BRP Inc (DOOO) 2016 Q1 法說會逐字稿

(Spoken in French) Hello, ladies and gentlemen.

Welcome to BRP Inc.'s First Quarter for Fiscal Year 2016 Financial Results.

(Spoken in French)

This call is about to begin. I would now like to turn the meeting over to Mr. Philippe Deschenes.

Please go ahead.

Thank you [Maud].

Good morning and welcome to BRP's First Quarter for Fiscal Year 2016. Joining me on the call this morning are Jose Boisjoli, president and chief executive officer; Sebastien Martel, chief financial officer; and [Anne Belec], corporate finance director.

Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's [ND-8] for a listing of those. Also during the call, reference will be made to supporting slides, which you can find on our website at brp.com under the Investor Relations section.

So with that, I'll turn the call over to Jose.

Thank you, Philippe.

Good morning, everyone.

The beginning of the year I've seen a lot of exciting moments for BRP. We introduced strong new line-ups for snow mobile and off-road vehicle. We won multiple awards. We produced our 100,000th Spyder, and all our new products have been well received in the marketplace.

But spring also brought a share of headwinds with the volatile currency fluctuation and a more aggressive competitive environment. Through all of this, our team did a good job and was able to deliver strong Q1 results slightly better than planned.

Looking at the financial highlight on Slide 4, our revenues increased 18% compared to last year to reach $898 million. The growth was primarily driven by the increase in personal watercraft shipments by higher side-by-side sales fueled by the introduction of the Maverick X ds Turbo and by a better than expected end of the snowmobile season in Scandinavia, which drove higher snowmobile shipment impact sales.

On the profitability side, we achieved normalized EBITDA of $91.5 million and a normalized diluted earnings per share of $0.31, both improving significantly compared to a weaker than usual first quarter last year.

Sebastien will walk you through the detail of our financial performance in a few minutes.

Now moving to the business highlights on slide five. Revenues from North America grew by 28% over the same period last year. Our retail sales in North America for both seasonal and year-round products increased by 6% for the quarter when compared to last year. Also, our dealer expansion plan in North America is proceeding as expected.

Our revenue from international declined slightly by 1%, driven by currency pressure, most notably the weakening of the euro compared to the Canadian dollar.

As anticipated, the aftershock of the difficult Russia economy contributed to the decline with sales down more than one-half of what they're worth two years ago. On the other hand, both of those factors were partially offset by increased shipment of seasonal products in Western Europe and Scandinavia.

On the product side, we launched our Ski-Doo and Lynx 2016 lineups, and both of them were very well received by our dealers. We have also just introduced last week a solid lineup for 2016 off-road vehicle season. I will come back with more on this.

From an operation point of view, everything has been running smoothly since the beginning of the year. The personal watercraft production transfer to Queretaro was completed in May, which means that the next personal watercraft model year will be entirely produced to our Mexican facility. Our joint venture in China is up and running since February.

Finally, we've just closed the repricing of our long-term debt effectively reducing our interest rate by 25 basis points.

Now switching to year-round product category highlights, our revenue increased by 9% in the quarter driven by shipment of the Maverick X ds and X ds Turbo. As for ATV business, now 10 months into the season in the North America industry is up low single-digit season-to-date, and our Can-Am retail is up mid single-digit over the same period.

The Outlander L continue to perform well for us and it's driving market share gain When excluding the Youth ATV, a segment where we reduce our offering, the industry is flat season-to-date and our retail is up high single-digits. We are pleased with our momentum in the ATV business despite a very competitive environment.

Now for side-by-side, the North American industry is up mid teens digit season-to-date. The dynamic of the industry is the same than last year, constantly putting pressure on our market share. It is still being driven up by strong growth in the utility category, a segment in which we don't have any model, and the sport category. Direct Youth category, the segment in which the Can-Am Commander competes, has continued declining.

Why the Maverick is there suitable as it have accelerating retail sales in the sport category, overall we are still behind our plan in terms of market share for the season. However, we have adjusted our strategy for model year 2016.

On the Spyder side, it is still early into the season, but the motorcycle industry is up mid single-digit while Can-Am Spyder is down low single-digit. The retail of the RT is slightly behind our plan for the spring as we had bad weather in some key markets, and we are also facing a tough comparable as last year early season was very strong with the introduction of the new RT 1330.

On the F3 front, the retail in North America is right on plan. In Europe, we are substantially in advance of our plan especially in countries like Germany, France, Italy, and the UK. In aggregate, we are over 20% better than last year in Western Europe.

The F3 drove a lot of interest in the motorcycle shows service, which combined with the ongoing demo tour in North America and Western Europe, generated several leads with a good potential conversion rate. We like what we are seeing so far, and we are excited about the long-term prospect of the new F3 family.

Continuing on year-round products, we have just introduced our model year 2016 off-road vehicle lineup last week, and you will find a highlight on slide seven.

Once again, we have taken a step to remain the performance leader in the off-road industry. As we brought the latest engine technology and industry-leading power in all ATV segments, we introduced three new Rotax ATV engine by upgrading all our 500cc engine to 570cc, all the 800cc to 850cc, and our 1000cc to 1000R.

We are expanding our Outlander L platform with multiple models adapted to rider needs, most notably the Outlander L XMR, an entry-level mud ATV that is expected to drive a lot of interest in that category especially in the southern part of United States.

On the US side front, we have improved our offering by upgrading the Maverick X ds Turbo version from 121 to 131 horsepower. We have also introduced the Maverick 1000R Turbo with the same great power as the X ds vesion, which has become the most affordable high-performance side-by-side in the industry.

Another highlight of our 2016 lineup is a new hunting edition Outlander L ATV and Commander side-by-side developed in market in cooperation with Mossy Oak, an outdoor industry leader in modern camouflage design. We see this has a very interesting opportunity for Can-Am as the hunting community represents about 15 million hunters and drawing the hunter interest a lot in their sport and a high percentage of them own an off-road vehicle. This initiative gives additional exposure to our brand.

Overall, we feel that we have a strong lineup for 2016 with functionality, affordability, and industry-leading performance. We are confident that with our lineup we will be able to maintain our moment in the off-road vehicle business.

Now on the seasonal product front on Slide 9. Our revenues were up 47% in the quarter compared to last year. The increase was firmly driven by higher personal watercraft shipment. Last year, we didn't ship as many traditional personal watercraft as usual during Q1 because we were in the production ramp-up phase in Queretaro. Now that the transfer of the personal watercraft production is completed, we were able to ship a greater number of traditional personal watercraft reaching our more traditional shipment levels.

The increase in revenue was also fed by higher Sea-Doo's part deliveries. Last year, at this time, many dealers were short of this model, so we increased our shipment to meet expected demand -- expected retail demand.

Switching to our retail performance, season-to-date, the North America personal watercraft industry is up mid single-digit. Sea-Doo retail is up high single-digit over the same period. Both the Sea-Doo Spark and traditional Sea-Doo lineup are performing very well, and we are hearing from some dealer that they are able to upsell Spark to traditional personal watercraft.

In the Southern Hemisphere, the personal watercraft season is coming to an end and our result in Australia had been good. However, it has been more challenging in Latin America due to the difficult economic environment most importantly in Brazil where we saw a significant decline in demand after we increased our price by 15% because of the devaluation of the real.

On the snowmobile side, the North American industry ended the 2015 season up mid single-digit. Ski-Doo gained market share with retail sales up high single-digit for the season and maintained its market share leadership into the industry.

Looking at next season, our spring order for the North American East Coast were very good, in line with what we had last year. However, they were lower on the West Coast as this region suffered from bad snow condition last season and ended with higher dealer inventory. Overall, our spring order ratio is lower than last year, but we are pleased with the booking as it is the second best of the past decade.

On the international front, Scandinavia has good snow late in the season, which generated increased shipment of snowmobile impact in the first quarter. Despite the good end of season, the industry is still down mid single-digit, and Ski-Doo and Lynx combined market share are slightly declined -- has slightly declined. The business environment has been tougher because some special sales programs have been offered by two of our competitor almost all season long.

Now, let's have a look at our propulsion system business on Slide 10. Our revenue grew by 5% in the quarter as we had a strong sales mix driven by the deliveries of the Evinrude E-TEC G2. Approaching the end of the season, the North American outboard engine industry retail is up high single-digits. BRP retail sales are also up high single-digit over the same period.

After a slow start to the season for Evinrude, we are clearly seeing the impact of the G2 in Q1. We gained market share in the over 200 horsepower plus category. The only category in which the G2 is sold and now available in large quantities. This new engine has also helped us expand our dealer network since the beginning of fiscal year 2015. 20 new boat OEMs have partnered with us and 99 new marine dealers have joined our network. We'll keep on building on that momentum and continue to expand our network to reach our target of adding 150 to 200 Evinrude new dealers in North America by the end of fiscal year 2019.

On the parts, accessories and clothing side, we had good results. Our revenue for overall business were up 13% into the quarter. The increase was primarily driven by year-round product and outboard engine parts and accessories coming from new product introduction. However, we are -- we were disappointed with the overall snowmobile past sales for the first quarter. Sales remain flat compared to last year because of the difficult Russian situation and the volatile market condition in the western part of North America, which led to an average end of season.

It is also worth mentioning that the transfer of PAC distribution activity to a third party is now completed and new distribution center is fully operational and the service level to our dealers is constantly improving.

And with that, I will turn the call over to Sebastien, and I will return with a few closing remarks.

Sebastien?

Thank you, Jose, and good morning everyone.

This morning we reported revenues of $898 million for the first quarter of fiscal 2016, an 18% increase from the first quarter of last year.

Our gross profit amounted $213 million for the quarter, resulting in gross profit margin of 23.7%, an increase of 80 basis points over last year.

Normalizing for elements, most notably the $46 million gain on our US dollar denominated debt, normalized net income stood at $37 million, an increase of $21 million compared to the same period last year. Normalized EBITDA amounted to $92 million and normalized diluted earnings per share is $0.31.

Turning to our revenues by product categories and geographies on Slide 14, as Jose mentioned, revenue growth was primarily driven by seasonal products with increased PWC shipments as our Queretaro facility is now fully operational, allowing for higher level of traditional PWC production compared to last year, and as we increased Sea-Doo Spark deliveries to accommodate for higher anticipated retail demand.

From a regional standpoint, most of the growth came from North America with US revenues growing 32% and Canada 17%, while international revenues declined 1%.

Normalized net income bridge on Slide 15. Quarterly normalized net income increased by $20 million, driven by volume and mix, pricing and sales programs with a net positive impact of $30 million, and production costs and operating expense with a $9 million favorable impact. And these were primarily offset by higher income tax expense compared to last year for about $13 million, and a non-favorable foreign exchange impact of $5 million.

Moving to the balance sheet and cash flow update, we ended the first quarter with a cash position of $235 million. We generated $6 million of free cash flow, slightly increased compared to last year driven by higher investments in capital expenditures.

Two weeks ago, we've closed the repricing of our long-term facility reducing our interest rate by 25 basis points. At the current foreign exchange rate, this reduction of interest rate should lead to a net interest expense reduction of about $2 million on a full-year basis.

Now Slide 17 for a look at BRP's Powersports dealer inventory for North America at the end of April. Dealer inventory was up 26% from the first quarter of 2015 levels. Sea-Doo Spark accounts for a large part of the inventory growth as we increased shipment in the first quarter to accommodate the higher expected demand for the upcoming season.

Traditional PWC inventory also ended up the quarter since, as we mentioned earlier, last year's production ramp-up in Queretaro limited our first quarter shipments, and we ended with a lower than usual network inventory. This year, with the ramp-up completed, we were able to increase shipments and our inventory stands at a more normal level for the beginning of the summer retail season.

Another contributor to the growth is our snowmobile inventory, which is up compared to a historically low level last year.

On the year-round product side, dealer inventory is only slightly up driven by new products recently introduced, primarily the Outlander L and the Spyder F3.

Finally, our guidance for fiscal 2016 on Slide 18. Now one quarter into the year we're reaffirming our guidance for the year, so we are expecting revenues to grow between 5% and 9%, normalized EBITDA between 6% and 10%, and normalized diluted EPS to end between $1.50 and $1.65. As for profitability distribution through the year, we are still expecting the same distribution as we presented you back in March, which is a normalized EBITDA distribution, slightly less skewed towards the second half compared to last year.

This concludes my remarks. I will turn the call back to Jose.

Thank you, Sebastien.

Let me conclude by saying that, all in all, we are pleased with our strong Q1 result. However, there are still some challenges ahead of us because of the market volatility especially in countries like Brazil and Russia, and because of a tougher competitive landscape in North America. Also, currency exchange remain very volatile. From an operation point of view, all our factories are running smoothly, and URS is on plan and on budget.

As for our yearend result for fiscal year 2016, we expect that the relative weight between each one versus full-year will be slightly higher than last year. We will maintain our guidance for the end of the year.

About 10 days ago, we announced the departure of Chris Dawson to ICON. Although we are disappointed to see him go, we want to thank him for his contribution and wish him good luck in his new challenge. We have a strong marketing and sales team in place, and we will be managing business as usual during the replacement and hiring process.

Finally, I want to reiterate that what we said on April 8 in Austria that our strategic priorities are about growth, agility, and lean enterprise. We remain convinced that by focusing on these three elements we will be able to grow our top and bottom line going forward.

So with that, I will turn the call back to the operator for questions.

Thank you, Mr. Deschenes.

(Operator Instructions)

We thank you for your patience.

Our first question is from Steve Arthur from RBC Capital Markets. Please go ahead.

Yes, thank you very much. I just want to discuss the Spyder a little bit more, something was down slightly in Q1. Even when you look at the current dealer feedback and order flow of the F3, in particular, and the RT, any thoughts and expectations heading into Q2, which presumably is seasonally a strong one or any change to your full-year view of Spyder products.

Good morning, Steve. First, almost all Spyder has been shipped worldwide. I think we have been in production in about two weeks, and everything will be shipped worldwide.

On the retail front, it's a bit transition year. Yes, we, as I said, in my remarks is going well in North America on plan.

At international, to be honest in Western Europe, better than planned, then we're happy with that. It's a difficult comparison because of the RT. Last year, we introduced the RT 1330. After four years with the RT twin cylinder and we saw a lot of existing consumer buying very early the RT 1330. Then this year we're a bit behind on the RT sales.

And the tougher idea is the ST. The ST price point is somewhat similar to the F3, and right now we are behind in the ST sales that they sell. We didn't ship much model year 2015 to the network, but we still have some 2014 up there with non-current program.

Then all in all, when you look at all of this, there is a lot of moving piece with the Spyder business, but we are still upbeat with the F3. The media coverage is incredible, very, very positive. The customers who purchased it are very happy with the product and very vocal about it.

And as I said last year, the F3 base and the F3-S that we have right now is the first of a family of products, and we're still positive overall with the Spyder business.

Okay. And I guess, just related to that, in the gross margin discussion, you said it was -- if I remember correctly it was way down a little bit by the mix of Sea-Doo and Roadster. I understand the Spark thing on the Sea-Doo side, but the roadster impact on lower gross margins, is that because there's non-current inventory or is that an F3 issue or ...

(Multiple Speakers)

Oh, it's the F3 versus the RT. The RT is a much richer margin product than the F3. And so as we ship more F3s this quarter, that's why we had a little bit of downward pressure on the margin for mix.

Maybe Steve, I would have the F3 -- the two models we have right now are not compatible to the RT. You can expect in time other FT models with richer margin compatible maybe to the -- a bit less than the RT, but higher than what we have today.

Okay. And just final point, you referenced more aggressive, competitive environment, I think, in particular, North America. Can you elaborate on that just a little bit which segments, in particular, you're seeing that stronger.

Yes, there is no secret, Steve, that in North America, on the ATV front, there is some of our competitor we believe have a lot of non-current inventory and there is a lot of big discounts right now on non-current models, a lot on ATV, a bit less on side by side, but overall there is a lot of sales program going on right now.

To be honest, if you remove the Youth ATV because we discontinued the [DS73]. If you remove the DS - the Youth ATV from the numbers, the industry is flat in North America for the ATV front and we're up high single-digit and very happy with our momentum in the ATV business.

The side-by-side, again a lot of competition there. Then definitely there is increased competitiveness pressure in North America in the last, I would say, six months.

Okay, thanks. I'll pass the line for now.

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

Good morning. From what I can gather from your remarks, it seems that the Spyder F3 is getting a little bit better traction in Europe than in North America. Is there anything that would explain that?

Good morning, Martin. First, in North America, there is some Japanese company that are very aggressive right now probably because of the end situation. In program and pricing, we can influence the situation.

Also if you look at the industry in motorcycle, the industry is up. But if you look another level, it's in the sports category fueled by the Japanese. The Cruiser and the touring segment are about flat versus last year. That being said, I would like to remind to you that half of our customer are people who don't come from the motorcycle industry.

We believe the weather also could have some influence. The month of May was warm at least here, but a lot of ups and downs; June so far so-so. And there is a lot of factors overall.

I would like to remind you that we are about on plan in North America, not behind.

Okay, okay. And then on the side-by-side, you mentioned that the utility segments, one that's growing really fast and you don't have an offering there. Any plans to launch utility side-by-side anytime soon?

Your question is quite direct. I mean, as you know, year-to-year we have always come out with innovative products. I am very happy with our novelty for 2016 for ATV and side-by-side.

For utility, obviously, we're not there yet. You know that we're building a new off-road vehicle plan in URS. The plan is on budget, on target. But the intention is to enter a new ORV segment and this plan will be running at the end of the year. Then for this morning for obviously competitive reason, I cannot comment more than that.

Okay, that's fair. And last question on the departure of Chris Dawson, what's your time line there for the replacement and have you started the process yet?

For us, you know, being a private company for 10 years and now public for two, seeing some of executives leave was something we're expecting -- not hoping but we knew that it could happen.

Our business is in good hands. We have a strong leadership group with over about 15 years of experience with BRP, so we feel confident we have all resources. We need to keep a good momentum going.

And yes, I was with the board yesterday. We discussed about replacement. And yes, the process has started.

Okay. Thank you very much.

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

Great. Circling back to the off-road, I was going to ask what your average selling price was for side-by-sides and ATVs. And then in your commentary you mentioned -- I think you said for the Maverick that you are going to kind of adjust your strategy. And, I guess, does that mean increasing rebates and would have been reflected in the [ASP] in the quarter that you're reporting?

And then this may be related, I saw your sales and marketing expense up quite a bit. Is that just due to the timing? Is that really more having to do with shipping watercraft, the PWC earlier, and not related to off-road?

Okay. Good morning, Robin. First, let's talk about the Maverick's performance. Last year, our team done an incredible job to come with the Maverick 121. But we're probably a bit late into this season, and the impact was a bit lower than what we wanted.

This year we adjusted our lineups. If you look in the detail of our lineup, we just introduced high performance Maverick at 121 horsepower at the lower price range. And we believe this was probably missing in our offering and we believe going forward, that will make a big difference.

Then we're maintaining the model on the high-end side, but we have introduced well-priced vehicle, high performance but with less feature on it. Then we believe this will help the Maverick momentum.

On the...

On maybe the sales and marketing question you had, yes, our sales and marketing investments were higher this quarter as planned, and it's because we did several portion on a few product lines on the marketing side, on the side-by-side and ATV in the US, Spyder as well and PWC. And so it's more of a shifting strategy. Peak retail is happening late spring, early summer. And so with the teams, we decided to heavy up the investments this quarter in order to make sure that we get retail momentum come to the peak retail period.

On the pricing side, Can-Am positioning is we bring to the market innovative products, higher performance, more technology. And we like to price in all our product line our products slightly above competition. And we can go in more detail with you off the call, but basically this is the overall strategy for ATVs and side-by-side.

Any kind of color on the change in ASP versus the prior year just realizing it's a premium product? Would that be ...

(Multiple Speakers)

Yes. We haven't changed our strategy in terms of average selling price. We do increase pricing every year. This year it's probably in the range of 1% to 2% depending on the markets -- markets where currencies have devaluated. We've been more aggressive like Brazil where we had to increase pricing more in terms of financial impact on our numbers, we found that material.

You'll see an average selling price probably go down when you look at the whole product portfolio because the mix is not as rich as in the past. Now we have Spark and we have the Outlander L as well, that brings the average selling price down for our products. And maybe if I could give you a bit of color on the mix in terms of impact on the gross margin so you can have an appreciation. The mix impact is about 70 basis points negative this quarter.

Okay, great. Thank you.

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

Yes, good morning, gentlemen and congratulations for the strong start. Just to come back on the earlier shipments of PWC, just wondering if it's more an easy compare versus last year or should we expect lower shipments in Q2 given you ship a much higher level of PWC in Q1.

Good morning, Benoit. I think there is two levels. On the traditional watercraft, if you remember last year we delayed some shipment from Q1 to Q2, and this year we are back to our normal ratio for the end of the year. Then on traditional watercraft, we are where we should be in terms of ratio.

The Spark, if you remember last year, our dealers were out of stock almost all spring. And we decided to frontload this production to make sure that we would have enough stock up there to retail as early as possible.

To be honest, I don't know if the pattern that we have this year will repeat next year. We need to go to the season, see the result at the end of the season and the reception to the model year 2016 product intro. But definitely, on the traditional side, it's normal.

On Spark, I cannot comment for next year.

Okay, perfect. And on the new facility, you [arrives], you mentioned that it's on budget. I would assume also it's on track in terms of timing, yes, Jose?

Yes, it's on budget and on schedule. It will be operational at the end of the year.

Okay. And in terms of a dealer inventory level, you mentioned very good color for the Q1. We saw the increase of 26%. What should we expect in the coming quarter especially in light of the upcoming products' introduction?

Yes, Benoit, this is Sebastien. Yes, the inventory this quarter up 26% as mentioned driven by Spark traditional PWC and snowmobile. And then I'm expecting the inventory to be up as well in the subsequent quarters as we have new product introductions over there.

Last year, if you recall, we ended July, we had no Spark inventory in the field remaining. Our expectation is that there's going to be some Spark inventory in the field for retail in August and September. And we'll also have some snowmobile inventory as well, which will be there coming from this year, so the expectation is that we'll be seeing a good increase in inventory as well for the upcoming quarters.

Okay. But are you talking about year-over-year or quarter-over-quarter --

On a year-over-year , Benoit.

Yes, perfect. Okay, that's great.

And the inventory is at a position where we feel very comfortable. Again, there are four elements which we control. And those levels are levels that we've seen in the past and we're comfortable operating with. And the fact that we're expanding our dealer network as well does result in increased inventories as well -- the dealer network.

Okay. And what about the mix between kind of new products versus older lines or older models?

The aging is good. If you were told last year, we have to launch more sales program in the second quarter because we wanted to [deplete] inventory of side-by-side. This situation is not existing to date. We're comfortable with the aging of inventory with our non-current levels. It's a right level where the dealer has the right mix of current and non-current need -- the various consumer needs. So it's good.

Okay. And last question if I may, when I look at the ruble, obviously, it strengthened a lot in the last few weeks. I understand that it takes some time, but what's in your view the lag impact before we start to see some positive impact on the retail side or it's more a function of the Russian economy that more than offset the strengthening of the ruble.

I think the situation in Russia is still very fragile. You know, the political uncertainty causing unemployment is putting pressure on credit lines. Our product are high in expenses in those countries. Then to be honest, Benoit, it's very, very difficult to predict how fast Russia could rebound.

In our planning right now, we're planning for about half to what our volume was two years ago, fiscal year 2014. And this is exactly what we saw in Q1 and that's what we put in our yearend planning.

Okay. Thank you very much for the time.

Thank you.

Thank you. Our following question is from Anthony Zicha from Scotiabank. Please go ahead.

Hi, good morning, gentlemen. Jose, can you please provide some color on your sell-through in the month of May and maybe a bit in June, others that looked compared to last year?

I mean, there is no doubt, Anthony, that May is softer than what we had planned. We have adjusted our programs in all product line and some is because to answer some of the competition situation, but we feel comfortable with the overall.

You need to understand that Q2 is somewhat a transition quarter for us. The shipment that we do are lower than any quarter. We almost ship every watercraft and Spyder. We don't have much snowmobile shipment and it's a transition period for off-road vehicle where you go from a model year to another, then program can influence -- can influence this -- the result.

Also on watercraft and Spyder, if things don't go as well, we could come up with some program probably in July. Then overall Q2, and that's our typical pattern. I mean, this has always been like that and it will be like that for a few more years. Q2 is our lowest quarter for BRP for all those reasons. And we'll adjust our strategy depending of the competition and the retail trend.

Okay. And, Jose, when we look at your agreement with Mossy Oak partnership, can you give us a bit more color on that and can you give us some color in terms of the payback which you're anticipating getting out of this partnership? And lastly, could we expect more of this type of partnerships in the future maybe with other products as well?

First, we're very excited with Mossy Oak. There's many companies in the hunting market with a different pattern and different strategy, but what we like about Mossy Oak is one of the most popular and very high-end, which we believe is tie in extremely well with the Can-Am off-road vehicle product line.

And as you saw on the slide, there is a lot of hunters in North America, and it's growing and very popular. And people invest in their hunting equipment. And ATVs and side-by-side is part of it.

Then we introduced quite a lot of models with the Mossy Oak pattern. And again we believe it's a good exporter for us. We're very excited about that.

We've done a few other partnership. I'll give you the example on the snowmobile side, the Summit X. We have the Burton edition this year where we co-brand a snowmobile. We're trying as much as we can to find the right fit. But if we find a company that have the right fit with our product image and our product performance, definitely something we want to do more.

Okay. And what kind of payback are you looking at in terms of signing this agreement? Is it percentage of the sales or...

Well, in terms of cost, it's an important investment, but not a significant material investment as part of our marketing stem.

The benefit as well with the Mossy Oak is again they have a large following. And when they'll be showcasing ORV products, they'll be showcasing the Can-Am ORV products. And so whenever they do events, shows, clubs and they want to showcase their products, they'll be using our products to do so.

And so for us that's a big payback because, as Jose mentioned, the hunting and fishing crowd is huge in North America, and that's going to just increase the awareness for our products especially on more the utility side with the Can-Am [Vandorel].

Okay, great. And then one last one for you, Sebastien, when we look at your net income bridge, it was up by 30 million. How much was that by the volume and then to pricing? I guess you answered that ...

Yeah, maybe if I get you on the gross margin side, with the appreciation of how much of it is volume-driven, about 140 basis points of the margin improvement is volume-driven. So you can do the math and see how much of that falls to the bottom line.

And as mentioned, about 70 basis points is a negative mix, and foreign exchange was also negative for both 30 basis points. So the net -- the other element would be pricing to offset that, for probably in the range of 30 to 40 basis points.

Okay, thank you very much.

Thank you. The following question is from Tim Conder, from Wells Fargo Securities. Please go ahead.

Thank you. Jose, on the side by side products, would you give us a little more color there -- is it predominantly Polaris that it is still being the most, I guess, competitive threat not necessarily promotions, but maybe just from a product perspective? Or are you seeing others come in incremental product from say, Japanese who's been maybe absent on the innovative front for several years in the market?

Well that's -- good morning, Tim. Let's say to start with, if we go by segment in the sport category, I believe it's definitely a race between Polaris and us. And this -- we are used to compete in high performance category and snow mobile and watercraft and other product lines. And for us, it's a normal situation. But I would say we're the two biggest contenders in that category.

After that, you have the Direct Youth or the Commander segment. We are very happy with the performance of our Commander. And there, there is more player and in that product category we have very, very solid market share, and we're gaining market share, but the category is shrinking.

In the utility segment, we're not there. And that segment represents right now more than half of the North America market in the side by side business. And this is something that we intend to enter aggressively going forward, knowing that there is many competitor there.

Okay. And then on the ATV side as you've already referenced and it's pretty well-known, there's some cleanup especially from one North American competitor occurring there.

In that segment also, you know, Polaris just talked about the Japanese being competitive at the entry-level ATVs. When do you anticipate that non-current product from your perspective looking at the industry? When do you anticipate that non-current product maybe cleaning up and maybe the promotions evading?

Very tough question. I wish I would know.

In our case to be honest, we're happy because despite that very competitive environment, we believe our inventories in terms of days to come is at pretty good level overall. There is some dealer would have more than others, but overall we're very comfortable with our days of inventories.

Now, there is some of our competitor who has many non-current and with aggressive program. And it's very difficult to predict how long it will take. You just mentioned one of the North America EM has said two years. Probably it will take a good two years for the overall to clean up the pipeline. But I wish I would know that answer to be honest.

Okay. And then -- and I apologize if I missed this earlier. But any commentary on Texas, Western Canada, your demand that you're seeing out of those markets from the oil fallout? You know, Texas has had quite a bit of rain also in May, but that would -- you would expect that to be a little more transitory as far as impact on demand.

Yeah, it's definitely down. We saw it on our snowmobiles, spring break typically. [Alberta] is very, very strong on snowmobile and we have good product news and it's down. The same thing for Texas area.

How long it will take? Difficult to say. But it's definitely -- there's definitely a trend there.

Okay. And then lastly if you would, just the May softness that you referenced in response to another question. Can you maybe rank reasons, one, two, three in here again, just to revisit that question?

Yup. The first, the competitive environment is very strong. And for particularly for off-road vehicle where we are into a transition between model year '15 and '16 for all the OEMs. And with the non-current level with some OEM, then there is a lot of competitiveness there. And this is one element.

Second, on the weather, the weather was -- here in Quebec, it was the warmest May ever, but on the other hand, it was ups and downs going from very warm to very cold. And people are not in the mood. And if you talk to dealer, they will say traffic was low in May. The rental -- the people will rent product, the thing was low.

Then when you look at all these, and that's what we're planning, Q2 for us is a low quarter in terms of shipment. And on top of it, it's a quarter that can be affected by such program to react at this -- to react to the situation.

That's why we -- despite the strong Q1, we're planning H1 to be slightly better than last year and maintaining our guidance, because there is uncertainty all around Q2.

But that being said, we feel we are overall with our product line, with our program, with our control of expense, we are in good shape.

Okay, thank you. Thank you gentlemen.

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

Yeah, good morning. I just wanted a follow up on a couple of things actually. So you just mentioned in terms of cost control and earlier, you were talking about the timing on selling and marketing; can you just give us a bit more color in terms of how you expect those expenses to track either in Q2 or for the balance of the year?

Yeah, we -- on average, we're looking at probably about 15% operating expenses as a percentage of revenue. And that's usually what we target for the year. And I think that's where we should be ending on an annual basis.

So there's going to be gating on a quarterly basis. Q1 was pretty heavy on marketing. We'll see Q2 as well good enough on some marketing. And then it's going to taper down in Q3 and Q4.

And then on the G&A, pretty consistent?

Yes, pretty consistent, Mark.

Okay. And then on the Spyder, at what point -- I think you sort of said July-ish, but at what point would you sort of take action if the RT sales continue to lag?

Typically, as I said the Spyder business is a bit similar to the watercraft business in terms of timing. Typically, we move in August. That being said this year if you look at our programs, we already have a $1,000 rebate on model year '15 since probably the beginning of June.

What happened Mark, is we had a $2,000 rebate on non-current RT by the year '14, an those are cleaned out. And when we saw the lag at the end of May, we decided to put $1,000 rebate on model year '15. It's a bit earlier on what we would like to.

What is difficult is that it's comparable to last year because last year after four years with the twin engine, now you're going with a nice [repo]. There was a lot of people who purchased in advance. And that's the situation.

Okay, thanks. And then just in terms of the number of dealers, I know the target, I think is 75 to 85 for the year. How many did you add and what?

We won't disclose, Mark, the number of quarter per quarter because as you know, there is some period where you don't find much in big numbers. And for us, one of the third quarter -- it's a quarter where we had dealers because of the club. I mean, if you talk to a dealer right now, most of the dealer would say -- okay, I'm interested, but I will wait until September to see your product news and to see your plan and to meet the management.

And for us, we have some done already, but the club will be -- the second half will be key moment for assigning new dealers, and we feel comfortable with our 75-85 target.

Okay, thanks very much.

Thank you.

Thank you. A following question is from Craig Kennison from Baird. Please go ahead.

Good morning. Thanks for taking my question as well. I wanted to revisit the inventory issue. You mentioned inventory was up 26%, and most of that driven by the Spark. I'm wondering to what extent the addition of new dealers is also a contributor to inventory growth kind of piggybacking on the last question?

Yeah, maybe I could give you a bit of numbers on the inventory. And for us, it's not an issue. We're again, comfortable with the inventory situation that we have. But of the 26% inventory growth that we see, you probably have at least 5% coming from new dealers. So that's again, with the dealers that we signed over the last two years.

And then Spark is about 11% of that inventory growth. And then both snowmobile and traditional PWC carry about 5% of the inventory growth.

So the remaining is very small and it's for year-round products and it's with the new product adds. And as you know, year-round products is a growth area of the business.

And so when we look at the overall picture, yes, the numbers seem high when you look at 26% compared to the last year. But last year was normally low, and this year, we're comfortable with that situation.

And then could you give us a little color on your new dealers? I know you don't want to break out the number. But to what extent are new dealers carrying the full portfolio or large percentage of your offering?

On average when we add the new dealers, you'll probably see them carry about 2.5-3.5 product lines on average. That's what we see. We're in the range of 2.5. That's what you'll see. So a dealer is going to take on Can-Am ATV, side by side, and maybe Spyder or watercraft depending on the geography where they are.

And how many product lines would you say you offer today?

What we offer -- five in the power sport industry.

Alright, great. Thank you.

Thank you. Once again, please press star-one at this time for any questions.

A following question is from Robin Farley from UBS Securities. Please go ahead.

Hi, great. Thanks. I wanted to clarify earlier in your comments when you talked about May being soft, I had understood your comments to be kind of relative to the competitors because there were so much promotional activities.

But then in answer to [someone else's] question, you made comments about whether that made it sound like maybe the softness was actually for the industry overall. So I wonder if you could just sort of clarify, because your comments through April just kind of mid-teens and just based on what we know from other in the market would suggest the month of April was, you know, at least low-double digit, it's not mid-teens for the month of April.

So is it with your comments about May -- I guess first of all, does soft mean, you know what, relative to those comments about -- and specifically this is side by side I'm asking -- and was that just sort of -- how do you feel about your own performance in the industry overall? Thanks.

Okay, first Robin, when we look at our numbers versus the industry after Q1, we are happy with the performance overall in our product line. And we understand what's going on behind the numbers.

For May, we have our numbers, but we don't have yet industry numbers. Typically you receive the numbers mid-May or mid-month. And we have, I think, a few but not North America.

But overall, I cannot comment too much yet on the industry in May. But when we talk to dealers and we constantly monitor what's going on with dealers, there is definitely less traffic in May than what we believe would be typical. That's the only comment I could say at this point.

On May, we have our numbers but not too much on the industry.

That being said, we're following closely our competitiveness in each industry, in each country. And we're trying to react as quickly as we can if we see any trend. But hearing again from dealer, traffic is down and they don't believe with lost momentum versus our competitor.

Okay, great. Thank you.

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

Thank you. So this concludes today's call. And I want to thank all of you for your interest in BRP.

I also want to invite you to our annual shareholder meeting that will be held this morning at 11:00, and will be accessible on the web at BRP.com.

So thanks again, and have a good day.

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