BRP Inc (DOOO) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the BRP Inc.'s FY17 first-quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Thank you, Maud. Good morning and welcome to the BRP's first-quarter conference call for fiscal 2017. 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 risk 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. Fiscal year 2017 is off to a good start.

Our team's efforts are paying off as we experience significant success with all our product line, boasting strong retail growth and market share gains around the globe. And despite a volatile currency environment that negatively affected our bottom line, we executed on our plan and delivered results right in line with our expectations and the outlook we gave last quarter.

As we are heading into the summer we like where we stand and we are reaffirming our guidance with some minor adjustments. Sebastien will provide additional comments in a few minutes but for now let's go through the highlights of the quarter starting with the financial results on slide 4.

As I mentioned our quarterly results were essentially in line with the outlook we gave last quarter. Our revenues reached CAD930 million, a growth of 4% from last year's first quarter, driven by favorable foreign exchange rate variation.

As we were planning the normalized EBITDA for Q1 was down 38% to CAD57 million. The decline is the result of our sales programs for snowmobiles as we wanted to mitigate the impact of the poor snow conditions in some regions of North America and the weak economy in Western Canada. Our programs were successful and we ended the season with a comfortable network inventory position, making room for the new Ski-Doo platform which bodes well for the next season.

Another contributor to the normalized EBITDA decline was higher operating costs notably as we continue to invest in R&D and maintain our tradition of delivering product innovation. Finally, this resulted in a normalized diluted earnings per share of CAD0.04.

Now to give you a better appreciation of our worldwide retail momentum we are giving you more colors on regional retail trends for this quarter on slide 5. Over the last few years we have been focusing on developing our product portfolio, our brands and our dealer network and we are starting to see our momentum accelerating.

During the first quarter thanks to the solid work of our team, our marketing campaign, effective sales program and the dedication of our dealers we were able to drive strong retail demand for our products, notably in North America where our powersport retail grew by 14% compared to a 3% growth for the industry. The strong increase was driven by a good end of season for snowmobile, the continued success of the Outlander mid-cc and the early retail of the Can-Am Defender.

Outside North America while retail has been softer in Latin America due to the difficult economic environment, our retail sales in the rest of the world was solid. We had mid-teens growth in the Europe, Middle East and Africa region with good early-season sales of personal watercraft and Spyder as well as market share gains in off-road. And we've delivered 26% retail growth in Australia and New Zealand as we had good success with the 300 horsepower personal watercraft and gained market share with our Can-Am off-road line-up.

We are pleased with our overall performance. And the team is focusing on our plan to continue our momentum going forward.

Now looking at Year-Round Products highlights on slide 6. Revenue for the quarter were up 1%. For our ATV business, now 10 months into the season, the North American industry is down low single digits and our Can-Am retail is up high single digits. We are pleased with the performance of our line-up which is gaining market share worldwide, especially in the large mid-cc segment with the Outlander.

Turning to the side-by-side, the North American industry is up high single digit season to date. After lagging the industry for most of the season, Can-Am side-by-side had a good quarter of over 20% retail growth driven by our entry into the utility segment with the Defender. For the season-to-date period, Can-Am side-by-side retail is now up mid single digits.

We are pleased with the Defender performance which is off to a good start despite competing with noncurrent models and discounted competitor product. Also, as we announced at the end of March, we have made the second product introduction in our commitment to launch a new side-by-side every six months for the next four years with the introduction of the Defender MAX six passengers side-by-side. Production will start as planned next week.

Now turning to Spyder. Still early into the season the motorcycle industry is about flat compared to last year. Can-Am Spyder retail is down high single digit over the same period.

We still see the industry growth being driven by lower price motorcycles while models with an MSRP of CAD20,000 and more, a better comparable for the Spyder are also declining season to date. Our North American marketing campaign is ongoing and we continue to invest in product and brand awareness. Meanwhile in Europe, the Spyder F3 continues its good momentum and is driving our Spyder retail sales up in the 20% season to date.

Now onto slide 7 for an update on our new off-road line-up that we introduced last week. For the season 2017 we have optimized our offering and added new packages to offer the most complete line-up in Can-Am history. Notably, we reinforced our industry-leading offering for hunters with the introduction of the new Mossy Oak hunting edition for the Defender and the Outlander 1000.

We are strengthening our dealership leadership position in the mud segment for the new Maverick MAX and the Renegade 570 X mr. And we renamed our Outlander L mid-cc ATVs to the Outlander 450 and Outlander 570. Our Can-Am off-road business has been performing very well for the last few seasons and we believe that we have the right line-up to continue on that momentum for 2017.

Getting back to our product category highlights with Seasonal Products on slide 8, revenues for Seasonal Products were up 6% driven by higher volume and stronger mix of personal watercraft sold as a result of the introduction of the 300 horsepower but partially offset by the higher snowmobile sales program costs that were set to mitigate the impact of the poor snow conditions in some parts of North America and the economic slowdown in Western Canada.

As I said our programs were quite successful. We ended the 2016 season with a comfortable network inventory position only slightly higher than last year and our dealer orders for the next season are firm with the booking level as expected.

Looking at the snowmobile retail, the North American 2016 snowmobile season ended with industry retail down mid-single-digit percentage. Because of our strong line-up and the quick reaction of our team in launching our sales program early in the season, Ski-Doo ended the season getting 3 percentage points of market share and achieving its highest market share since the industry began recording. On top of that, we are pleased with the customer reaction toward our new snowmobile platform which positions well Ski-Doo to continue to be successful in the coming season.

In Scandinavia season to date the industry is down low single digits and BRP retail is in line with the industry. As for our personal watercraft business, still early in the season the North American industry is up mid single digits and Sea-Doo is also up mid single digits.

Looking at contra-season market share market in Australia and New Zealand, the industry ended their 2016 season with its retail up in the low teens percentage while Sea-Doo retail grew in the high teens gaining 2 percentage points of market share.

Now looking at Propulsion Systems on slide 9. Our revenue grew by 8% to reach CAD111 million, primarily driven by higher volume of aircraft engines sold and favorable exchange rates. In the outboard engine business, the industry season-to-date retail was up high single digits while Evinrude retail was down low single digits. We continue to gain market share in the 200 horsepower plus category with the G2 engine and we keep on progressing in our network development effort for Evinrude as we added 15 new dealers and two OEM partners in the first quarter of 2017.

Also, later this month we will be holding our second Evinrude dealers event in three years. We are expecting once again a strong participation with over 800 invitees who will attend our new product introduction scheduled for June 26.

Now turning to slide 10 for Parts, Accessories and Clothing. Revenues for the PAC business were up 4% for the quarter despite lower snowmobile parts sales due to the poor snow conditions in many North American region that shortened the riding season. The growth in revenue was primarily driven by the good momentum we have in our Can-Am off-road accessories business as we continue to grow our vehicle installed base and develop our accessories offering.

As part of our model year 2017 ORV line-up announcement, we also introduced over 30 new accessories for the Can-Am Defender. As you know, utility side-by-side customers tend to accessorize their vehicles and this represents a good growth opportunity for our PAC business going forward.

On that I will turn the call over to Sebastien for an overview of our financial results.

Thank you, Jose, and good morning everyone. This morning we reported revenues of CAD930 million for the first quarter, an increase of 4% from the same period last year mainly driven by favorable foreign exchange. Our gross profit amounted to CAD194 million, resulting in a gross profit margin of 20.9%, a decline of 280 basis points from last year as the positive impact coming from a favorable product mix was more than offset by higher sales programs for snowmobile and unfavorable foreign exchange, which alone resulted in a 220 basis point negative impact.

Operating income was down CAD38 million in the quarter. We are involved in multiple different lawsuits with one of our competitors whereby each party is claiming damages for the alleged infringement of some of its patents. Subsequent to quarter-end a verdict was rendered in one of those lawsuits against the Company for an amount of $15.5 million.

For the three-month period ended April 30, 2016, the Company recorded as an expense the preliminary compensatory damages of $15.5 million or CAD19.5 million in equivalent Canadian dollars which we excluded from our normalized results. Management believes that the verdict is unfounded and we intend to file an appeal.

Our normalized EBITDA ended in line with the outlook we gave last quarter at CAD57 million. And we generated a normalized net income of CAD4.8 million and normalized EPS of CAD0.04.

With that being said let's turn to our revenues by product categories and geographies on slide 13. Our product category mix for the first quarter was quite similar to last year with 43% of our sales coming from Year-Round Products, 31% from Seasonal, 12% from Propulsion Systems and 14% from Parts, Accessories and Clothing.

From a regional perspective, international markets drove most of the growth being up 17% driven by higher shipments of PWCs and ATVs in Scandinavia, Western Europe and Asia Pacific. US reached CAD498 million, up 1% as a positive impact from currencies was partly offset by lower volume of Spyders sold and higher snowmobile sales programs. Canada was down 9% also impacted by additional sales programs and lower volume of Spyder.

Looking at the normalized net income bridge on slide 14, our normalized net income stood at CAD5 million, down by CAD32 million from the same period last year. Benefiting the normalized net income were volume and mix for CAD5 million and financing costs and normalized income tax expense for CAD7 million. These elements were offset by pricing and additional sales programs, mostly coming from snowmobile, for a net negative impact of CAD10 million, higher production costs and depreciation expense for CAD5 million, higher operating expenses for CAD15 million driven by higher investments in R&D and increased administrative expenses mostly related to legal costs and unfavorable foreign exchange rate variations for CAD15 million.

Turning to the balance sheet and cash flow update, we used CAD40 million of cash -- we used CAD40 million of free cash flow in the first quarter compared to a generation of CAD6 million for the same period last year. The main reason for the decrease in cash generation was the decline in normalized EBITDA and higher cash taxes paid. We also used CAD11.5 million to repurchase approximately 650,000 shares in the quarter. Accounting for these elements we ended the quarter with CAD183 million of cash on the balance sheet.

Now to slide 16 for a look at BRP's powersports dealer inventory for North America at the end of April. We ended the quarter with network inventory down 1% from last year's first quarter. Our network inventory is up in certain areas of the business, primarily driven by a slightly higher level of snowmobile inventory in Canada due to the poor snow conditions last winter and also due to shipment ramp-ups of Can-Am Defender and increased dealer count. These were more than offset by a decrease in network inventory in the rest of the line-up.

And finally slide 17 for a quick update of guidance for fiscal 2017. Our guidance remains essentially untouched except that we reviewed our expected depreciation expense to CAD145 million, down from CAD150 million, and we adjusted our share count to reflect the progress made year to date on the NCIB.

The reviewed depreciation expense impacted our normalized net income guidance which we adjusted upward to up 2% to 8% increased from flat to up 7%. Both the reduced depreciation expense and the reviewed share count improved our normalized diluted EPS guidance of CAD1.79 to CAD1.89, up from the previous range of CAD1.75 to CAD1.85.

In terms of EBITDA generation through the year our plan remains the same. We are still expecting the majority of the normalized EBITDA to be generated in the second half of the year.

Like we mentioned during last quarter's conference call, Q2 should once again be our smallest quarter, especially given that we received strong orders for the new Ski-Doo platform which will be produced in the second half of the year. So this is expected to decrease our snowmobile deliveries in the second quarter but increase them in the fourth quarter compared to last year.

We are also planning for higher operating expenses in Q2 compared to last year and we are expecting the normalized EBITDA to be similar to what it was in fiscal year 2015 second quarter. On that, I'll turn the call back to Jose.

Thank you, Sebastien. Once again I am pleased with our results and where we stand at this point in the year.

We are confident that markets in the United States, Europe and Asia-Pacific will keep providing us with good opportunities going forward. We are, however, closely monitoring the situation in Canada, Russia and Brazil.

On the product side we are pleased with the great reception they get worldwide. For example, our Can-Am brand is well recognized and consumer awareness level is rising. Our different line-up enjoyed great momentum led by our new side-by-side the Defender. As I said before we'll keep adding new models in that segment every six months for the next four years.

On the snowmobile side, we are pleased with the new platform and our booking for H2 is firm. We are also excited because we now stand with the greatest North American market share ever achieved since the beginning of Ski-Doo.

For personal watercraft we are pleased with the success of the Spark and the good early performance of the 300 horsepower models at the retail level. Our global marketing campaign is ongoing and we are pleased with our NASCAR sponsorship that is helping us building the Can-Am brand.

On the distribution side we continue our dealer network optimization program and we are still targeting to add 45 to 55 new dealers this year. We are also focusing on integrating and bringing up to speed the 105 new dealers we added last year. Our global network continued to be highly committed in growing the business.

Finally, the BRP team remains engaged and focused on our strategic priorities of growth, agility and lean enterprise to deliver on our objective both for the year and for the long term. And on that note I will turn the call over to the operator for questions.

(Operator Instructions) Mark Petrie, CIBC.

Hi, good morning. I wonder if you could just give us a bit of an update in terms of your performance and the pace of orders and inventory levels in some of your more challenging markets, so Western Canada, Russia and Brazil?

Let's start by Western Canada. In Western Canada right now, the industry is down low single digits, the first quarter where the rest of Canada was up 20% and Canada is up mid-double digit but you can see the Western is affected.

In Russia last year if you remember we had planned to be 50% of fiscal year 2014. We ended up at 40% and this year we are planning 30% and this is all included in our guidance of fiscal year 2014 level. And for Brazil, in Brazil the Brazil market is down by about half right now but Mexico, Argentina and Venezuela is up by 30% and the whole together Latin America is down by about 30% and all of this is a factored in our guidance.

Okay, that's helpful. Thank you. And then wondering if you could please just update us on some of your various manufacturing initiatives. I know there's a lot going on.

But maybe just an update in terms of the ramp-up in Mexico, how that's progressing? And then more broadly I guess the push to lean manufacturing in some of your other facilities in other geographies? And then what savings are you realizing today and how should we think about that in the coming 18 months or so?

Let's start with the Mexico. The ramp-up in Juarez 2 is done. We are right now running at the hourly rate that we're planning at the beginning of the program and everything is running well.

The Defender MAX will go on the line next week as planned and we are ready to add the second shift when the volume will dictate it. Then Mexico everything is ongoing in Juarez 2, Juarez 1 and Queretaro.

In Gunskirchen you saw last year the progress we were doing into the factory. No change there, we are on plan.

And right now in Valcourt, the Valcourt 2020 plan is divided in three phases. Phase 1 is ongoing right now. We are about halfway on it and we will -- we'll start Phase 2 on the back end of this year but everything is as planned.

On the improvement in the financial impact, everything is included in our guidance going forward. But definitely the goal, and you see here our guidance for this year, is to increase at a higher rate the bottom line versus the top line.

As we talked last call, Mark, the margin for this year is expected to be flat as we're benefiting from Queretaro PWC that is now fully ramped up. But we're getting a bit of headwind from the Juarez 2 plant starting up. And next year we should be seeing a lift on the margin coming from Juarez 2 being at full production.

Okay, that's great. Thanks very much.

Martin Landry, GMP Securities.

Good morning. I'm wondering if you could give us some color in the US on how demand for powersports is going right now. I don't know if you can talk little bit about traffic at dealers during the spring and what's expected during the summer.

Well as you saw in my review of the industry, the industry in the US, I mean ATV is about flattish. Side-by-side is growing but at a lower pace. Snowmobile we had a good end of the season but it was because of the program.

Watercraft it's still early into the season but looking good and we had good watercraft results outside North America. And motorcycle is flattish drive by the low-end motorcycle and the high-end motorcycle is a bit down then.

The industry is not growing at a fast pace but I would say it's quite stable. But what I'm very happy with is our momentum with all our product line. And it's again multifaceted.

There is the marketing campaign that is very well focused, the NASCAR sponsorship to bring to build the Can-Am RNS. The dealer network improvement, dealers make more money with our product than some of our competitors. Then there is that momentum and I believe that we're well-positioned for the future.

Okay, and then on slide 3 or, sorry, slide 5 you talk about your retail performance in the quarter in North America. Is it your sales or are those units that are up 14%?

Those are units margin, Martin, that are up 14%.

Units, okay. What would that be in sales?

It's retail level, so it's tough to quantify. But obviously you can look at our wholesale, add a dealer margin and extrapolate what that could represent.

And then just wondering, what drove that increase? Was there like one product line that boosted it materially?

For sure the Defender we're entering in an industry where you have a 60% of the industry, then if you would move the Defender from those numbers the rest of the product would grow 8% which is still -- we're still very happy with all the other line-up.

Okay, that's helpful. And lastly just on acquisitions, is this something that's on your mind? Are you looking at making acquisitions, expanding your product lines or is it pretty quiet on that front?

As we've discussed a few times, we still believe that with the six product lines we have and entering a new segment and gaining marketshare we can continue to grow for the next few years. That's all factored in our plan. And in our plan there is no acquisition factored in but it's something that we're looking at more actively.

Okay, thank you very much.

Jaime Katz, Morningstar.

Good morning, guys, thanks for taking my questions. First, I have a question actually on outboard engines and it looks like in that segment there might have been a little bit of share loss. I'm I guess curious to read what's working for competitors and how you guys might be able to adjust to capture more of that market because I know that's been an opportunity for faster growth for you.

If I recall the history we acquired the bankruptcy of OMC and again when we came out on the market, when they started production our competitor assigned almost all our boat builder OEM customers. And we end up being a very, very successful in the powered but that segment is going down and the OEM is going up.

Then the strategy with the G2 introduction was to create the pull from the consumer. And so far very happy because since the introduction of the G2 we've been able to sign about 150 dealers and 30 new boat builders. Then we can definitely see a momentum of outboard Evinrude engines with the G2 introduction.

And this takes time because when you deal with an OEM it's longer than directly with the dealer and you have also the boat builder in there. But we are quite pleased with our momentum so far and we will announce more product on June 26. Then overall the strategy is on track and we're happy with our progress so far.

Okay. Then it looks like there's very little leverage in operating expenses this year as you guys invest in the manufacturing side of the business. Do you have a feel of what top-line growth you might need to see in the future, just sort of a rough estimate to really start levering those expenses or will the efficiencies just sort of naturally lever starting in 2017 pending the promotional environment doesn't get more competitive?

We will be seeing some efficiencies and we've talked about our lean and agile manufacturing strategy, the way we design products. And as we are introducing these products with a new design methodology we will be seeing a benefit to the margin.

In terms of operating expenses what we look at is about 15% of revenue is an area where we feel we're comfortable in terms of operating expense, making sure we sustain investments in R&D given appropriate support on the marketing side to make sure our brands are being promoted out there. And that's the level we're seeing.

So, yes, obviously when we get some revenue growth we are going to get some operating leverage from the admin expenses and other areas of the business, especially on the manufacturing side. But in order to achieve profitability growth we don't necessarily need to grow revenue tremendously.

Okay. And then lastly on personal watercraft, can you tell us what your estimate for industry growth might be this year just to think about share shifts?

Yes, well the industry has grown quite considerably over the last two, three years since we've introduced the Spark and Spark actually carried all of the industry growth. Our expectation for Spark this year is to continue to grow but not necessarily at the same pace that we saw in the previous year. So I would say, let's say low single-digit industry growth would be a fair assumption for this year.

Thank you.

Robin Farley, UBS.

Great, I wonder if you could give us a little bit of color on your average selling price per unit and then maybe how much that was impacted by the sales programs? I guess I'm specifically thinking about ORV, if you have ORV and snow separately but just to get some color on that. Thanks.

Yes, the ASP was up about 3% this quarter. That includes also the currency impact and as you saw currency was about 4%.

So when you strip it out you're probably a negative, you're a 1%, 2% ASP. And the impact of sales program is what brought the average selling price down. If you look at it by product line, most of the discounting as you can appreciate happened in the snowmobile side which brought down the ASP there but in terms of ORV we're seeing, let's say, a flat average selling price year over year.

And would there have been mix benefit that is offsetting that? In other words, if the average selling price in constant currency is down 1% or 2% does that mean the sales program impact is 1% or 2%? Or is it like mix actually made ASPs go up some percent and so the sales programs, the drag is actually greater?

Mix did bring it down about 1%, Robin. We sold less Spyder and the average selling price for Spyder is high. And that would have brought the overall mix of the ASP down.

And just an overview, as well, would the ASP have been flat --

So as we're shipping the Defender 1000 it's a unit which has a good wholesale price and compared to the Commander or the Maverick. So the average price would have been flat there.

Okay. Great. And then just looking at your commentary on retail sales for the off-road business, so you give the season to date at the end of January and then the season to date at the end of April. So it looks like there was quite a big swing in there.

And then when we compare that to other manufacturers' comments about the March quarter, industry sales being mid to high single digits, I guess I'm thinking does that imply -- I don't know if you can give us some color on the cadence throughout the quarter, but it seems to imply if I combine all this all the commentary out there that the month of April was up at a double-digit rate or possibly that there's just different definitions of what industry means when you talk about industry sales and others do? Maybe you could give us a little bit of commentary on sort of the cadence through the quarter.

But if we talk about the off-road, the ATV the trend is still flattish and we continue our good momentum, mainly drive by the Outlander mid-CC family. On the side-by-side side there is some growth happening.

First, very limited data on side-by-side industry. We don't have much. Then the side-by-side is still growing.

But for us the Maverick and the Commander, there is some cannibalization with the Commander with the Defender but the Maverick and Commander are doing okay. And we are doing quite well on the Defender and the line-up is expanding.

Just to give you a sense, on the Defender we started to ship the HD10 in December 2015, the HD10 cab in January, the HD8 and HD8 cab in March and we started shipping next week the six passenger. On top of ramping up production in Juarez we are ramping up the model and that's what is creating the momentum for us.

Okay. Great, that's helpful. And then maybe last thing is just a quick clarification.

On your slides when you talk about kind of what makes things between the first half and second half be more weighted towards the second half, it's slide 18, you mentioned shipments of the Defender and I was just wondering why? And maybe that actually, maybe you just sort of answered. In other words, it sounds like you're not really fully ramped in the first half for Defender.

I know you've been shipping it for a number of months. That's why I didn't know why it would've been more of a second-half impact versus first half.

Well, it's both a first and a second half. We started shipment late, late last Q4. And so this quarter we shipped the HD10, the HD8 and the cab version.

We're going to be introducing more models, as you saw the six passenger Defender. And so that's going to be starting to ship now and we're going to be shipping, as well, in the second half of the year. So as we introduce a more complete line-up of products you will be seeing positive shipments throughout the year.

Okay, thank you.

Benoit Poirier, Desjardin Capital Markets.

Yes, good morning, gentlemen. And just to come back on the significant outperformance of BRP versus the industry, especially in Latin America and Asia Pacific, you mentioned good color about Argentina, Mexico but I was just wondering what drove the significant outperformance, if it was some products in particular that drove this outperformance?

Good morning, Benoit. If you take Brazil, Brazil is a market where there is people like the high-performance product watercraft and there is also a market for entry-level the Spark. The midrange has never been a great business.

Right now we are outpacing the industry because of the 300 horsepower watercraft in Brazil because it's a market that is fueled by the performance. Mexico is really, really going well for ORV and watercraft and also Spyder. With Mexico we have great momentum and the dealers are getting more engaged and success brings success as they invest more in their business then Mexico is great.

Argentina, you know that the country was blocking, to manage their currency they were blocking products that we could export there. And right now with the new government that is now in place there is more units that we can ship to that country can.

I think at the end of the day it's the strength of our line-up and we are well-positioned in all segments in each product line. And we are benefiting of the strength of the line-up and also the dealer network that is well-established that makes the difference.

Okay, very good. And on the SSV side you've done a very good job of growing revenue in a challenging market. The industry, looking specifically at the industry, Jose, it is down low single digits.

Obviously, you are capturing some market share but just wondering any thoughts on what is driving the decrease for the industry? Would you expect further deceleration for the industry going forward? I'm just wondering if it's more related to the utility recreational or it's kind of the used market that's starting to put some pressure on the new sales?

Just to make sure, Benoit, do you talk ATV or side-by-side?

Side-by-side, sorry.

Okay. The way we see things, I said it a few times, we believe the utility vehicle, the Defender category, the vehicles are getting more sophisticated. I said a few times the example of the Ford F-150 where the vehicles are getting more luxurious, more better suspension.

And I believe that that's why the utility segment is still doing well. And us entering with the Defender in that product category with a very good product is giving us an edge.

And also one of the competitor introduced the rec-u, the Commander category, a good product and that is also giving the Spark in this segment. The dynamic is changing quite fast in the side-by-side industry. The trend is very good for us and we are benefiting again of the line-up that is getting better, the momentum with the dealer network and the marketing campaign and the NASCAR sponsorship.

Okay. And just for the Spyder, obviously you've made a significant sponsorship for NASCAR, which has garnered pretty strong interest.

Looking at the retail sales down high single digits, obviously you made some comments about the momentum around the kind of low end. So just wondering if there's an opportunity here for kind of introducing a low entry level or maybe adjust the price like you've done with the RF model in the past.

First, this year there is a few things. The F3 awareness is still below what we would like to be. To be honest it's taking more time that we would like to create the awareness of the F3. That being said, it's growing at a good pace but we're expecting a faster pace.

The other thing that we didn't mention so far is the marketing campaign. We delayed the marketing campaign by about a month in Canada and in the United States. This could have some impact.

And also we cannot ignore the trend of the high-end motorcycle that is down. The motorcycle industry is flattish but it's because of the low-end motorcycle that is up.

Then all of this is the Spyder situation. That being said, we still believe that Spyder is an area where we can grow and it will remain a priority. But it's taking more time than we would like to build the awareness.

Okay. And last question, just on the propulsion system, Jose, the industry is up high single digits, Evinrude retail down low single digits. Is it still, again, the same thesis around the repowered market or was there some impact from the weather or kind of people waiting for the G2 or the further announcement on June 26?

There is definitely, the industry is -- the growth is coming a lot from the saltwater where we are weak. And also like I said before the repower business where we are strong this segment is going down.

Right now we are trying to continue our momentum with the G2. And what I'm happy with this since the G2 introduction is the momentum we have with new dealers and new boat builders.

And just to give you a sense we've done a training tour. About a month ago we visited 40 cities in 40 days, we trained about 1,800 technicians about the G2 advantage and how to rig a G2 on the boat. And this is starting to gain momentum definitely.

Then so far we are disadvantaged because of the trend of the saltwater growth where we are weak and the repower that is going down. On the other hand, I'm happy because we have good traction with the G2. We are really creating the pull from the consumer.

Okay. And what would be the lag because you signed up a lot of dealers in the last few years on the propulsion side. What is the lag before seeing the impact on the retail sales side?

I think the lag on the dealer side is not too long. It's the boat builder. When you sign the boat builder it takes time because the boat builder will do the perfect rigging of the engine on the boat.

He will introduce our engine in their boat with the new line-up. Sometimes they start with a few models and they grow in time depending of the success.

And I would say the delay between when you sign a boat builder and when you see the real growth is longer than the dealers. That being said, we are still planning good growth in our guidance for Propulsion Systems this year and I think we'll continue the momentum.

Okay, thank you very much for the time.

Gerrick Johnson, BMO Capital Markets.

Hey, good morning. On your 12% North American retail growth how much of that was driven by promotions and how much of that would have been full price sales?

It was 14% in North America. Obviously promotion was a big factor this quarter. However, as Jose mentioned, the Defender did carry a lot of the retail growth and that was not influenced by promotional activity.

Snowmobiles probably has an impact of 2% on the overall retail increase year over year. And that, as you are aware of, was subject to heavy promotions as we wanted to make sure we finished the year with clean inventory as we knew we were launching a new model for the next season.

Okay. So was the 12% number that's in the MD&A does that include outboard engines? Is that why that's lower?

Yes, yes, that includes the outboard engine part of the business.

Okay. My second last question, your dealer inventory's 1% down but includes Defender and new incremental dealers. So obviously strip those out it would be a little bit lower. Do you have a number, an exact number what that would be without Defender and new dealers?

Yes, Defender new dealer is 9% up. So if you strip that 9% you'd be significantly lower.

All right, great, thanks Sebastien.

Cameron Doerksen, NBS.

Yes, good morning. I just want to touch on I guess the full-year guidance and your visibility into the second half of the year. Obviously pretty back-end loaded year.

It sounds to me like you are very comfortable with where you are on the snowmobile side and your visibility into the second half of the year. But what about for the rest of the business? I guess maybe the question is do you feel more confident about the second half of the year today versus three months ago?

For sure, Cameron, because we have now firm orders for snowmobiles and there is a lot of snowmobiles that will be shipped in H2 we are more comfortable with this business for the back end of the year. But you know, when you look at the big picture the risk is always -- there is always more risk in the first half of the year.

We've just introduced last week our new off-road line-up. Dealer we know will, and our retailer is going well, and the order on a monthly basis ATVs and side-by-side. Right now watercraft is going well and we will introduce our new watercraft at our club in August. And there will always be demand for watercraft which is the second half of our fiscal year but the first half for the retail season.

Then for us there is always more risk in the first half of the year than the second half. And that's why we are confident reaffirming our guidance.

Okay very good. Just a second question on the litigation.

I know this is sort of part of the industry but maybe if you can just talk a bit about the timeline, if you're going to appeal this decision, what is the timeline to win cash might go out the door if you were to lose that appeal? I assume this is going to take a fair bit of time.

We will appeal the verdict. And again we can -- it can vary a bit from state to state but we are talking maybe a year to get the verdict or the result of the appeal.

Okay. That's all for me. Thanks very much.

(Operator Instructions) Anthony Zicha, Scotiabank.

Yes, good morning. Jose, what is it going to take to push the Spyder sales higher? Like you mentioned build more awareness.

Is it also a pricing issue? And could we eventually see a lower price product?

And then my second part of the question is when we look at dealer recruitment could you give us an idea how important the Spyder is in terms of recruitment and overall product portfolio when a dealer wants to join?

Good morning, Anthony. For the Spyder question, and I said it a few times, we have what I'm happy about the business overall but on the other hand frustrated because we have some dealers who are extremely successful with the Spyder, others that are not as successful. And the first priority right now is to make sure that every dealer has the success that Spyder deserves.

For sure if it would introduce a lower price point Spyder you could see some volume there. But right now the priority is to make sure that all our dealers are doing the right thing to generate the success that the Spyder deserves. And that's a priority that we are focusing. Your second point was about --

Well, in terms of dealer recruitment and how important is it to attract.

Yes, for sure when we recruit dealers we try to sign a dealer who has many product lines as we can. So far since we signed, we started the signing of new dealers we have increased our dealer coverage for Spyder by about 30%. And we are planning again to add 45 to 55 this year and we will try as much as we can to sign Spyder dealers.

That being said, I still believe there is more upward if we can engage every dealers to do the right thing than signing more dealers. That's the priority for now.

Okay, great. And then one question for Sebastien.

Could you please give us some more color that's tied to the increased cost to the Juarez 2 plant? Was it a surprise there?

There was actually no surprise there, Anthony, in line with our plan. And when you look at the margin decrease year over year, a decrease of about 280 basis points, what drove the majority of the margin decrease was currency for both 220 points and then the other one was pricing and sales program for about 80 basis points. So overall no surprises on Juarez 2 opening.

Okay great. Well, thank you.

Tim Conder, Wells Fargo Securities.

Thank you. Gentleman, I just want to maybe continue a little bit there on the Spyder. You expanded the dealer base and brought out lower, more entry-level product.

Could part of it be there's some, I guess, competitive clearance of inventory out there? And how do you see that part maybe being part of the equation here and impacting drawing customers in at a price point? And as that maybe winds down, in your opinion on that, do you see Spyder picking up over again as it's maybe been alluded to, is it where you need to kind of adjust the price points on the Spyder more on a permanent basis?

Good morning, Tim. As we said when we ended the season last year, we end up the season last year with too much inventory, more inventory than we would like to.

Definitely right now there is promotion on the noncurrent and for a model where you don't have much change, the noncurrents sell faster than the current model. When you create those situations you always -- there is customers who stay on the fence, will wait for the current model to be, noncurrent and get that rebate, that sales program.

Right now our strategy is to as fast as possible, but we cannot go too fast, to bring the inventory of noncurrent to the right level like we have in other industries. And we believe that will stabilize the appetite for customers for noncurrent product.

Again, coming back to the low price Spyder, for sure if it would bring lower price Spyder it could generate some volume. That being said, I still believe that there is more opportunities if we can do a better job in market the product, build the awareness faster and engage faster our dealer network. But at the same time, I still believe that Spyder is one of the growth opportunities that we have going forward.

Okay. And Jose, shifting to the competitive outlook here in ORVs, just your view of you had an announcement from Yamaha yesterday with some additional tweaks on their YXZ product and your Defender is going well. How do you view what appears some of the new products are targeting more in the sport rec side of the side-by-side market?

To be honest, Tim, yesterday was a Board meeting. I didn't see the Yamaha introduction in the detail. We knew it was coming because there was some video teaser out there but so far our Maverick is performing well.

People recognize more and more the performance of the Maverick versus some of the competitor competition. The durability is a very good.

Then we're well-positioned with the Maverick. We are well-positioned with the Defender. There is more cannibalization than we had planned originally between the Commander and the Defender.

That being said, it seems in the last two months where we've took orders that the ratio is coming back to what we had planned. At the end of the day, there is definitely more product introduction from all OEMs in the last few years but we believe that we have a strong line-up and the line-up will get even stronger because we are on plan to introduce another model in the fall. And that's the plan.

Craig Kennison, Baird.

Good morning. Thanks for taking my questions.

The first is regarding dealer inventory. It finished lower this quarter. What would be the expectation for the full year?

Well what I could give you I could give you a bit of color what we're expecting for the next quarter. We're expecting the inventory to be higher at the end of Q2, probably up high mid to high single digits coming from SSV inventory. As we've said we're shipping the Defender in all of the current versions.

And I'm also expecting a bit more snowmobile inventory from where we ended the season. And probably a bit of more PWC as we do have -- we did finish the year with more inventory last year and that's going to be retailed in the later months of the year.

Thanks. And Jose, it's early but based on early Defender sales, what does the demographic profile of that buyer look like relative to your expectations? Thank you.

It's a bit early. Obviously we have targeted our usual customer but we've done quite a lot of advertising in Farming Magazine and website. Also we've done a lot more hunting promotion and magazine.

But I would say at this point it's too early to say but we are focusing on those three. Our typical customers, hunters and the farmer, and so far too early to give you a good answer. But this is our focus, but I cannot give you colors if we are successful or which category we're more successful.

Thanks for taking the questions.

We have no further questions registered at this time. Back to you, Mr. Deschenes.

Great, thank you Maud. And thanks everyone for joining us this morning and for your interest in BRP.

And I want to invite you to our Annual Shareholder Meeting that will be held this morning at 10:30 and will be accessible on the web at BRP.com. 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.