the revenue didn't get there, the EBITDA still could. So just wondering how you're thinking about those? And then also, I don't know if you quantified in your comments there, you definitely talked about the outlook softening. Would you kind of put a ballpark quantifying your expectations for retail in North America in Q4 and into 2024 kind of what your current expectations are now with the reset? José Boisjoli: First, on the M25, the initiatives are not changing. They are the same. Our focus is the same. But obviously, like I just explained with the recent industry trend in North America and international and the macroeconomic environment, we're now working with more conservative industry numbers going forward. We want to be, again, responsible and we proactively do shipment to improve the inventory turn. And we believe that fiscal year '25 revenue could be down next year. And at this point, with the trend we're seeing, we don't expect to achieve the M25 target as planned. Now again, I would like to remind you that we're well positioned with the inventory we have to continue to gain market share and we target to remain the OEM of choice. And on this, I will give the mic to Sébastien, just to give you an idea about the numbers. Sébastien Martel: Robin, it is obviously still early and we still have a few months to go before we firm up the assumptions for the planning for next year. But generally, we are expecting a softer industry. And from a profitability…

Great. That's very helpful color for next year. Thank you.

Next question will be from James Hardiman at Citi.

And I think that was really good color on sort of next year. Obviously, nobody is going to hold you to that. It's pretty early. But I think you mentioned the softer industry for next year. Just to clarify, is that softer than previously expected? Or you actually expect the industry to be down next year? And if so, what does that mean for how you think about your own retail in fiscal '25? Sébastien Martel: Yes. Well, as I said, we still got a few months ago before we firm up the assumptions for guidance next year. But given the macroeconomic and political backdrop there, we expect the industry to be down next year but we'll give you more color when we talk in Q4 on our results in the next year.

Okay. But to clarify, you think the industry will be down. Could -- do you think your own retail will be down? Or do you think market share gains will be more than enough to offset that? Sébastien Martel: Still early to give any color for next year. We'll obviously monitor how the situation is evolving in the fourth quarter and that's obviously going to be a big driver as to how we set up for next year. José Boisjoli: But we're confident to continue to gain market share. With the strength of our lineup, with the trend, with the premium, we're confident to continue our momentum with market share.

Makes sense. And then on the inventory front, it sounds like days on hand are lower than they were pre-pandemic. Could you maybe quantify what that number was and how that compares to pre-pandemic? Just trying to get a feel for what should we should expect for the end of this year? And whether or not we should be factoring in any sort of inventory corrections as we look to fiscal '25? Sébastien Martel: The -- today, as we mentioned there, when you look at our inventory turns, they're healthier than pre-COVID. But we want to operate with higher inventory turns than pre-COVID and dealers as well want that. The expectation for this year is that inventory at the end of Q4 will probably be flat to up single digit versus where we are at Q3. Obviously, very dependent on the how the snowmobile season will evolve but it's off to a good start. Next year, some of the wholesale adjustments that we will do will be as a result of managing the inventory in the network. So if you were to ask me, we said, would you want inventory to be lower at the end of next year than it is today. It's certainly something that I'd like to see because, as I said, we prefer retailing current products and non-current products. And so given the current backdrop and the softness in the market, running with leaner inventory is beneficial for us because of less programs and beneficial for the dealers as well because less discount.

Got it. If I may ask, that was the follow-up. But if I may ask a follow-up. Do you think your peers will see the current environment in much the same way? It seems like there may be risk that if you're taking a really conservative approach and hoping to finish next year with lower levels of inventory if your peers aren't doing the same, then you could ultimately, A, lose market share but B, still feel the effects of a dealer channel that feels like it has too much inventory? José Boisjoli: But I don't know -- I don't want to predict what the peers are doing or will do. But one thing I can tell you, pre-COVID, we had less inventory than our competitor and we've been gaining share since fiscal year '16. And we're doing this by protecting the value proposition of the dealers. Then we're getting – we truly believe in our plan that if we are increasing the inventory turn, protect the dealer profitability, this will pay off long term. And this, we had it pre-COVID from fiscal year '16 to fiscal year '21, we're gaining share with less inventory than our peers. And we want to make sure that, again, we're protecting the value proposition for our dealers and that will be more successful going forward.

Next question will be from Martin Landry at Stifel.

I'd like to just get some color on the order of magnitude of your production costs -- your production cuts, sorry, for -- that you're making in Q4. Can you give us just an idea of how much you've cut your production for Q4? Sébastien Martel: Well, the best way to read it, Martin, is by looking at the adjustment we made in the guidance. So again, with one quarter ago, we've adjusted guidance downward to reflect mostly our production cuts. And so that's the main driver from a top-line point of view. If you look at -- or we're expecting a strong quarter for year-round products because we're going to catch up from the Texas-Mexico situation that happened in the third quarter. So there's probably about 100 -- a little over $100 million of revenue coming from that. But also, we have Maverick R's to ship, the new ATV platform that's shipping and high-end side by sides as well. So we'll have a decent quarter there. And we're delivering the final snowmobiles for which we have preorders from dealers and customers as well. So expecting a good quarter as well for seasonal products.

Okay. And just trying to understand a little bit what's your approach to promotional activity. Some OEMs you've mentioned are very promotional. So what's your strategy to protect your market share on a go-forward basis? Do you want to match these promotions? Like how are you thinking about that? José Boisjoli: First, some of our competition right now are having promotion on model year '23 and '24. We have no promotion on '24 and -- but obviously, like normal, we have promotion on '23. Then we're trying to be balanced, obviously, again, to protect our brands and our value proposition and to continue our momentum. But it's a fine line. But at this point, we have more promotion, obviously, than last year but we are still, we believe, in the normal path like we had pre-COVID

Next question will be from Joe Altobello at Raymond James.

I guess first question, I was hoping to get a little bit more clarity on the softer demand and the adjustments in production. It sounds like it's mostly off-road and mostly marine. But -- is it really more across the board? Or is it primarily in those two categories? José Boisjoli: That's correct. Off-road and marine is where we've adjusted. We've also adjusted P&A because same story for P&A versus units. We want to be diligent in managing the inventory in the network as well. And so we've made adjustments to the P&A shipment plan based on the current inventory in the network. We do have a bit of visibility there and also expectations on retail in the fourth quarter as well.

Okay. And just a follow-up on that. It looks like based on your revised guidance, you're expecting double-digit growth for year-round products in Q4. And obviously, a lot of that's the catch up that you talked about earlier from the slowdown at the border. But it also looks like your marine revenue guidance implies double-digit growth in Q4. So help us understand that dynamic given that demand is so soft in that category? Sébastien Martel: Well Yes. We're lapping a very easy quarter last year in Q4 for marine. We were in the beginning of the ramp-up of the new Manitou boats. And as you know, it was a challenging ramp up. And so last year, we had very little shipments on the marine side. And so this year, now that the production is running much more smoothly, we are expecting to deliver the new product to the market ahead of -- and obviously, dealers need these units for boat show.

And just one last one, if I could. The renewal of the NCIB, the timing of that, is that impacted at all by the fact that the Canadian tax on buybacks goes into effect January 1? Or is that not in your thinking? Sébastien Martel: Well, obviously, we don't like the tax. We don't think that -- we think that the government missed the mark in putting the tax in play but it's not impacting our decision whether or not to do buybacks. So 2% tax that they're putting in place, if you look at what we've done in terms of investments over the last 5 years. And that tax is meant to stimulate companies to do investments in the business. But if you see the amount of CapEx we've done, the R&D we've done over the last 5 years, it's not because we've done buybacks but it has held us back. And so no, not related to anything on timing.

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

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

Okay. Perfect. And just in terms of capital deployment, you end up the quarter with a leverage of 1.4. I would be curious to get more color about whether you still expect some working capital reversal in Q4? And how does the market softening impact capital deployment with respect to a potential SIB sub product launches or any opportunity maybe to look more closely at M&A over the next 12 or 24 months given the softening market environment? Sébastien Martel: Those are few followings on that question. But obviously, given the production cuts we've done, it is going to impact the tailwind that we were expecting from working cap that we were expecting $400 million. So we'll probably be short of that but still, we're expecting a tailwind in the fourth quarter. We'll be generating over $1 billion of free cash flow this year. And so some of that went through the NCIB. We -- as you saw, we just reinitiated our NCIB and so we'll be opportunistic on that area as well. And as we said, our priority is to continue to invest in the business with OpEx -- with CapEx, sorry, because we're obviously very focused on growing this business and we've been successful doing so and we'll continue focusing on that. And as for the M&A, again, we've always been opportunistic. If it happens, we'll obviously consider it if it's strategic to our business. Certainly something that we look at but we're not necessarily in the market looking for M&A activity today.

Next question will be from Xian Siew at BNP Paribas.

Maybe given the kind of softer demand, can you talk about the cost base and how you can kind of maybe places where you can kind of cut the cost to kind of protect the margin. Any thoughts on that? Sébastien Martel: Yes. Well, it always varies on how soft the market is. First thing we want to be strategic on what we look at when we address costs. We want to be flexible as well. But we want to protect the business for the long term. And so the last thing we want is cut purposelessly in activities such as R&D and key marketing activities that will hurt the business in the long term. But we want to be tactical as well and address short-term headwinds that we might see in the business. So there is room to adjust our cost structure in the short term, yet plan for the long term as well.

Okay. Got it. And then I think you kind of talked about expectation a little bit for industry retail going into next year. But maybe can you think about the different geographies. Obviously, international is softer in October, does that kind of trend where North America kind of outperforming international continuing to next year, do you think? José Boisjoli: Well, if you look to our results in Q1, Q2 and Q3, I mean, we saw some weakness since the beginning of the year in EMEA and APAC. It's a market that fluctuated a lot in the last three quarters. Now obviously, at the end -- at the tail end of Q3, it was worse than what we were expecting. United States is still okay but there is some key economic data that we're following that we need to be cautious. The unemployment rate is still low at 3.9%. The inflation in U.S. at the end of October, the inflation is going down 3.2% at the end of October, the closer to the target of 2. Consumer confidence decline in July -- since July from 71% to 61%. And the credit card balance is record high, then there is a sign that the U.S. is also softening. And this combined to the international market, particularly EMEA and APAC. And again, the two conflict in the world, that's why we prefer to be prudent.

Next question will be from Jonathan Goldman at Scotiabank.

On the retail trend, I was wondering if you can discuss the cadence of retail, how it's trended in November? Did you see the pace of declines accelerate versus October or show any moderation or any color on the cadence would be helpful. Sébastien Martel: Well, on the -- we don't have industry numbers yet for November but our retail is still up but we expect the industry to be down in November.

Okay. Perfect. And then second, on the competitive dynamics, the presentation calls out elevated discounting by competitors on new model year units. Do you have a sense if that's largely a reflection of the worsening industry or weaker consumer or maybe something specific to a competitor strategy, maybe a share gain approach? José Boisjoli: I think in some industry, we're gaining significant market share. And some competitor want to defend their position. And this is why particularly ORV discount. What surprised us is discount on model year '23 but model year '24 product at this time of the year, it's quite aggressive but it's to defend their market share position.

Next question will be from Jaime Katz of Morningstar.

I hope you can maybe elaborate on an earlier question about the marine business because if revenues are turning positive again, then can we assume profitability, at least at the gross profit line has hit a trough? And if so, could it potentially turn positive again in the fourth quarter? Sébastien Martel: Well, marine had another tough quarter in Q3. Obviously, the longer ramp-up of both and very little shipments because dealer inventory. And that's the number 1 reason the weaker industry is obviously not helping. In this quarter, we also had a special charge coming from the legacy Evinrude business where we had a special charge on inventory and that impacted profitability significantly. And so our plan is obviously for the turnaround to happen. Some of it we'll see in the fourth quarter but the expectation is that next year, we'll see a much improved profitability on the marine front.

Okay. And then from a pricing perspective, I think there's probably some sentiment that it will be harder to raise prices next year. In which case, could there be some pressure on gross margin? And if so, what levers do you guys have or plan to use to mitigate those headwinds? Sébastien Martel: Well, obviously, pricing is top of mind, especially in this higher inflationary environment and inflation on cost, on salaries is still there. So we'll be diligent in making sure that we price our products in line with the cost structure that we have. But one of the huge benefits we have is obviously our manufacturing footprint that is the majority of what we produce is in Mexico. And so obviously, we have a better cost advantage that are coming out of the production facilities we have. And also in our approach to designing our products through modularity and what we've just recently launched, a new ATV platform is under this new design approach. And so the majority of our lineup is on this modular design. And so that's obviously helping us drive better margins, I believe, versus the competition. And so it's giving us a hefty competitive advantage.

Next question will be from Luke Hannan at Canaccord Genuity.

José, I think you mentioned earlier that for three-wheeled vehicles, it was entry-level sales that were a little bit softer. Is that consistent with what you saw for your other product lines as well? And then maybe just following up on that, how have you been able to -- can you maybe describe the share capture that you've been able to do within the entry-level portion of your broader product lines versus premium, given that there's been a bit of a wash out of those lower-end OEMs in the market? José Boisjoli: Yes. If I give you some data that we follow on the value versus premium trend -- and obviously, it's different from one product that get to the other. But on the side by side in Q3 -- and this is the industry, the value product were down about mid-double-digit when the premium was up about 20%. And this is definitely helping us. And our numbers for the three-wheeled vehicle because we closed the season '23 in Q3, the Ryker category which we consider value with our three-wheeled lineup was down about 20%. But the F3 and the RT, the high-end model were up 20%. Then the trend that we saw since the beginning of the year where there is more traction on the premium and consumer that have lower household income are more hesitant to finance the product is affecting the value, then this is continuing. That being said, overall, if you step back and you look at the big picture, we want to win in each category but we are more skewed to premium product. And I think this is one of the reasons why we're continuing to gain share in this tougher environment.

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

Maybe just a bigger picture question around sort of the competitive environment. I know in the past, you made some commentary about dealing with a potential downturn scenario, there might be an expectation that some of the smaller players in Powersports might choose to exit the industry. We've actually seen some exits even in a good environment. So I'm just wondering how your thoughts around if we have kind of a protracted downturn in the industry, call it, a year or so? What do you think will happen with some of the marginal competitors? I mean do you think you'd still want to see -- still potentially would we see a trend where these companies will be investing less in Powersports? José Boisjoli: This is very difficult to predict what our competitor will do. But if we're focusing on our things and the dealers, the dealer right now with the slowdown in the industry, some dealers have at least they have option to decide and we believe that with the space that now our business is requiring, the space in the service shop, that some dealers could be -- would make the decision to drop some product line. And this is -- we're seeing from time to time and this could happen in this downturn. Then I don't want to comment on what the competition could do. But I think there will be some dealer who'll have to make some call on do they keep everything or they drop some smaller line for them?

Okay. That makes sense. And just as a kind of a follow-up and sort of related is just thinking about your CapEx as we look ahead to next year, obviously, you're not in a position to guide at this point. But part of your market share gains here have been you are continuing to invest in new products. I mean just directionally, what do you think CapEx might do in fiscal 2025? I mean do you think you'll still obviously continue to invest significantly the product line? Or will we see an easing off of that? Sébastien Martel: We should see a continued investments in CapEx or a number similar to what we have this year is something that would be reasonable to [indiscernible].

Next question will be from Mark Petrie at CIBC.

Yes and thanks for all the comments thus far, very helpful. Just a couple of follow-ups. I guess, specific to the fiscal '24 guidance implies about 100 basis points lower EBITDA margins for the year versus what you had previously provided. So Seb, I think you said programs are in line with expectations. So is the lower run rate just simply lost leverage on the slower volumes? Or is there another factor? Sébastien Martel: The majority of it lower leverage from manufacturing side, given the, we'll call it the short-term production cut that we did. So less time to rebalance our production and be more efficient and the other one is OpEx as a percentage of revenue will be slightly higher because of the cuts in production.

Yes. Understood. Yes. Okay. Perfect. And then also just following up on the comments you shared with regards to sort of the demographics of the customer and sensitivity there. Can you just update us in terms of what you're seeing from the customer that's active in the business today, who's new to the industry returning to BRP? And any sort of color you can provide on demographics, that would be helpful. José Boisjoli: We didn't see any trend change into the industry. And this is -- we don't have data on this but we're hearing from dealers that there is more for the customer with lower income, there is more credit reject approval but we don't have any hard facts on this. It's more anecdote that we're hearing from dealers. But except that, Mark, we don't see any change. Obviously, the household income is still higher than it was pre-COVID. The new entrant, same ballpark but it's more the entry -- the lower household income customer who has more difficulty to finance their product with the high interest rate. And I think the banks are more restrictive than they used to be.

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

Of your kind of your fiscal '24 guidance for revenue, how much of that is [indiscernible]? Sébastien Martel: I'm not sure I understand your question.

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

Okay. And I just want to follow up to believe with James follow-up as a follow-up. Is just kind of like your playbook is, let's say, the industry gets a little bit softer than you think or the competitors get more aggressive? Is it fair to assume that you would rather slow shipments then continue to ship and then have to subsequently promote? José Boisjoli: Yes. I would like to remind that we've been through those cycles many, many times and I've personally been through a few of those over my 30 years at BRP. And one thing we've learned over time is when you see the situation develop, you're always better to be proactive. And we've been gaining share since fiscal year '16. We have developed an incredible value proposition for the dealers and we want to protect that. And this is what we're doing. We just proactively -- we're just proactively reacting to a softer demand to make sure that we protect that. And we're convinced this is the right thing to do for the long term.

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

I'm just following up on kind of the dealer inventory question from just earlier. I guess you said you wanted inventories to ideally be lower kind of by the end of next year. I guess, can you may be shed a little bit of color on is that really if demand plays out or going to expectations? What are dealers telling you in terms of their plans for fiscal '25 in terms of do you have a magnitude on how much lower they would like inventories to be, given the floor plan financing costs? And maybe just kind of the follow-up is, are there any incentives or ways you're looking to help them with the plan financing cost if the current rate environment continues? Sébastien Martel: Yes. First of all, the situation is not bad in the network. And we're in better shape than pre-COVID as we talked earlier in the prepared remarks, inventory is up 24%, yet our retail is up 43%. However, dealers have seen price increases, MSRPs have gone up and so the value of the inventory is higher. The mix as well is more richer. So we sell more high-end models from -- in all product categories. And the product-mix as well is different. There's a lot more side by sides with higher MSRPs, more switch as well. And so despite the dollars increasing by 24%, the value is up 50%. And so when you factor in as well a financing cost that is probably increased by 300 basis points for the dealer, they're seeing the impact of a monthly for [indiscernible] And so that's why we want to be diligent in managing the inventory, especially in the current economic context. We do support our dealers with a [indiscernible] plan period and we do support dealers as well when we come out of the season and there's more inventory. And so we've been active in the past to do this and we will continue going forward. And so we're -- we want to make sure that we manage that inventory. So there might be a reduction of inventory in, let's say, in the low-teen percentage for next year, that would be a nice number to achieve. But again, the situation today is not a disaster. It's very much -- very healthy when you compare it to pre-COVID.

Next question will be from Brian Morrison of TD Securities.

Many of my questions are asked but I want to ask about what you're seeing in terms of price in the used market? I think the question was posed earlier, I didn't understand the answer. There's obviously been some softening this year but are you seeing acceleration in October and November? And if so, what do you see is the magnitude [indiscernible] decline in used prices? Sébastien Martel: Yes, we do have a bit of visibility on the used market but the used market is still healthier than pre-COVID. The gap of new to use has increased. I mean it was almost zero during COVID. Now it has increased. But someone looking into trade in a used product, will get a good value because MSRPs have gone up quite a bit in the last two to three years. So -- and plus, there hasn't -- there's been a shortening of supply in the last two, three years. So there's not actually a big used market contrary to what people might expect. And so it's still very healthy, Brian.

Thank you. And at this time, Deschênes, we have no other questions. Please proceed. Philippe Deschênes: Thank you, Sylvie and thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again in March for our fourth quarter conference call. Thanks, again, everyone and have a good day.

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