BRP Inc (DOOO) 2014 Q2 法說會逐字稿

Hello, ladies and gentlemen. Welcome to BRP's Q2 FY '14 Investor Call. The call is about to begin. I would now like to turn the meeting over to Mr. Jon Reider. Please go ahead.

Thank you, operator, and good morning to all of you on the phone and the webcast. Welcome to BRP's fiscal 2014 second quarter results call. With me are Jose Boisjoli, BRP's president and Chief Executive Officer, Claude Ferland, Chief financial Officer, and Pierre Pichette, Vice President of Communications and Public Affairs.

I would like to remind everyone to please refer to page two of the second quarter update slide presentation, currently available on our website at www.brp.com, under the Investor Relations section, to view our caution regarding forward-looking statements and the risk factors pertaining to these statements.

And with that, I'd like to hand it over to Jose.

Thank you, Jon. Good morning, and thank you for joining us today for our second quarterly call as a public company. On today's call, I will highlight our performance in the quarter, talk briefly about industry trends, and update you on the progress being made with regards to our strategic initiatives.

Following this, Claude Ferland, our CFO, will take you through our Q2 numbers in detail and also provide you with a greater understanding of the seasonality trend that impacts our quarterly numbers.

Overall, I am happy with our global sales, despite the fact that the late spring impacted some industries. We achieved a 7% growth in comparable revenue to Q2 fiscal year 2013, and note that this excludes the revenue related to the sport boat business, which, as you know, we exited in the fall of 2012. The growth in revenue was driven primarily by an 8% growth rate in year-round products, supported by the newly introduced Maverick Side-by-Side vehicle.

Our quarterly performance was also helped by a solid growth of 14% in our international revenues, excluding sports boat, and this was achieved despite several of our global markets still facing a weak economic climate. As far as the bottom line goes, our normalized net income, as anticipated, was down to $7.6 million.

Q2 has always been a weak quarter for the company, as it coincides with the off-season for snowmobile and the retail peak for personal watercraft. Also, this year's second quarter was impacted by increased sales program costs related to our current model year watercraft as it became necessary to put in place sales program in June, which is earlier than usual, due to poor weather. [Minimal] sales program were required during the corresponding period last year due to this trend of the watercraft market last season.

On the off-road vehicle side for both the ATV and the Side-by-Side, we put in place more competitive non-current sales program in order to bring us in line with other OEMs, which resulted in increased retail sales. As expected, we incurred more costs related to the ramp-up of our operation in Queretaro, Mexico.

We are expecting a strong second half of the year, and I am pleased at this time to be confirming our full-year guidance of low-double-digit growth in normalized net income, with normalized earnings per share forecasts in the range of $1.45 to $1.50.

In terms of our business highlights for the quarter, with regards to the North American market, retail sales of our product were up 16% in aggregate in the quarter. Despite unfavorable weather conditions, that affected most of our market. Our seasonal product retail sales in the quarter were up mid-single-digits.

I am pleased to say that we ended the model year '13 off-road vehicle season with market share gains in both ATV and Side-by-Side, and as a matter of fact, the number-three North American market share position is now within reach on the ATV business.

In addition, this is a strong momentum on the international front for ATV and Side-by-Side vehicle, with sales up more than 35% in key markets. We saw significant Side-by-Side sales in Europe, Australia, and Latin America and registered strong demand for ATVs in Scandinavia, Russia, and Brazil. With regards to our North American dealer network expansion, we are tracking on plan for 35 to 40 new dealers this year.

As far as operation highlights, the ramp-up of our new facility in Queretaro is progressing well. Our first off-road vehicle engine came out of the line last November, and our first watercraft hulls were produced on August 21st.

And last but not least, as you know, we take pride in our design and innovation capabilities, and in Q2 we received four international design awards, one from red dot from Germany for Ski-Doo Summit, and three from Australia for the Ski-Doo RXP-X, our Can-Am Spyder RT, and the Can-Am Outlander. These are great testimony to our design capacity and strong arguments to attract the best designer in the world, something that is critical for us in maintaining our leadership in innovation and design.

In terms of our Q2 performance by product category, 45% of our sales came from year-round product, 22% were from seasonal product and 19% from parts, accessories and clothing, and 14% from propulsion system. And for the six months, despite the fact that the first half of the year is always the weakest for BRP, our revenue grew by 10%, excluding sports boat. On geographical breakdown, 48% of sales came from the US, 19% from Canada, and 32% from the rest of the world.

On the international front, I am pleased with our 14% growth in comparable sales in the quarter and 13% growth in the six months, mainly driven by the strength of year-round product sales in the majority of countries in which we operate. This demonstrates that even though some economies are still under pressure, our products are gaining momentum.

As you know, we are now selling in 105 countries worldwide, something that I'm very proud of. I wanted you to see the new and now the largest BRP center in China, located in [Chamin], which officially opened six weeks ago. We now have 15 dealers in China, and this is growing at a good pace.

Focusing on seasonal products, the season to date for the watercraft industry in North America is down low-single-digit versus a high-single-digit gain last season. This was disappointing, given that the season started well, with solid results from boat show early in the year, but the late spring really impacted retail. As a result, all OEMs including us launched sales program earlier than usual.

On the positive side, 10 months into the season, our retail is flat versus last year, a very good achievement given the market dynamic. On the international front, the market dynamic were similar.

As I mentioned, we reported growth of 8% in revenue for our year-round product in the quarter. The North American ATV industry was down low-single-digit, while our ATV share with up slightly both in Canada and in the US. The US Side-by-Side industry grew mid-double-digit in season 2013, while our retail sales grew by more than 30%, a very solid performance. Our new Maverick Sport Side-by-Side is getting good reviews and is showing strength at the dealer level. We are pleased with the strong sell-through.

On the Roadster side, in North America, nine months into the season, motorcycle industry retail is down low-single-digit, while our Roadster retail sales are up mid-single-digits. In Western Europe, our sales were up high-double-digit. Overall, we are comfortable with our growth, given the weakness in the industry. However, we know that the potential for Spyder is even greater than what we are capturing and are currently planning a renewed go-to-market strategy to accelerate the level of awareness of the product.

During the quarter, several Can-Am Spyder owners' events were hosted. These were held in North America and Europe, and all were extremely successful. The largest event Can-Am Spyder owner event was held in Maggie Valley, North Carolina. This event attracted 1,300 participants, a 70% increase over the previous year.

You can get the great sense of the excitement of being a Spyder owner and the overall experience of riding the Spyder by watching the YouTube video of the event. We have provided you with the link on the slide, and I encourage you to watch it.

On the propulsion system side, the North American industry retail season, which ended June 30th, was up mid-single-digits, while our retail sales were flat. This is explained by industry growth that was driven mainly by an increase in outboard engine sales on new boats versus the repower business, which refers to putting a new engine on an existing boat.

We expect this trend to continue for the next model year, even [road] as traditionally focused on the repower segment, but we are actively working to be more present in the new boat segment, and in June, we introduced three new outboard model directed at the fastest-growing boat segment, the pontoon category. Also, our outboard- and pack-related sales were adversely affected by weather in the quarter. As for our new jet propulsion system business, it is progressing on plan.

On the part, accessories and clothing side, which also includes other incidental revenue, the overall business was up 9%. When excluding the other revenues, our parts, accessories and clothing business was up 11%. Consumers are responding well to the Maverick accessory line, which is one of the key factors driving the growth in our pack business. You will recall that we are now doing the development of new accessories in parallel with the new product launch. When we introduced the Maverick, we had 74 accessories ready for market.

As I mentioned at the start, our Q2 performance was right in line with our expectation, and we continue to be focused on these key priorities, continue to aggressively grow our revenue from year-round products, expand our worldwide dealer network, ramp up watercraft production in Mexico, and continue product innovation.

To this end, we are looking forward to our semiannual dealer meeting starting this Sunday, where we'll be launching several new products for the model year 2014.

And with that, I will pass it over to Claude.

Thank you, Jose, and good morning, everyone. Before I take you through the highlights of our numbers for the quarter, I think it's important, given that we are still relatively new to the public markets, to once again talk about our revenue seasonality.

As you all know, BRP revenue seasonality is primarily impacted by the seasonal product segment, which represented 36% of our total revenues in fiscal '13. Retail sales of snowmobile and personal watercraft tend to peak over a three- to four-month period, a period during which they can be highly influenced by weather.

Since these peak retail periods are quite short, dealers must have most units on hand before they start the season, so BRP sales to dealers tend to peak about two months between industry retail peaks. With this backdrop, BRP second quarter coincides with the off-season for snowmobile and with the retail peak for personal watercraft.

We are making investments in snowmobile as production for the new season begins, and there is a drop-off off in PWC shipments since the majority of units are shipped in the first quarter. As a result, Q2 for BRP is typically our lowest quarter in terms of revenues and earnings.

So with that said, we posted revenues of $621 million in the quarter, an increase of 2% over the same period in fiscal '13. Excluding the impact of sport boat revenues, which we [accepted] in the Fall of 2012, our revenues increased by 6.5%, again, as Jose mentioned, right in line with our expectations.

Our gross profit of $142.6 million in the quarter, or 23% of revenues, equated to a decrease of 5% compared to last year. Normalized EBITDA came in at $47.4 million, or 7.6% of revenues, which represented a decrease of 12% over the same period last year.

Finally, all of this resulted in a bottom line of $7.6 million in normalized net income, a decrease of 58% compared to Q2 fiscal '13, or $0.07 per normalized basic earnings per share.

As you all know, on May 29, 2013, the company completed its initial public offering of its subordinate voting shares and received gross proceeds of $262.3 million from the issuance of the subordinate voting shares.

At the same time, the company repaid US dollars $258 million of its $1.50 billion US dollar term facility and also amended its pricing, which resulted in reduced interest costs. We also extended the maturity of our $350 million revolving credit facilities from March 2016 to mid-2018 and amended our pricing to reduce interest costs on this, as well.

And on June 27th, the company received gross proceeds of $39.3 million from the issuance of an additional $1.8 million of subordinate voting shares, following the exercise by the underwriters of their over-allotment option granted in connection with the IPO.

On this slide, we have provided you with a graphic representation to help you understand the bridge from our fiscal '14 Q2 EBITDA to our Q2 normalized net income. We start with the Q2 fiscal year '14 EBITDA of $58.1 million that we adjust to remove the estimated gain from an insurance recovery related to the reconstruction of our Valcourt research and development center.

The normalized EBITDA is then adjusted with the depreciation expenses, the net financing costs, and the adjusted income tax expense to derive the normalized net income of $7.6 million.

We have also provided you with a graph illustrating the bridge from our fiscal '13 year-to-date normalized net income to our fiscal '14 year-to-date normalized net income. The $22.1 million increased in volume and mix was offset by a $16.8 million increase in sales program costs, as highlighted by Jose.

The increase in production and operating costs was mainly due to the expenses supporting the initial stages of the transfer of PWC manufacturing to Mexico, higher investments in research and development projects, and higher stock-based compensation in relation to the IPO.

Now, turning to the balance sheet, cash is down $513 million versus the beginning of the year, mainly as a result of the $529 million distribution to shareholders during the first quarter of fiscal '14, and the typical seasonality of our cash outflows in the second quarter related to the start-up of snowmobile production. At the same time, our long-term debt decreased by $234.6 million, mainly due to the 258 US dollar term B repayment following the IPO.

Negative free cash flow of $84 million in the first six months was down versus first half fiscal year '13, primarily as a result of an abnormally low level of accounts payable at the end of fiscal year '12, due to early payments to suppliers, which positively impacted the first half of fiscal year '13 free cash flow.

Now a quick update on BRP's North American power sport dealer inventory at the end of the first half. Dealer inventory was down 18% compared to the previous quarter ended April 30, 2013. As compared to the same period in fiscal year '13, dealer inventory was up 7%.

The reasons for this were twofold -- growth in our Side-by-Side business as we continue to fill the pipeline with our new Maverick models, and slower-than-expected retail of PWC and Roadster, resulting from the colder spring weather. We are comfortable with our current inventory position.

On slide 23, you will see our guidance for the current fiscal year. As we said earlier on in this presentation, we are reconfirming our guidance as outlined in our call with you in June. On an annual basis for the full-year fiscal '14, we are expecting growth in company revenues in the high single digits.

We are expecting both normalized EBITDA and normalized net income to be up low-double-digits%, and we are forecasting normalized earnings per share of $1.45 to $1.50, or a 10% to 14% increase over our pro forma earnings per share in fiscal '13, after taking into account the 14 million additional shares outstanding following the IPO.

As you can see, we continue to forecast a strong finish to the year. And on that note, I would like to turn it back to the operator to open the lines for Q&A. Thank you.

Thank you. (Operator Instructions). Our first question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.

Hey, good morning, everybody. Just a question on shipments and retail sales. North American shipments were down 2%, yet retail sales were up 16%. What explains the difference between the two? I'd kind of assume shipments would be more in line with the retail sales growth.

As you know, Gerrick, there is always a lag between retail and whole sales, depending of the timing. You know, you ship vehicle to the dealers and there could be a lag of three to six months, depending if you ship in North America or if you ship in Australia or in other country.

But overall, I am happy with our sales growth, but we believe that both our outboard engine watercraft business, along with the part accessories that are related to those business, were impacted by the late spring.

In terms of delivery timing, we had some transition in the deliveries of Side-by-Side shipments. The white Maverick was significantly more popular than what we had planned, and there is some shipment that was supposed to be made in Q2 that will be made in Q3. And those things, as you know, Gerrick, can happen.

I want to remind you that we're managing our business on a yearly basis and understand that, on the quarterly basis with a diversified product line-up, like we have, we have to expect quarter-to-quarter variation. And, again, this was wholesale. The wholesales as you mentioned was very strong, and that's why we're very confident about our year-end guidance numbers.

Okay. Why would it be some Maverick shipments would have slipped into third quarter from the second quarter?

I mean, we introduced -- as you know, in June, it's the month where you have the transition between model year '13 and model year '14. And we introduced to the new line-up, to the dealer, and at the same time, the sales force take orders for ATVs and Side-by-Side.

And what happened is we -- in the -- in parallel in the month, we start production of the model year '14, and we produced too many yellow Maverick. The white was more popular. And we had more order than planned on the white [than, yes], on the yellow than planned, and we have readjusted production quickly, but we're not speaking big numbers. We're speaking less than 500 units.

That being said, I would like to remind you that our retail were very, very good in the quarter, were up 16% in aggregate between all the business.

Right, and just one last follow-up on this, this whole topic. I think you mentioned earlier on that you had some non-current sales promotions that might have boosted your retail sales number there. So if you factor for those non-current sales promotions, how would retail sales in the dealer channel look on current year product compared to last year's current year product sales?

Yes. Just to give you a sense, last year, we've lost momentum at the retail level in June, July, August, September. Our program were less competitive than some OEMs, and we lost some momentum. And we had discussion with the dealers, the dealers were saying to us, you cannot not be as competitive than the others. Then all of this was planned, and this year, we decided to be in line with the industry, and we had very, very good momentum in all the summer.

This year, a dealer could sell, because in June, the current model, the '13 models became non-current, could sell Can-Am with competitive price versus the non-current model of the competition. And we end up in the year-round product, the industry was up aggregate -- between ATV, Side-by-Sides and in Roadster, was up by about 10%, and we're up double than that, than we had a good momentum this year on the second quarter because of that new strategy.

Okay. Thank you very much.

Welcome.

Thank you. Our next question is from Martin Landry from GMP Securities. Please go ahead.

Good morning. Your international sales were up quite strongly, up 14% year over year, when we exclude sports boats. Can you give us some colors on what products are getting traction and also what companies are doing really well?

Yes, good morning, Martin. To be honest, it's worldwide. And if I give you a sense -- for example, in Brazil -- in Brazil, the economy is more difficult, but our retail is still growing, at a lower pace, but is still growing well.

In Western Europe, everyone talks about the Western Europe economy that is difficult, and it is difficult, but we see some momentum, very slow recovery, but we see some momentum in all product lines. Scandinavia, where we have a good -- a good market share between off-road, I mean, were solid, and Russia is still growing at a lower pace than [growing]. And I believe that our growth is the result -- we've been 10 years in international.

We have worldwide dealer network. We have solid -- solid team everywhere in the world. And I believe that now we're benefiting of all the effort that we had, and our products are very competitive. But it's not coming from -- I cannot tell you one country versus the other. It's coming from everywhere.

Okay. And maybe if you can give us some colors on how -- always on an international basis, how does your shipments compare to your retail sales on international levels?

In international market, in most of the international market, dealer have less inventory on hand than what you see in North America. The dealerships are smaller, and typically we have inventory in -- like for Europe, we have inventory in Ghent in Belgium. We have some inventory in Australia. We have some inventory in Scandinavia.

Then the inventory that they have in their store is smaller than what you have in North America, and the relation between wholesales and retail or the lag is shorter than what you have in North America. Then, overall, the dealer inventory, it's very low level outside North America.

Okay. Good to hear. And then just lastly, if we look at your guidance, if we exclude sports boats, by my count, your normalized EBITDA is probably stable year over year for the first six months, and you've kept your guidance on normalized EBITDA growth in the low double-digits. That would imply an acceleration of your growth rate and probably growth rate in your normalized EBITDA near 20% for the back half. Can you give us some color on where that growth's going to come from?

Yes, maybe, as you know, snowmobile is still a big portion of our business. And right now, we are in the ramp-up of production in Scandinavia, in Finland, and here in Canada. We're shipping units to the dealer everywhere in the world, and you know our first half always been weaker than the second half, and now we're ramping up snowmobile, the year-round product like ATVs and Side-by-Side model year '14 are in production. And it's a natural cycle that we have within the company.

Okay, thank you very much.

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

Thanks. Yes, two questions. One is, with the -- I guess slightly lower performance in the outboard engines, you're keeping your full-year guidance unchanged, kind of suggesting 15% or 20% growth in the second half. And I guess I just wanted to get a little more color on the driver of that kind of growth.

And then, also, Side-by-Side and Roadster growth, retail sales in the quarter, you have given a rough guidance about -- or not guidance. You've given us a rough idea of what your actual Q1 retail sales were for Side-by-Side and Roadster separately, and I'm wondering if you could do the same thing for Q2, even if it's just sort of a range or a ballpark in your retail sales growth, just obviously especially with -- given the timing of Maverick shipments, Q2 would be helpful to see what happened with market share in the quarter, in addition to -- I know you gave kind of full trailing 12 market share comparison, but kind of to see what happened in Q2.

Okay, I will go with the first question. Good morning, Robin. I will start with the first question. On the propulsion system segment, first, we introduce some new product on the outboard side. As you saw in the slide, the pontoon series, those engines have been at that -- modified and adapted with better torque curve and less vibration for pontoon. And this was announced in June, and we're starting shipping this fall. And pontoon is the biggest growing segment in the new boat -- the new boat industry.

Then, this is one of it. The other thing is jet propulsion system will start shipping jet propulsion system to [Reg Boat]. Reg Boat will start to produce (inaudible) boat this fall. And [Shapalal] will start production in January. That's the plan for the time being. Then it's a combination of all those elements why we believe we'll have a better second half than a first half of the year. And that's for the propulsion system. Claude, did you have time to figure out --

Yes, the Side-by-Side increased retail sales in Q2 versus last year. We're looking at slightly over 50% increase over the previous fiscal year. Roadster, we're looking at about a flat in Q2 only versus fiscal year '13. As Jose mentioned earlier on, sales have been impacted by the late spring or the cold spring.

Okay, now that's helpful on the -- on the quarterly. And, yes, no, that's great. Thank you very much.

Thank you.

Thank you. Our next question is from [Antony Sikha] from Scotiabank. Please go ahead.

Hi, good morning. Jose, could you please provide some color on promotional activity in the North American marketplace? How does it compare to last year? And if you have any comments on international markets.

Yes. On the -- in North America -- I mean, first, in all our products is a bit like the car industry. At the end of a season, you have what we call internally end-of-season programs. On watercraft last year, the system in North America was so good, then we launched normal program, and to be honest, they were less generous than typical.

Typically, the rebate that you give at the end of the season is 10% to 15%. And last year, the season was so good that we had less generous program and very, very late in the season. This year, with the bad weather in May and June, us and our competitor in the watercraft business, we didn't take any chance, and we -- we advanced those end-of-season program by late June, and we launched those program.

Then obviously, you have generous program or 10% to 15% discount in the peak of the season, which is June -- at end of June, beginning of July, all the month of July. Then this has quite a big impact. If you look at our sales program expenses this year versus last year, because you're comparing a bad year to a good year.

On the off-road side, it's a strategy. Last year, we didn't have much Side-by-Side inventory, because we're still filling up the pipeline. And on the ATV side, we were -- decided not to be -- or to be as generous as some OEM, and we lost momentum.

And this year, we said we cannot -- if we want to continue our momentum in the off-road business, we cannot -- not be competitive in the -- at the end of the season, and that's why on ATV and Side-by-Side we're in line with the competition. And we have very good retail in June, July, August.

Then this is the big difference between this year and last year, and that's why we had quite a big impact in our year-end results, but we still believe that this was positive decision that we made.

At the international front, it's very different from one country to the others. Typically, the end-of-season program are less generous than in North America, because dealer has less inventory. Then, typically we are better those, because the volume are slower -- lower in many countries.

If you take Australia by itself, it's good business, but the inventory that the dealer has is smaller than -- you don't have to put as much money for end-of-season clearance. Then that's the color that -- or that's the situation.

Okay, super. One last question for Claude. Sales and marketing expenses were lower than last year. Is it sustainable? Or is it more of a timing issue, Claude?

I would say it's more of a timing issue. If you remember, we probably explained in Q1 that the Spyder marketing campaign was frontloaded this fiscal year as compared to the previous fiscal year, so last year, we were stronger in terms of our TV campaign during Q2, and this year we advanced some of this national campaign mainly in the US in Q1 of this year, so it's mainly timing.

Okay. Well, thank you very much.

Thank you. Our next question is from Greg Badishkanian from Citigroup. Please go ahead.

-- Maverick and how it's selling at retail and inventory levels of that line and where you expect those to be and just kind of dealer feedback?

Can you repeat your question, Greg? Good morning. And we missed -- we missed the first part of your question, just the last part.

Yes, sure. Good morning, too. Could you provide some color on the Maverick and just, you know -- just give us some more color on it? Because it's such an important product line for you guys. And just what you're hearing from the field on it and how it's selling and how comfortable you are with dealer inventories.

Is there any scarcity there and -- and on certain part -- you know, models of it? Just -- you know, more color would be great on that one.

Yes, first, we started to produce or ship the Maverick two-seater early, and we started production in December, but we really started shipping in January. And we're shipping worldwide. And we're hearing very good comments from the dealer, and we're happy with the sell-through.

We started the production. I was in [Uais] in July, and we just started the production of the four-seater and are just starting shipment right now. And it's going on plan. And we're hearing -- we're hearing both good comments on both product lines. The demand is quite strong.

For sure, you probably alluded to the introduction of the Polaris RZR. You know nobody had a chance to try it yet, and like we always do, but I'm sure it will be a good product. But when you look at our offering in the Maverick, we have the base model up to the Maverick XRS model, our high end of the Maverick.

We feel that in terms of handling, in terms of power-to-weight ratio performance, in terms of fit and finish, and in terms of the model that we're offering in the sport category with the price range that we have, that we have a very competitive product offering, and so far very well received by dealer and consumer.

Good. Thanks. And then just, finally, what's baked in to your guidance and outlook for the rest of the year, in terms of the North American consumer? How do you expect the consumer to behave, to meet the guidance and outlook that you have out?

It's -- there is no doubt that the US economy seems to get better and picked up. To be honest, Greg, except for the Side-by-Side business, where this industry is growing, all the other industries are somewhat stable or a bit down, a bit up, but there is no major trends, and we're not planning for that. All -- I would say all the indicators point in the right direction, but we didn't see yet all our industry with big momentum.

But we still continue to grow, because we're gaining momentum in all our product lines. We're gaining market share in the off-road business. We had good season in watercraft. We gained market share in watercraft because of the product. The -- we are very confident about our snowmobile season. We end up the year very strong.

Our spring break orders -- that means snowmobiles that are already sold to an end customer -- are delivering right now, and dealers are saying that the customer are quite enthusiastic about the coming season.

Then, at the end of the day, we have a good momentum in North America, because our product line-up and our competitiveness of our products. We didn't see big lifts in any industry except the Side-by-Side business. But we feel confident, if -- if everything that is written on the US economy is happening, we're very -- would be happy.

Good. Thank you very much.

You're welcome.

Thank you. Our next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

Yes, good morning. Just to come back on the product launches, beside the RZR from Polaris, I was wondering if you could provide any comments on the product launch we've seen so far and what you feel was kind of innovative among the different ATVs, SSV, or PWC that have been introduced for next year.

First, let's start with watercraft. Lately, Yamaha and Kawasaki have introduced new watercraft. We don't believe that any of those products are a game-changer. We still have very solid line-up, and we'll introduce more watercraft next Sunday. We still have a solid line-up, and for us, I'm really happy because the IDR the brake on the watercraft is giving us an edge versus the competition.

On the off-road side, I have to admit, I mean, we've talked about the Razor. I have to admit that many Japanese -- Yamaha and [Unda] -- have introduced new watercraft -- a new ATV -- sorry, a new Side-by-Side -- but it's not really, I don't think, any game-changer there, and I don't see any threat versus our momentum in the off-road business and our product offering.

Okay. And just to come back specifically on the ATV, Polaris revamped their Scrambler, but also their Sportsman 570, so I understand that you gained some market share on the ATV. But would you expect maybe some softness in terms of growth of market share or you feel that those two segments were kind of -- those two products were kind of more reactive to the Renegade and Outlander products you currently offer?

I mean, Renegade versus Scrambler, I don't think -- I think we have very competitive product there. On the mid-CC category they have introduced new model mid-CC category, but it's not an area where we have big volume. It's an area that we will address at one point, but as you know, we're stronger in the ICC category, and we don't see any threat there from any other OEM in the industry.

Okay, great. And on the Spyder, could you maybe elaborate, Jose, on the strategy in order to -- that will allow you to gain brand awareness and market acceptance? What are you putting in place that will allow you to drive that?

Yes. We're still working on the strategy. Three years ago, in 2011, we decided to go forward with a three-year plan. When we switch from Bombardier ATV to Can-Am, we had a three-year marketing campaign to build the awareness of Can-Am, and this worked very well.

Two years ago, starting in 2011, we started a marketing campaign to build the awareness of the Spyder. And to be honest, we're happy with the awareness that we were able to build in the power sport customers. People who own a snowmobile, an ATV, or a motorcycle, those people today know about the Spyder.

Where we need to readjust our plan is on the (inaudible), the people who don't -- who never own any motorized product, except a car. We didn't -- we've not been able to grow the awareness as much as was our target in those category of customer.

And we've been -- we started to work on reorienting our marketing strategy for next season. Obviously, today, I won't tell you more about that, but you will see a shift in the marketing strategy starting with our 2014 season.

Okay. And maybe last question, if I may, on the propulsion systems. You announced nice agreement with Chaparral Boats and also Reg Boat holding. Could you comment a little bit about the ramp-up so far and if we should expect other opportunities to be announced in the coming quarters?

For the time -- again, we will start shipping propulsion system to Reg Boat this Fall. They have a good plan. And Chaparral will start early in 2014. And for the time being, we are -- we're having -- we have agreement with those two OEM, and we are in discussion with other OEM, but we want to get the ball rolling before to expand too quickly with other OEM.

Then, you will see the number growing in the next -- as I said, in the second half, you will see some number, and that's partially why our guidance on the propulsion system is stronger than the first half. But the -- you will see more next year because of the jet propulsion system.

We are in discussion with other OEMs, but again, we want to get the ball rolling before to expand too quickly. We want to make sure that, at the end of the day, the customer buy a product and they are happy with, obviously, the boat, but with the power pack, and the integration is very important. We don't want to go too fast (inaudible)

Okay, perfect. Thanks for the time.

Thank you, Benoit.

Thank you. Our next question is from Tim Conder from Wells Fargo Securities. Please go ahead. Mr. Conder, once again, your line is open. You may go ahead with your question.

Good morning. Thank you. I apologize if you touched on this earlier, but I wanted to circle in -- one of the -- one of the tent poles of your growth strategy is your dealer base growth. And I think that also plays in -- obviously, into your other categories, Spyder and the Can-Am side, with the Side-by-Sides.

Can you give us an update, Jose, where that stands here, six months into the -- or seven months into the calendar year, and what your plans are by the end of the calendar or fiscal year?

Yes, Tim, good morning. First, we are right on plan. As you know, we said 200 to 300 dealer within the next four years. This year, we said 35 to 40 dealers, and we are right on plan to meet our target.

Right now, there is -- there will be -- as you know, we'll have our dealer meeting in Florida this weekend. And there will be a lot of prospect dealers that want to see who we are and they have the chance to be part of the event to sign up in the fall. But so far, we are right on plan for our target for this fiscal year.

Okay. Okay. And then -- and then could you also -- you touched on what the Japanese -- some of the new competitive product is looking like in relation to your product in the industry and then also the promotional end-of-season environment.

Can you just give us any color from your perspective, are any of your Japanese competitors in any way that you're seeing using the yen as a competitive weapon? I know it's sort of an ongoing question that people ask, but just any update from that perspective?

Yes, like I said, this year, we see more new product, particularly in ATV and Side-by-Side, from the Japanese competitor. But I would say that the -- they're playing more in the mid-CC category on the ATV. On the Side-by-Side side, they're playing more on the (inaudible) category, where we don't have any offering now. And we don't see that they introduced any product that is a threat to our momentum and our lineups.

In terms of pricing -- and I'm sure you're thinking about the value of the yen -- in terms of pricing, we don't see any bad behavior, where the reduced pricing, because of the gain that they had on the yen. They have introduced product, and their pricing is in line with the rest of the industry with some variation, but nothing major.

Okay, okay. And then, finally, just more of a clarification, in your reference to what the motorcycle market has done year to date, just to clarify, you're looking at defining the market in that sense as the broad market collectively being down the percentage that you cite. Is that correct? Or are you just talking about a certain segment of the market?

No, what we do, Tim, the way we end that, again -- we believe that the motorcycle market is the best proxy to get a sense versus the trend that we have in the Roadster category. What we take as a proxy is all motorcycle -- all on-the-road motorcycle up to 500 CC. And that's how -- higher than 500 CC. Then that's how we identify the best proxy to compare the trend or the momentum of Roadster versus the motorcycle industry.

Okay, great, great. Thanks for the answer to the question, and we'll see you this weekend.

Thank you very much, Tim.

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

Hey, good morning. Just a couple quick questions on gross margin. Was there any impact from segment mix, and particularly thinking about the higher pack sales? And, second, when do you think Queretaro and the ramp-up there will no longer be a drag and turn to be a positive impact on gross margin?

Versus fiscal year '13 gross margin, there's no major swings in mix between units or pack. To your second question on Side-by-Side, as you know, after six months, the Queretaro cost is impacting our gross margin to the tune of about $6 million.

Next year, we're planning to be relatively flat in regards -- in relations with our additional costs coming from Queretaro and the savings we'll be getting from the start of the production. So there might be a quarter difference when you look at us on a quarterly basis, but for the overall year, we are planning to be relatively flat between our increased expenses to ramp-up production and the savings coming from the production that we'll be doing out there.

Sorry, that was $6 million in Q2 or in the first half?

First half.

Okay. And back half? About the same?

I would say it's going to be relatively the same trend.

Okay, thanks. And then just on the corporate inventories, when do you expect that the growth in corporate -- in your inventories will match up closer with -- with top line?

Well, as you know, in Q2, we have seen growth in our BRP inventory industry that we hold here at BRP. And again, this is due, as I explained, to our seasonality, to the seasonality in our revenues. So during Q2, we start building up the production for our snowmobiles, so that's basically generating the increased inventory, and you will see this inventory go down, obviously, in -- by the end of the fiscal year.

Okay, great. Thank you.

Thank you. Our next question is from Gerrick Johnson from BMO Capital Markets. Please go ahead.

Hey, I'm back. I just wanted to talk about gross margin a little bit, down 160 basis points. Can you give us a breakdown, what the -- what the change was, what -- what was impacted by promotions, mix, input costs, things of that nature?

We have it in the presentation. If we -- if you go to the presentation, that's about the extent at which we want to give details. So volume and mix versus fiscal year '13, we were up $22 million. Net of pricing and sales program cost increase was an additional cost of $17 million. And then we had production and operating costs.

And as I said in the production costs, we had about $6 million in the first half of the year for the ramp-up of production and the setting up of the facilities in Queretaro.

Okay. Thank you.

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

Thank you. Yes, as a follow-up, I just wonder if we could get a similar color within the on-road segment about the -- you talk about shipment of 8%, how much of that -- just sort of roughly what were the increases for Side-by-Side, ATV and Roadster in Q2?

Robin, for competitive reasons, we cannot go in so many details by product lines. We can give you an idea of the trend, but we don't want to go in so many details.

No, I understand. I guess I'm just trying to get a sense of, when we look at your shipments and your -- and your sell-through, just how the -- how the inventories sort of balance for each of those segments. In other words inventory may be growing from average because you're stocking up or it may be growing for something else that you're not as happy with the sell-through on (inaudible).

Maybe to give you some colors, on the -- obviously, right now, we are in shipments, in heavy shipment of snowmobile worldwide, and there is an inventory build-up this fall, because the peak of the retail season for snowmobile is November, December, January. Then we don't have -- our inventory in our site will reduce and will it be shipped to the dealers for the retail season, which is quite short on the snowmobile season.

If you take -- and snowmobile business -- if you take on the year-round product, it's more a replenishing of the inventory, and you don't add those peak. There is some seasonality into likely in -- in the north of North America, you will have less retail in the winter, but there is some seasonality, but it's not as severe as what you have in snowmobile and watercraft.

Thank you. At this time, we have no further questions. I would like to turn the meeting back over to Mr. Boisjoli.

Just to conclude, our first half result put us right on track to achieve our year-end guidance. And we look forward to updating you when we report our third quarter results on December 12th. As I mentioned, this Sunday began our semiannual dealer meeting and product launch. We will be welcoming 2,000 participants, 700 from international markets, with 99 countries represented.

We are very excited about the new product announcements that will be made this Sunday evening. For any of you that are interested, there will be an analyst and investor briefing in Orlando on Monday morning at 9.30, and you can find how to participate by phone on -- or on the website.

Thank you again for your interest in BRP, and we look forward to meeting you a lot -- to meeting a lot of you at [Club] this Sunday.

Thank you. The conference has now ended. Please disconnect your line at this time. We thank you for your participation.