BRP Inc (DOOO) 2016 Q3 法說會逐字稿

(spoken in French) Hello, ladies and gentlemen. (spoken in French) Welcome to BRP Inc.'s FY16 third-quarter results conference call. (spoken in French) The call is about to begin.

I would now like to turn the meeting over to Mr. Philippe Deschenes. (spoken in French) Please go ahead.

Thank you, Moex. Good morning, and welcome to BRP's third-quarter conference call for fiscal year 2016. Joining me on the call this morning are Jose Boisjoli, President and Chief Executive Officer, and Sebastien Martel, Chief Financial Officer.

Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these. 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. Let me say at the outset that the last few months have been positive for BRP, even though the global economic environment remains challenging. As you can see, our financial results are solid, due to our geographic, manufacturing and product portfolio diversification, and to our capacity to innovate.

From a market point of view, the US remains the strongest, with Western Europe, Scandinavia and Asia-Pacific improving markedly. However, Russia is still challenging and difficult to predict. Closer to us, Western Canada is underperforming compared to the last few years, because of the economic slowdown caused by lower oil prices.

All our products are well-received globally, and we have a good momentum worldwide. The manufacturing ramp up-for the Defender is on plan in ERA, and our performance in the personal watercraft business has been very good, as well as in the ATV business.

Now let's have a look at the financial highlights of the quarter on slide 4. Revenues in the quarter grew 10% to just over CAD1 billion. The growth was primarily driven by strong sales to the US, which benefited from favorable foreign exchange valuation. The revenue increase was also helped by a richer product mix across the portfolio.

Looking at the bottom line, and despite a currency headwind of CAD10 million, our normalized EBITDA reached CAD142 million, an increase of CAD7 million. This translated in a normalized diluted earnings per share of CAD0.62, a [3%] increase over last year.

Looking at our retail performance for the quarter. Our North American retail sales for both seasonal and year-round products increased by 7%. If we exclude snowmobile, the increase is 11%. We had very good momentum in the US with low-double digit growth in the quarter, driven by good off-road retail and a strong end-of-season for personal watercraft.

The situation in Canada was much different. Although Western Canada has always been a good market for BRP, the difficult economic environment stemming from the low oil price has significantly impacted our industries, resulting in a decline of mid-single digit for Canadian retail sales in the third quarter, including a 30% drop in Western Canada. As we advance to the snowmobile retail season, we are closely monitoring the situation.

Despite the market volatility, I am pleased with our result. From an operational point of view, everything is running smoothly and all our programs are on plan. Sebastien will give you more details about our financial performance in a few minutes.

Now let me walk you through some of the key events of the quarter, starting on slide 5. As you may remember, I ended the Q2 call by mentioning that we were just about to have one of our best dealer Club in our history. In retrospective, it may have been an understatement.

Our products were well-received. And since the Club, we have signed 34 new dealers from which 25 are already operational. We are tracking to reach our objective of signing 75 to 85 new dealers this year. This Club product launch was one of the strongest we ever had, and our team did an incredible job delivering innovative products that will help us driving growth going forward.

We introduced the Spyder F3-T that extends the Spyder reach by appealing to a group of bikers similar to that of the cruiser bagger, one of the largest motorcycle crowds. We also unveiled the new Sea-Doo Rotax 1630 ACE engine; the new more efficient 300 S-PAR engine that is 15% more powerful than the previous generation. We believe this will make us an even stronger competitor in the high-end personal watercraft market, which represent a large portion of the industry in dollar terms.

Another nice addition to our lineup is the Renegade XMR, the most powerful mud ATV in the industry. This confirms our position as the biggest player in the off-road mud market. But the most important news of the Club was certainly the Can-Am Defender. With the Defender, Can-Am is entering the utility side-by-side segment, the largest segment of the industry that enjoyed a fast-growth pace over the past few seasons.

And we are determined to become a strong player in this segment. Our team of designers and engineers went directly in the field to work with the daily users of these vehicles to make sure that we understand what they need. And we have come up with a vehicle that is tough, with its class-leading torque and power at low rpm's, capable with its best-in-class towing, hauling and payload capabilities, and clever with its intuitive and roomy cockpit.

The vehicle has been tested and reviewed by the media, not only from the side-by-side industry but from hunting and farming publication. The reviews are very positive, and all agree the Defender will be a strong competitor.

Now let's speak about the plant where the Defender is manufactured, the Juarez II plant. This project has had quite an impressive journey. It took 10 months from the ground-breaking ceremony to the first vehicle out of the production line. The state-of-the-art facility was designed and built based on lean manufacturing principles for the next generation of side-by-side vehicles. We have completed the construction on time and on budget.

The Defender production ramp-up is ongoing, and the first units have been shipped at the end of November. Steady-state of production is expected to be reached at the end of February. I am very proud of what our team has accomplished, and I believe that this factory will be a key enabler to allow us to achieve our growth objectives, which include a new side-by-side model every six months for the next four years.

On that, let's move to the product category review, starting with Year-Round Products on slide 9. Year-Round Products revenue reached CAD260 million, a 14% increase, driven by favorable currency variation and improved mix of ATVs and side-by-sides sold.

Looking at the off-road retail sales. On the ATV side, our North American retail sales are up mid-single digit for the season to date, outperforming the industry, which is down mid-single digits. Our strong performance was primarily driven by the Outlander L family.

Our ATV business is also performing very well in international markets. Can-Am ATV now holds the number one market share position in Scandinavia, and is continuing to gain market share in Western Europe while solidifying its number two position.

Turning to the side-by-side. Season to date, the industry is up mid-single digit, while Can-Am is down mid-single digit. The decline in our side-by-side products was driven by a soft start of the season in July and August. Since then, we were able to invest our Q2 saving in additional Q3 programs, and we have regained some momentum. In September and October in the US, retail increased mid-single digits. However, Western Canada remained a challenge.

As I mentioned earlier, we just started shipping the Defender. And the first shipments are done on an allocation basis, so that dealer have units in their showroom. You will mostly see the initial impact of the Defender under retail in the first quarter of fiscal year 2017.

Moving to Spyder. The 2015 motorcycle season ended on October 31 with the industry up mid-single digit. Can-Am Spyder ended the season with retail sales down mid-single digits. Our performance was impacted by an unfavorable market trend as the industry growth was essentially driven by lower priced units. However, motorcycle retailing at the price of CAD18,000 and more, the best proxy for Spyder declined by low-single digits.

Nevertheless, we had higher expectations for the season in North America, and we are disappointed with our results. On a more positive note, the Spyder F3 is performing well on the international market. As I mentioned in Q2, the consumer first purchase criteria is now based on look, performance, so we are readjusting our marketing campaign.

The European success of the Spyder F3 has continued in the third quarter, and Spyder retail sales in Western Europe have now grown by more than [30%] over the last 12 months. We are also seeing positive trends in Japan.

Before heading to the seasonal product, I want to come back on another Club announcement. We will be a major sponsor of the NASCAR Sprint Cup Series racing team to our Can-Am brand. In addition, we have announced that Can-Am will be the title sponsor of two of the races of the NASCAR Sprint Cup Series, the Can-Am dual at Daytona and the Can-Am 500 at Phoenix International Raceway. We believe that this sponsorship represents a significant opportunity to improve Can-Am brand awareness in the US within the target market for our products.

Let's now take a look at Seasonal Products on slide 10. Seasonal Product revenues increased 5% to CAD476 million. This increase was a result of favorable foreign exchange rate valuation, but was partially offset by lower shipments to Russia. Russia remains a difficult market at this point. We were behind our plans in terms of shipment at the end of the third quarter. The snow condition in most of the country are good, as we are heading into the heart of the snowmobile season, but the economy is still fragile and access to credit is a challenge for many dealers.

On the North American side, where snow coverage is weaker than last year, the snowmobile industry at the end of November was down mid-teen digits. The overall situation was up in the Western part of the continent, and down in the Central and Western region. In the meantime, Ski-Doo gained market share mid-single digit. To stimulate retail, we have launched sales programs in early December into the Western region, which is the most affected. Having been through this cycle before, we are closely monitoring the situations.

Moving now to the personal watercraft North America retail, the 2015 season ended on September 30 with the industry up low-double digits. Sea-Doo had another strong season with retail up mid-double digit, and now holds its highest market share position in the last decade. After two seasons on the market, I think it is fair to say that the Sea-Doo spark has met its objectives. It re-sparked the personal watercraft industry as it has for a second straight season, driven double-digit industry growth in multiple markets around the globe.

Now turning to Propulsion Systems. Our sales stood at CAD98 million, an 18% increase over last year. For outboard engine, the industry season to date is up low-single digits while Evinrude retail was down low-single digits. However, the E-TEC G2 has driven market share gains in the 200 horsepower plus category.

Another highlight of the quarter was the agreement with Sea Pro boats. This OEM agreement is an additional acknowledgment of the multiple benefit of our new engine. Sales from PAC business have increased 14% to reach CAD176 million. The growth came from higher volume of outboard engine driven by the sales of the G2 color panels.

We also have continued to see good sales momentum in our international market, mainly in Asia-Pacific and Western Europe. Our PAC business has been performing well, and the introduction of the Can-Am Defender will help to support the growth. The utility side-by-side customer usually likes to accessorize their vehicles to fit their need. Can-Am is offering a wide selection of accessories especially adapted to fit the Defender.

Sebastien will now walk you through the financial review of the quarter.

Thank you, Jose, and good morning, everyone. Earlier this morning, we reported revenues of CAD1,010,000,000 for the third quarter of fiscal 2016, up 10% from last year. We generated gross profit of CAD246 million, resulting in a gross profit margin of 24.4% -- a decline of 170 basis points from last year. This decline was primarily driven by unfavorable foreign exchange rate variations.

In fact, currencies have a positive impact on our revenues, but a negative impact on our gross profits, and this resulted in a net negative impact of 260 basis points on gross profit margin percentage. Our normalized EBITDA for the quarter came in at CAD142 million, and now stands at CAD286 million after nine months. Normalized net income amounted to CAD73 million and our normalized diluted earnings per share was CAD0.62.

Moving to our revenues by product categories and geographies on slide 15. Our product category mix for the quarter was similar to last year, with 26% of our sales coming from Year-Round Products, 47% from Seasonal Products, 10% from Propulsion Systems, and 17% from Parts, Accessories and Clothing.

When looking at our different regional markets, most of the growth came from the US, which benefited from the strengthening of the US dollar over the Canadian dollar, driving a 30% revenue increase. Canada was only slightly up, as Western Canada is still feeling the impact of the decline in oil prices. As Jose mentioned, the economy in Western Canada is difficult, which is driving an overall weaker demand for power sport products.

International revenues were down 5%, driven by lower unit deliveries to Russia and unfavorable foreign exchange rate variations. The decline was partly offset by higher snowmobile shipments in Scandinavia.

Now for the normalized net income [bridge]. Normalized net income was up CAD1 million from last year's third quarter. We had a positive CAD26 million impact coming from volume, mix, pricing and sales program, which was mostly offset by higher production costs and operating expenses for CAD11 million, driven by higher overhead and warranty costs. A negative impact from normalized tax expense and financing costs for CAD1 million increased depreciation expense for CAD3 million, and unfavorable foreign exchange rate variations for CAD10 million.

Now on to the balance sheet and cash flow update. Our cash position at the end of the quarter was CAD94 million, and our long-term debt was up CAD31 million from year-end 2015, as the US dollar continues to strengthen. Our free cash flow for the first nine months of the year is slightly down compared to last year, despite an improvement of CAD64 million in normalized EBITDA, as we invested more in working capital to support the growth of the business and CapEx, which is up CAD42 million, mostly due to the investments in the new Juarez manufacturing facility.

And finally, we have repurchased about 1.7 million shares during the third quarter for a total of CAD44 million, driving the total number of shares repurchased since the launch of the NCIB to 2.9 million shares.

Now slide 18 for a look at BRP's power sport dealer inventory for North American at the end of October. Our network inventory is up 18% from last year's third quarter, but the inventory growth is down sequentially from previous quarters. Our network inventory remains healthy, as 90% of the increase is due to earlier shipments of snowmobile this year and the inventory ramp-up in new dealers that we have signed in the last two years. The rest of the increase was driven by new product introductions.

And finally, our guidance for fiscal 2016 on slide 19. Nine months into the year, we have been able to deliver on our plan, and we feel we are in a good position heading into the fourth quarter with a good level of orders from dealers for ATVs, SSVs and PWCs. However, the snowmobile season is young and there are still uncertainties ahead with a thin snow coverage in North America and with retail demand in Western Canada, which continues to be difficult.

As Jose talked about, Russia is still soft and may end up being worse than initially planned. So, after accounting for all the pluses and minuses, our guidance remains essentially unchanged, other than some small adjustments to revenue, tax rate and share count. On the revenue side, these changes bring our total revenue guidance range from up 5% to 9%, to up 6% to 9%.

On the profitability side, as we get closer to year-end, we have better visibility on our profit mix in the different tax jurisdictions, allowing us to reduce the high-end of our tax guidance. So our tax guidance range is now 27% to 28%. With this adjustment, our normalized net income guidance range is now from down 5% to up 4%, to down 3% to up 4%.

So when we factor in the tax rate adjustment and the share count adjustment from the NCIB, our normalized EPS range is now CAD1.60 to CAD1.72, as the tax range adjustment has a CAD0.03 positive impact on the low end of the range, and the progress made with the share buyback is expected to improve our EPS by CAD0.02.

So, this wraps up our guidance update. And with that, I will turn the call back to Jose.

Thank you, Sebastien. All in all, I am pleased with how we have progressed so far this year. We have delivered on our plan, all the while making some key moves to position the Company for our long-term growth objective. We are the world leader in snowmobiles and the watercraft business. Spark continues to be a great success.

We are gaining share in ATV. We are making the push in side-by-side utility markets with the Defender. The Spyder F3-T and Evinrude E-TEC G2 are innovative products that will help us grow in their categories, and we continue to gain momentum with our network worldwide.

We are transforming our manufacturing footprint to be more agile and lean. All our Mexican facilities are in full operation, including Juarez II. And last week announcement reaffirmed [that core] contribution for the future of BRP. Although world economies are still somewhat unstable, our diversified product portfolio and our strong global presence allow us to keep growing and performing well.

Finally, I am proud of our employee contribution. I want to underline their commitment and resilience in relation to the necessary transformation that we have made over the years. Because of globalization, we had to take tough decisions to improve our efficiency and remain competitive.

One of these was last week's announcement that directly affected our Valcourt employees. They understood that we are taking these decisions to ensure Valcourt remain a center of expertise for the Company, not only for design, innovation and product engineering, but also for manufacturing. I want to thank them for their loyalty and dedication.

Thank you. We will be pleased to answer your questions.

(Operator Instructions) (spoken in French) Steve Arthur, RBC Capital Markets.

Just a couple questions starting with the Defender. The feedback of the launch event a couple months ago was quite positive. Can you give us some flavor of how that's translated to initial order flow? Was it at or above your expectations? And when you look at the planned production ramp in Mexico, does that really sync up with the initial demand?

Good morning, Steve. When we introduced the Defender in Nashville, we've told dealer that it would be on allocation from the beginning of production or deliveries in November until the end of February. And after that in March, it will be -- we'll try to supply to the demand.

Then we didn't took any order in Nashville, but we have asked for their feeling about or their plans, their estimation for the first half of next year, and we were happy with the response. We are taking right now orders for deliveries in February. It's still in allocation. And in general, we will take orders for deliveries in March.

Okay. And I guess just more generally a very competitive environment out there for the Year-Round Products. What are you seeing now and in the expectations for the next few months on sales programs, intensive levels? Any expectations that those will move immaterially outside of your normal ranges?

If I look at -- obviously snowmobile right now is a bit -- is slowing down because of the warm weather. You can expect, if the situation continued too long, to have aggressive program in January/February from all the OEMs to try to maximize the retail, in the season that will be very short. We've been through those cycles before, and typically that's what's happening.

On the ATV front, I will say the competitiveness of programs is about the same than what we saw last summer and this fall. We are gaining momentum with ATVs because the Defender is extremely well-received. And on the side-by-side, I would say no change since Q2 in terms of program.

If there is one thing that is happening on the side-by-side industry is the number of new models that are announced by many OEMs, then the competitive environment is higher than it was before. That being said, we enter with the Defender in a segment that represents more than half of the market. And we believe we can grow in that segment.

And Spyder incentives, any material changes there?

No. We are at the low -- in the low season for Spyder and watercraft, then no change there. The retail will restart more in February.

Thanks very much. I'll pass the line for now.

Thank you.

Jamie Katz, Morningstar.

Thanks for taking my questions. I'm curious how you see your ability to raise prices in some of the segments going forward, in light of the competitiveness across segments that's ongoing right now in North America?

Let's say that pricing -- you always need to be careful how fast you increase pricing or reducing pricing, because you generate typically cross-border shipments between countries and dealers, and it's somewhat not healthy for anyone. Then right now, the US dollar is very strong, and we see some of our competitors raising pricing in country.

And we're trying to follow, but you cannot go too fast up or down, because it's very difficult for the resale value of the unit, the dealer start to do some cross-border shipment, and we're going pace by pace. Typically in a year, we are increasing pricing by about 1% overall. Right now with the situation we might be a bit more aggressive, but you cannot go too fast up or down.

Okay. And then for the Can-Am side-by-sides, it looks like, in the slides, you guys had said that the retail sales were down at a mid-single digit rate, and I think that the industry was up. So how do you think you can pull on different levers, I guess, to regenerate share gains, either through maybe financing or promotions there in the upcoming period?

But if I look at the side-by-side industry, we're competing with the Maverick in the sport category, which is about one-third of the industry. And our market share in that category is about flattish right now.

The Rec-U, where we have -- above 30% of that segment is 10% of the industry, and that segment has declined in the last year. Then that's why the Commander sales are affected because of that industry trend. But we are entering with the Defender in segments which represent 55% of the industry. And that's why we are so upbeat about the reception of the units and the enthusiasm about the dealer. And we believe we can grow in the side-by-side industry when you look at the big picture.

Thank you so much.

Robin Farley, UBS Securities.

I have two questions. First is just trying to understand how much FX has kind of moved your revenue guidance. I'm trying to think about how much it drove outperformance in Q3, and then how much it was lifting your total revenue guidance that incremental sort of percentage point off the bottom. Maybe if you could quantify how much currency is affecting your full-year guidance now versus kind of what you had said earlier in the year?

Yes. Hi, Robin. When we announced our guidance last March, the US dollar was trending about 30% above the Canadian dollar. And that's the trend we are seeing today. So when you look at it globally, the currency fluctuations that we've seen in the last, let's say, nine months hasn't influenced tremendously our year-end guidance.

Obviously when you look at a year-over-year comparison, well, last year, the currency, the US dollar was not as strong as it was. And that's why you are seeing such a big variation in revenues. I am not expecting an 8% FX impact on top line for the fourth quarter if the US was maintained at the same level as the US rates started to increase last year at the end of the year.

But if you just look, I guess, sequentially from Q2 to Q3, I think FX was a little bit more of a benefit maybe? So I guess on your full-year guidance, a quarter ago, you had said there was about 600 basis points of FX benefit --

Yes.

-- in the 5% to 9% guidance. What would you say now is that FX benefit in your full-year guidance?

I would say probably around the 6% to 7% overall impact, Robin.

Okay. No, that's helpful, thank you. And then I don't know if you commented on -- if you could give any color on November side-by-side sales? I realize you may not know industry color at this point, but just how you feel that side-by-side sales trended in November?

Yes. We -- as we said, we don't have any industry data. Basically if you remember in Q2, we were -- we lost some momentum. We saved some dollar on program that we invested in Q3. And you saw the lift that we had in Q3. And in November, our retail is similar to what we saw in Q2.

And is that -- do you attribute that to less promotional programs in November?

No, I think a few things, Robin. First, Q2 is always a bit a funny quarter because it's the end of the season for off-road business. Then OEMs sometimes are aggressive to retail as soon as possible the model year. Then the Q2 is always a bit funny quarter. Q3, you have the ramp-up of the new model year product in the retail. And our level of inventory is, I feel, comfortable overall. And sometime we are missing product in a quarter at the end of the season versus some of it at the OEM.

Then this is in a nutshell, the situation. The other thing is, as I said before, the Club was a big Club because the dealer who attended the Club in Nashville saw our commitment for the off-road business with the Defender, the new facility, the commitment of new model every six months for the next four years, plus the novelty on the ATV lineup. Then it's the combination of all those things that make a difference and fuel the momentum.

Okay. Great. Thank you very much.

Thank you.

Anthony Zicha, Scotiabank.

Jose, can you give us a bit more color what's behind the 7% increase in retail sales for the seasonal and for the Year-Round Products? And second part to the question is what's up with the US consumer? Are they migrating towards lower price points? Are they going towards the Asian manufacturers here? Has anything changed in the psychology of the US consumer?

Listen, for your first question, the retail was up 7%. If I remove snowmobile, like I said in my statement, the retail was up 11%. It's a combination of solid retail -- solid ending of the watercraft season, plus the off-road momentum that we had reinvesting the money we saved in Q2 and Q3, and competing -- our model year 2016 competing against the other OEM model year 2016, the model year 2015 had been clean for some OEMs.

Then this is the situation of the good momentum we had in Q3, and so far in November is ongoing. In terms of your question about entry-level product, if you look at what's happening in every industry, you see what we've done with the Spark and watercraft. You see the trend in motorcycle. The motorcycle industry in 2015 was up mid-single digit, but if you remove the entry-level motorcycle, it was down mid-single digits.

Then there is definitely a trend where customers -- there is demand for more pricey units in every product line. I don't think that -- there is some good Asian product out there, but I think there you're going very low in the food chain. And I think there is a trend, but I'm not sure if the US customer would go buying a lot of Asian product.

Okay. And one last question. With reference to inventories at the dealership level, so you had seen a good improvement from Q2 to Q3. What about Q4? Is the positive momentum continuing in the last couple of months?

Yes, I'm expecting Q4 inventory to be up slightly, but it should be in the low-single digits. Obviously, snowmobile season is a big factor and there's always good retail that happens in January, so that could influence the snapshot that we have at the end of the year. But if the snow comes and the retail picks up on snowmobiles, Anthony, I'm expecting to be in the low-single digits.

Okay. Excellent. Thank you very much, gentlemen.

Martin Landry, GMP Securities.

Good morning, Jose and Sebastien. My question is on the Spyder. I think your sales were a little bit below your expectations. Wondering how does the inventory at the dealer level looks like right now? I'd love to hear color, both from a unit standpoint and from an age standpoint.

Good morning, Martin. First, you're right. We were disappointed with the Spyder season last year. I think one of our surprises is, despite the good media coverage we had for the F3 introduction, the marketing campaign that we had, only one-third of the Spyder customers -- the people who own a Spyder, know about the F3. And this is a disappointment. Our marketing campaign was not as efficient as we had planned.

And you're right, the level of inventory in North America is behind or higher than what we had predicted. But it's not -- it's either -- most of it is model year 2015. We don't have much model year 2014 out there. It was -- we take the approach that when we have inventory, we prefer, at the end of the model year, to be aggressive and try to clean it out as much as we can.

Then out there you have a good level of inventory of model year 2015 but we don't have much 2014. That being said, very happy with the Spyder business outside North America. It's a smaller in number of units, but like I said in my statement, when you wrap up the season 2015, it was up 30%. And we are expecting, with the F3-T, continued growth in both North America and in international.

Okay. That's helpful. And on your snowmobile, you said you initiated some sales programs. Is this in reaction to your competitors? Or it's more in anticipation of slower sales? Meaning have your competitors started to initiate some sales programs as well?

What we have done so far -- this is a program we have implemented, and it was launched, I think, December 1 -- is just what we call internally a no-no-no. And the people -- the customer buy a snowmobile and you don't pay for the first year. We're trying to give a reason -- for people who are uncertain about their financial situation, we're trying to give them a reason to feel better and buy a snowmobile. Then it was not an aggressive program so far from us or from any competitor.

Okay.

And it was done only in the West, by the way.

Okay. Okay, thank you very much.

Thank you.

Benoit Poirier, Desjardins.

And just to come back on the Spyder, did you have a feeling that some of the sales were impacted by people waiting for the new Cruiser Bagger? Because I understand it was supposed to start shipments in December. So I'm just wondering whether it put some pressure on the sales?

Good morning, Benoit. For sure, some customers were waiting for the Bagger, because if you buy a base F3 or an F3-S, and you want to equip it for better wind protection and some more comfortable equipment for the passenger, it's a lot of money. Then for sure the Bagger -- it's a good deal for people who want to ride too, and someone who have a more high-end product.

And we started shipping the F3-T in December as planned, and we will see how it goes. But again, at this time of the year, it's very, very small numbers. Then it's too early to get to have a feeling of how the retail will go next year.

And for fiscal 2017, what should we expect in terms of F3 sales in terms of with the Spyder?

Obviously, for competitive reasons, I cannot elaborate too much on this. But our marketing campaign will evolve next year. Because one of the disappointments we had is, despite the money we invested last year, only one-third again of the owners knew about the F3. Then you can expect quite a different marketing campaign this coming spring. Because it's key that we find a way to build the [RNS] as soon as possible, and we know that we have a very good product between the F3 lineup and the RT lineups.

Okay. And just on the outboard engine, obviously the market is still healthy. But is it still driven by the new boat as opposed to the repower market, which is still weak? Or is there more a trend to where buying smaller engines as opposed to the larger engines? Is there any trend in terms of a pricing point? Or it's again driven by new boats?

No. The trend we are seeing, Benoit, is a strong market in the saltwater markets. So looking at Florida, Texas, very strong. And also in the new boats and pontoons. These are the key markets we are seeing growth in.

Okay. So is it fair to say that the G2 engine, basically these 200 horsepower-plus, outperformed the industry in terms of a growth rate?

Well, we did get good retail and market share gains with the G2, as it's a new product and offers clear benefits to the consumer. So we did see good momentum there. However, we've talked before on our network and the footprint of that network. And we are not as strong in the saltwater markets, and so we are not going to be seeing a pickup in retail, let's say, in Q4 for the G2, because it's not a market where we are strong. It's much more in the Northeast and the Central US that we are strong and have a good dealer base.

Okay. And just in terms of cost saving, with respect to the ramp-up of Juarez II in Mexico, you were looking for about CAD25 million of cost savings coming from Mexico, mostly skewed towards fiscal 2017, I understand. So how confident are you to achieve kind of a CAD25 million of cost saving from Mexico next year?

Well, the cost saving is going to be, one, driven by the fact that now next year, 100% of the watercrafts will be manufactured in Mexico. And therefore, that's going to be driving savings to the bottom line. And also the fact now that we have an additional plant in Mexico. Obviously, it won't be running at full capacity next year, because it will have one product, which is going to be manufactured there.

But, over time, as we introduce new products, we're going to be gaining even more efficiency from our operations in Mexico. And we will see that margin improvement come down to the bottom line.

Okay. Thank you very much for the time.

Thank you.

Gerrick Johnson, BMO Capital Markets.

You guys talked about a richer product mix. Can you give us some examples? Because it looks like Outlander L and Spark have really been driving some sales. What's driving the better mix?

Yes. Good morning, Gerrick. Actually two product lines had good mix this quarter and actually drove almost a 300 basis point improvement on the margin this quarter. The first one was snowmobile; we had a lot of crossover sleds which were being shipped this quarter, and some mountain sleds, which do have better margin profile than the overall average of snowmobiles.

And also, as Jose indicated, we launched a new XMR mud version, and we shipped quite a few units this quarter. And that also helped our gross margin percentage.

Okay. Great, thanks. And then after last quarter, you mentioned ramping up promos to compete better against Arctic Cat players who have their own inventory issues, the Japanese who have been more promotional. But it doesn't look like that came through on your margins. So was there an impact on your margin for more programs and promotions?

Yes, there was, and that's included in we'll call it the pricing mix in sales program. We did invest quite a bit of that money that we had saved in Q2 into the third quarter in order to drive the retail performance.

Okay, great. Thanks, Sebastien.

Thanks.

Mark Petrie, CIBC.

With regard to the snowmobile inventory, you gave some pretty good specifics with Q2 in that snowmobiles were up 12%, I think, in terms of inventory specifically. What was that number at Q3?

Yes, I have this number. The inventory impact was 11% year-over-year, Mark, for the third quarter.

So snowmobiles were up 11% year-over-year?

Yes, yes.

And I think the Scandinavia market was relatively weak for you guys last year, at least relative to North America on snowmobiles again. What is your outlook there? What's the snow coverage like in Scandinavia? And what's your outlook in terms of competitive activity?

Yes. Good morning, Mark. Scandinavia last year, they had snow, but very late. Then they had a very, very slow start of the season, which improved on the back end of the season. And over there, the season runs till end of March/mid-April. Then this year, the start of the season is better than last year. And we are having a good retail over there for Scandinavia.

Russia, the snow coverage right now is very good. It's one of the best we've seen in the last few years. The difficulty is the credit line for the dealers. Then we're off our target at the end of Q3. We have a plan right now to catch up by the end of Q4, but this is a risk that is factored into our guidance. We could be off our target by the end of January. And the season over there, again, is longer than here. But it's a good start overall in Scandinavia.

Okay, that's helpful. Thanks. And then just a couple follow-ups on the utility side-by-side. What's the pace of production right now at Juarez II for the Defender?

Right now we are running the one full shift operation half the base about, that we intend to go. Like I said, we will be at the full daily rate or hourly rate by the end of February, one shift. And after that, we can ramp up, depending on the demand. That's why, in January, we'll take orders for the Defender for deliveries in March and we will adjust accordingly.

And what is that rate in terms of units per hour?

We don't go in those specific, Mark, for competitive reasons.

Okay. And then just last, what's your outlook -- I mean, obviously, the utility segment of the side-by-side market has been a strong performer, and it -- clearly, it's the largest segment. What's your outlook over the next year or two in terms of growth of that segment?

But we're planning -- you saw -- we saw growth of double-digit in the last few years, and high double-digit in the last year in the utility segment. Now it's slowing down. I would say it's probably in the range of -- it's high-single digits for now or half, about 5%. But for us, it's a huge opportunity.

It's a segment that presents 55% of the industry, where we are totally absent. Then that's why, obviously, we would like the segment to continue to grow. But even with moderate growth, for us, it's offering a big opportunity because we started from scratch.

Yes. No, I understand. Perfect. Thanks very much.

Derek Dley, Canaccord Genuity.

Just on the inventory levels, I just want to get the math right here. So if snowmobile was up 11%, does that imply that the other 7% was just new dealer adds?

No, new dealers is about 7% -- 5%, Derek. And the rest would be other product lines.

Okay. Great. In terms of the promotion on snowmobile, I understand you guys are going to put some promotions through in Q4. Are you seeing that matched by your competitors? Or is it as competitive an environment as we are seeing in ATV and SSV?

Right now, direct again, we've launched some -- I would call it soft program in the West, which is a financing programs. But where -- depending on how the snowmobile season is evolving, we've been through those cycles before. If the season is very, very short, the retail season is short, you become more aggressive to make sure you maximize your market share.

Then we -- this is one of the risks we have for year-end is a sales program for snowmobile. That will happen probably more -- most of it after Christmas time. And it's -- I mean, the retail season is short for all OEMs in the industry; trends are down. So, obviously, no one wants to get stuck with inventory at the end of the season. So, it's fair to assume that if the trend continues, other OEMs will also be supporting their dealers with retail incentive programs.

Okay, great. Yes, that's helpful. Just a couple more housekeeping questions. In terms of your capital allocation going forward, I mean, should we expect you guys to remain aggressive with the NCIB, given your healthy balance sheet?

Well, obviously, with the current share price, the NCIB remains an attractive way to return capital to shareholders. So obviously, we will continue and consider it. The current NCIB expires at the end of March. And in due course, we will have further discussions with the Board to decide what we do with any cash that we have on the balance sheet.

Okay. And then just the last one from me. Can you give us an update of guidance just on your tax rate for fiscal 2017?

Well, we are actually providing guidance in March when we publish our Q4 results. So -- Derek, so today, we will focus on Q4, which is coming up.

Okay, great. Thank you very much.

Tim Conder, Wells Fargo.

And a couple questions here, gentlemen. You've given some color, but specifically again your exposure in the southern portion of the US, you're working on building up your dealer network there specifically. But any comments that you can have relating to the cadence of sales, say, in Texas over the last four months?

And then also other commodity-dependent areas. A little more color, if you could, on Western Canada, and then maybe Australia. And then Brazil -- obviously, Brazil's got more issues than commodities, but I've seen comments on those areas, specifically the sales cadence at retail the last four months.

Yes. If you take -- good morning, Tim. If you take Western Canada, all our -- I mean, if you look at all the industry, it's about down 25% right now, if you mix all the product lines together, which is a big decline.

In the United States, there is a slight decline in Texas, in states like this, but it is not material. I would say it's below 10%. If you go in Brazil, in Brazil, at the beginning of the year when the real lost 35% in value, every OEM increased their pricing in the range of 20%, 25%, and we had a big drop in demand in person.

APAC, Asia-Pacific, the retail is going up. Obviously with the weakening of the Australian dollar, the profitability has declined. Then if you look at the big picture, it's -- that's what's happening overall.

Okay. Okay. And then on the motorcycle market -- thanks for the color earlier. As you've seen again the lower end of the market or the more entry-level of the market performed better. What do you think changes that here? And can Spyder make the turn if the rest of the, let's call it the heavyweight market, does not?

What's your comfort level in that? And then a clarification question on the outboard -- are you saying that your share -- because your less exposure to saltwater market, the products are performing well where you have distribution -- but are you saying overall that your share maybe shrank a little bit?

Let's start with the motorcycle. The motorcycle industry increased last year by mid-single digits. But the heavyweight, the more expensive motorcycle, declined by mid-single digits. Then the point I want to make is there is still -- the growth is coming from the entry-level product, but there is still a big portion of motorcycles that are above CAD15,000.

I think there is definitely a trend where there is new customer who are looking for, for more entry-level product on any product line, but there are still a lot of customer who are looking for high-end product in the motorcycle industry.

On the outboard engine, as Sebastien explained earlier, we've always have been stronger in the power versus OEM. We are trying now to shift that trend. We are signing more and more OEM. Then because the trend is going down in power, gaining in OEM, that's where we've lost our market share. That being said, our Propulsion System is up 18% because the risk is good, because the G2 right now is offered only in the 200 horsepower up category, where obviously higher horsepower, higher margins.

Okay. And then last question, gentlemen, just a little bit on the manufacturing on the RS-2 appears to be (technical difficulty) very, very well and good execution overall there. As it relates to going to more of a, if you want to call it, just-in-time poll type of process, where are you roughly? If you can, give us some color, where you -- if dealer sells a side-by-side or a Spyder, in each of the main product lines, where are you in the ability to replenish, say, in terms of weeks or months? -- however way you want to comment on that.

When we acquired Juarez I, we acquired an existing factory, and we moved ATV from Valcourt to Juarez I. And after that, we started side-by-side in the same factory. And we are missing space. And to be able to manufacture both products in the factory, we had to farm out some -- like a few things that we are doing internally. And we had no bank system, no metal print system for -- there other products made in Juarez I.

Then the Juarez II right now you have -- we have the capacity to make internally everything around the frame, the rack. We are doing our printing ourselves. And that's where we have an efficiency gain going forward. That's why we needed to invest in Juarez II to be more efficient, plus it's the facility, things are -- manufacturing sites are always improving. And this facility operated in one piece slow principle. And it's very, very flexible the way it's designed. And that's why we will be able to implement so many new models in that factory in the next four years.

Okay. And then just the turnaround times, are they -- from, I guess, a replenishment cycle perspective?

We can turn around -- I mean, if you increase by a big number, the lead-time would be anywhere between three to four months, to be realistic.

But our objectives are actually to reduce those lead-times down the road as part of lean manufacturing, and give more flexibility to dealers in the shorter window for ordering goods and having them on the floor ready to sell.

Okay. Okay. Thank you, gentlemen.

Craig Kennison, Baird.

Thanks for taking my question and squeezing me in. You've addressed most of them, but a question on Defender. I'm curious if you have any expectations for the impact on the Parts and Accessory business? I imagine that the attachment rate of additional accessories on that particular unit is particularly high.

Definitely the Defender is the type of product where we expect a big dollar per unit. But I would say that even with the other side-by-sides, we have quite a high level of dollar per unit than -- the Defender will be higher, but it's not enough to -- it's not a big increase versus Commander and Maverick dollar per unit.

Great, thank you.

Cameron Doerksen, National Bank Financial.

Just, firstly, just a quick, I guess, guidance question, just on the Seasonal Products revenue for the full year are flat to up 4%. That sort of implies -- at least if my math is right -- a fairly significant decline year-over-year in revenue in that segment. Is that just a reflection of your conservatism on the snowmobile market with Russia and Western Canada, et cetera? Or is there also some timing issues in there?

Good morning. Yes, two things, actually. First is, it was planned that way. We early-shipped snowmobiles in Q2 this year versus last year, so we knew our Q4 shipment of snowmobile would be lower. And also, yes, some Russia units -- Russia is going to slightly lower than what we had anticipated. And usually we do good deliveries to Russia in Q4. So that's impacting the numbers somewhat. But the main reason is timing and deliveries, Cameron.

Okay. That's what I thought. Just second question, I know it's too early to be talking about fiscal 2017, but maybe just sort of big picture -- what worries you the most as we head into next year? I mean, is it demand environment? Is it competition? Or is there something else? Just sort of want to get your thoughts on sort of the big picture of things that you are -- maybe the biggest question mark for you as we head into next year.

I would say, Cameron, that in terms of our product offering, we are quite comfortable with our product offering. If you look all our product lines are up to par, very competitive in their respective industry. Then not to worry there.

Demand -- the world is getting more volatile and it swings very quickly from good to bad or bad to good. Then, for sure, demand is a bit more difficult to predict. But we -- if you look at the overall with our -- and again, I think right now you're starting to see one of the strength of BRP, our product diversification and our geographic diversification, and also our manufacturing diversification.

Then when something happen in one product line in one country, we have more than one -- we have many legs or many levers we can pull to help to continue to go in that volatile environment.

Okay. Very good, thanks very much.

Thank you.

Gerrick Johnson, BMO Capital Markets.

I just wanted to ask you about demand for the Maverick Turbo, since Polaris came out with their Turbo. And also how is the side-by-side market over that CAD20,000 threshold?

Let's say that it's difficult, Gerrick, to read the situation in the sport category. As you remember, we came out with the Maverick 121 late last season. It was in November. Then we were a bit on the back end of the season for the Southwest.

We had an okay spring. We came out with the 131 on time right now; Polaris came out with their 144, I think, a month later. And right now we don't have much industry data so far on the side-by-side business.

Then our retail is about on track on the sport category, but it's difficult for me to comment versus the competition. One thing I could add, our product is very competitive. The Maverick 131 is a very competitive product.

Okay. So you are still seeing strength in the CAD20,000 and above category?

There is definitely -- how can I say it? When you pass the bar of CAD20,000, it's getting expensive. Then you need to be careful. We need to be careful as OEM to be realistic with pricing. There is some elasticity there when you arrive above CAD20,000.

Okay, fair enough. Thank you.

Thank you.

Thank you. We have no further questions registered at this time. (spoken in French) Back to you, Mr. Deschenes.

Great. Thank you, Moex. Thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again in March for our fourth-quarter earnings call. So, thanks again, everyone, 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. (spoken in French)