BRP Inc (DOOO) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to BRP, Inc.'s fiscal year 2017 third-quarter results conference call. I would now like to turn the meeting over to Mr. Philippe Deschenes.

Thank you. Good morning and welcome to BRP's third-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 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 and you can find the presentation on our website at BRP.com, under the investor relations section. So with that I will turn the call over to Jose.

Thank you, Philippe. Good morning, everyone, and thank you for joining us. Once again this year we have set high objectives for the back half of the year and the third quarter was an important first step to get us there.

And we deliver in a big way. We managed to deliver financial results above our plan. We have launched a production and quickly delivered to our dealers two new product platforms: the Can-Am Maverick X3 and the new fourth generation of Ski-Doo snowmobile.

We made good progress in our dealer network optimization effort and we gained market share in a competitive and difficult environment. All of this while we continued to work relentlessly on projects that will allow us to deliver our long-term objective.

We also continued managing our CapEx carefully, reducing our expected depreciation expense for the year, and we have completed our NCIB program, which lowered our share count. Both of these elements allow us to increase our normalized EPS guidance by CAD0.04. All in all, the third quarter was key in the achievement of our plan for the year and with our strong results, we feel we are in a good position heading into the fourth quarter.

Now let's look at the financial highlights of the fourth quarter on slide four. Our revenue grew 7% to reach CAD1.080 billion. The increase was primarily driven by our growing side-by-side business, notably the contribution of our new products, the Can-Am Defender and Maverick X3.

The quarterly normalized EBITDA came in above expectation at CAD197 million, as the timing of a fuel element was favorable into the quarter. Sebastian will come back on this in a few minutes. Our normalized diluted earnings per share is up 50% over last year third quarter, reaching CAD0.93 per share.

At the retail level, we had another solid quarter as our power sport lineup, excluding snowmobiles, was up 10% compared to an industry that we estimate was down low single digits. This strong performance was driven by a solid end of season for personal watercraft, continued market share gains for ATV, and very good momentum for our side-by-side business.

For snowmobile, as we mentioned before, this year's shipment were delayed compared to last year due to a later start of production, which resulted in the lower retail into the quarter. I will give you more detail on this in a few minutes.

A key highlight of the quarter was our ability to quickly start the production of our newly-introduced platform: the Can-Am Maverick X3 and the new fourth generation of Ski-Doos. Remember that we launched the Maverick X3 at our Can-Am and Sea-Doo club in August. We started the production a few weeks later and the first unit reached our customers in the second half of September.

As for Ski-Doo, production for the new platform started at the end of September without any issue and people are already riding on them up north and into the mountains. Both of these products received exceptional reviews from the media and the customers. The future looks promising and we are really excited to see the coming seasons unfold.

Now going into the review by product category with the year-round product highlight on slide 6. Revenues were up 48%, mainly driven by higher volume and favorable product mix of side-by-side due to the introduction of the Can-Am Defender and Maverick X3.

Growing our off-road business is at the forefront of our strategy and we are seeing our effort paying off. For ATV, the industry remained difficult and for the first four months of the season, the North American industry retail was down high single digits.

Despite that difficult industry trend, Can-Am ATV continued to perform well with retail up low single digits. We have a very good momentum with our ATV business, as we have now been outpacing the industry for the last five quarters and we currently hold a third market share position in the industry season to date. Can-Am ATV is seeing the same solid trend in international markets.

Turning to side-by-side, the North American industry retail is up low single digits season state. Driven by the continued solid momentum of the Can-Am Defender and the very good reception of the Can-Am Maverick X3, our side-by-side retail was up over 20% for the first four months of the season. We are pleased with our progress with the Defender as retail continued to grow every month, demonstrating that the Can-Am brand is gaining traction within the utility side-by-side market.

On the Maverick X3 front, while it had only been on the market for the second half of the quarter, the sellthrough has been excellent.

We also introduced a new key side-by-side model in the quarter, the Can-Am Defender HD5. The HD5 offered the same tough, capable, and clearer feature of the Defender platform with a midsized engine. This package offers exceptional value and improve our offering at the lower end of the price spectrum and the utility side-by-side segment. The Defender HD5 will start shipping in January.

Now looking at Spyder, the North American motorcycle 2016 season just closed at the end of October, down low single digits. For the season, retail motorcycles with a price higher than $18,000 declined high single digits.

As we mentioned previously, it was a difficult season for Spyder. The industry trends were not favorable. We also decided to hold back on sales program to better maintain long term the value of the units and last year introduction of the Spyder F3-T did not generate the expected result.

With all of this, Spyder closed the season with retail down high teens percentage. We are disappointed with the season and we are taking steps to turn the situation around.

For the Spyder business to reach its full potential, we will need to increase our focus on the business and use a different approach with our dealer and our customers. This is why we have hired Josee Perreault, who will fill our newly-created position of Senior Vice President, Spyder business. Josee, with her strong experience into the international wholesale and retail business within the consumer goods industry, is a great addition to our management team.

To conclude on our year-round product, I want to say that overall I am very pleased with our result. With that, let's turn to seasonal product on slide 7.

Seasonal product revenues were down 12% for the quarter ending at CAD417 million, primarily due to lower volume of snowmobiles, partially offset by higher volume and favorable product mix of personal watercraft. Looking at retail, the North American personal watercraft ended the season on September 30, with retail up high single digits.

Sea-Doo had another strong season, with retail also up high single digits, growing its market share for the sixth consecutive season and achieving a record market share position. The growth was driven by both the Sea-Doo Spark and the traditional personal watercraft. The worldwide demand also continued to be strong with double-digit retail growth for Western Europe and Asia-Pacific into the quarter.

Now turning to snowmobiles, here's some explanation on retail. At the end of October, the North American industry retail was down over 30% season to date. Ski-Doo retail was down about 50% over the same period. The decline is driven by the limited availability of our new Ski-Doo REV Gen4 due to later start of production this year compared to last year.

As you may know, every year we presell to customers snowmobiles during the spring season and those presold sleds are usually the first to be shipped to the dealer and then the first to be retailed to the customer in October and November. This year a good portion of those presold snowmobiles were the newly-introduced snowmobile platform for which mass production only started in October.

As we continued shipping those units through November, our retail has improved and is now down in the mid-30%s season to date, right in line with our internal forecast. Therefore, it is just a question of shipment timing. Everything is going according to plan, as we expect to have everything shipped and at the dealer before Christmas.

All in all, our seasonal product business continued to perform very well. Now looking at propulsion systems on slide 8, revenues for propulsion systems were down 4%, primarily driven by lower volume of aircraft engines sold to OEM. Now four months into the new season, the North American outboard engine industry is up mid single digits.

For the same period, Evinrude retail was up low single digits. The E-TEC G2 lineup continued to perform well and we started deliveries of the new 150 to 200 horsepower range E-TEC Q2 engine during the quarter.

Turning to parts, accessories, and clothing, our revenue were up 5% into the quarter, driven by higher volume of side-by-side accessories sold, following the introduction of the Defender and the Maverick X3. Despite a 5% increase over last year, our pack sales were lower than plan, mainly due to the fact that dealers still have stock of maintenance items in inventory like oil, belts, and ski runners, due to a shorter riding season for snowmobiles last year.

And with that I will turn the call over to Sebastian and will return for closing remarks.

Thank you, Jose, and good morning, everyone. This morning we reported revenues of CAD1.080 billion for the third quarter of fiscal year 2017, an increase of 7% from last year's third quarter. The growth was primarily driven by higher wholesale of year-round products, partly offset by lower wholesale in seasonal products.

We generated CAD307 million of gross profit, resulting in a gross profit margin of 28.4%, a 400 basis point increase from last year, due to favorable product mix for both SSV and PWC, general price increases, and favorable foreign exchange rate variations. Operating income came in at CAD163 million, or 15.1% of revenues, primarily driven by higher gross profit. As Jose mentioned, normalized EBITDA came in above our expectations at CAD197 million, or 18.2% of revenues.

The higher-than-anticipated results were driven by a few elements that were favorable in the quarter. Expenses came in lower than plan as we continue to exercise tight management of costs and were able to defer some expenses in the fourth quarter. With a good retail experience in the last few quarters, we replenished some dealer inventory, mostly for ATV and PWC, in Q3 with units that were initially planned for early Q4.

As you see, most of the incremental lift we realized this quarter versus our plan is a question of timing between the last two quarters of the year. This resulted in normalized diluted earnings per share of CAD0.93, a 50% increase over last year. We generated CAD129 million of free cash flow in the quarter and completed our NCIB program by repurchasing 900,000 shares in the quarter, for a total of 3.4 million shares repurchased for the year.

Now slide 11 for revenues by product categories and geographies. 35% of our sales came from year-round products with a year-over-year growth of 48% driven by side-by-side business; 39% percent of our sales came from seasonal product; 9% from propulsion systems; 17% from parts, accessories, and clothing.

International revenues were about flat compared to last year as higher wholesale of offroad vehicles was offset by lower deliveries of snowmobiles. For Canada, revenues were down 10% as higher wholesale of SSVs and Spyders was more than offset by lower volume of snowmobiles sold and lower wholesale of ATV. Finally, revenues from the US were up 21%, driven by higher year-round product shipments and higher volume and favorable mix of PWC, which were partly offset by lower shipments of snowmobiles.

As a reminder, remember that due to the introduction of the new snowmobile platform, snowmobile shipments are expected to be heavier in the fourth quarter and this drove a decline in snowmobile volume in the third quarter for all regions.

Turning to slide 12 for a look at the normalized net income bridge, our normalized net income increased by CAD31 million compared to last year's third quarter, benefiting the normalized net income, or volume and mix, for CAD28 million; pricing and sales programs for CAD12 million; production costs for CAD4 million; and foreign exchange variation for CAD19 million. These elements were partly offset by higher operating expenses for CAD12 million, driven by higher investments in R&D and admin, and higher income tax expense and financing costs for a net negative impact of CAD21 million.

On to slide 13 for the North America power sport dealer inventory. Our network inventory level was up 7% from last year's third quarter. The increase was primarily driven by the introduction of the Can-Am Defender and Maverick X3, with strong demand from dealers, and the continuing ramp-up of shipments to new dealers we added over the last few years.

The increase was partly offset by lower inventory for Can-Am Commander and Can-Am Maverick side-by-side. Given the new product introductions and our expanding dealer network, we are very comfortable with our network inventory level.

Finally, slide 14 for an update on the guidance for fiscal 2017. As Jose mentioned earlier, now with three quarters behind us and after achieving solid third-quarter results, we are in a good position heading into the fourth quarter. So with only a few weeks to go until year-end, we are making a few changes to the guidance. The excellent reception of our new side-by-side models and the strong end-of-season for PWC are allowing us to review upward our revenue guidance for year-round and seasonal products.

Our PAC is still suffering from the short snowmobile riding season last winter. Dealer replenishment orders continue to come in lower than expected and, coupled with the impact of the disappointing Spyder season, we are adjusting our revenue guidance downward for that product category. Accounting for these changes, total revenues are now expected to be up 5% to 9%.

On the profitability side, while we are increasing our total revenue guidance, we are also reducing our forecast for the PAC business, which is our most profitable product category, so the net impact on normalized EBITDA is neutral and our guidance remains up 7% to 10%. Finally, as we are approaching year-end, we have better visibility on different elements of the business, allowing me to adjust our tax rate and depreciation expense guidance. As a result, normalized net income is now expected to grow between 5% and 11% and normalized EPS guidance has been increased by CAD0.04 and is now CAD1.86 to CAD1.96.

With this, I will turn the call back to Jose.

Thank you, Sebastien. The third quarter was a very successful one. Our sales in the US grew by 20% over same quarter last year. Our margin grew by a strong 400 basis points. We continued expanding our distribution network worldwide as planned.

We have launched several new products for which the market reacted very positively and helped us gaining market share. And we brought two new senior executives to our management team, whom I'm sure will contribute to make BRP even more successful.

In closing, as the US new administration is put in place, we are following closely the business-related orientation that the new government will take come January 20. We are confident that our diversification strategy on product manufacturing sites and global market will allow us to maintain our industry leadership position and our profitable growth in the US, as well as in the rest of the world.

I am very proud that we were able to continue to grow despite operating in an aggressive industry and an overall difficult environment. This would not be possible without our employees and I want to thank all of them for their commitment and loyalty. And on that I will turn the call over to the operator for questions.

(Operator Instructions) Steve Arthur, RBC Capital Markets.

Yes, thank you. Just a couple of quick follow-up questions; first on the lower PAC sales. I do hear you on the snowmobile and Spyder implications, but has that been enough to offset the new products that have been launched which seem to have a full complement of accessories? Or more broadly, maybe if you can comment on the uptake of accessories with the new products, the X3 Defender, the new snowmobile platforms?

Good morning, Steve. I would say that the addition of X3 is compensated by some reduction on the Spyder. The difficulty on PAC is we don't have much visibility on the stock that the dealers have. It's very difficult to predict and the order of maintenance items, like I said oil, belt, runners, were lower than planned in August-September.

Those items typically the dealers replenish early in the fall and the orders were quite low compared to our planning. Then because of that situation and that difficult visibility, that's why we decided to reduce our guidance for year-end.

Okay, I understand. Secondly, just on the Spyder business, it looks like renewed focus in a specific business unit. Is it too early or are you able to comment yet on any changes in the go-to-market strategy there that you might be looking at?

It's too early. We worked -- Josee Perreault took over about six weeks ago. She's been on the job; she's been touring dealers and making a better assessment of the situation and we should come out with a plan early in 2017.

Okay, that's fair. Final point, you mentioned, Jose, earlier making good progress on dealer optimization; just wondering if you can elaborate on that a little bit more. Is that a new way of looking at new dealers or more efficiency from the existing dealer base?

As you know, we have a target this year to add 45 to 55 new dealers. We are on track on this plan, but obviously, like we said I think 18 months ago, the focus is a lot on making the existing dealer more performance. And to be honest, it's going quite well.

Obviously, the retail momentum that we have, the profitability that our dealers do with our product is helping the situation, but we are trying to get traction and get more space in each of our multiline dealers. And the plan is going quite well.

Thank you for the color.

Derek Dley, Canaccord Genuity.

Can you guys just give us a bit of an update on how the PerforMAX dealer program is going? It sounds like there's some good momentum there, but any additional color would be great.

As you know, Derek, we shared the overall dealer network plan with investors in September. Bernard presented the strategy and how we are addressing, especially the multibrand dealers, in the US and PerforMAX was a big part of that equation with the backend incentives that dealers can earn.

Obviously, if you look at the retail performance this quarter, excluding snowmobile, up 10%. PerforMAX played a big factor in making sure that the dealers are focusing more and more on the BRP business.

Okay, great. On your -- international sales were flat during the quarter. Can you just give us a break down of regionally where you saw some strength and weakness?

Asia-Pacific is strong. You're in a counter season market there so -- and the watercraft business is doing very good there. And the side-by-side business as well is doing excellent there, so we saw good momentum there. Where revenues were down versus a year ago is more Scandinavia Russia and part of it is because of the production of snowmobile timing versus a year ago. So less units of snowmobile were shipped to those markets.

Okay. And then in Canada are you still seeing some weakness in Alberta or is that starting to come back?

We see last year the West was down by about 30%; now it's improving. I would say it's probably around 15% and it's getting better, but the West is still weaker than the East. But improving.

Okay, thank you very much.

Jamie Katz, Morningstar.

Good morning, thanks for taking my questions. My first question is on year-round, which the shipments were pretty strong this quarter and it sounded it was mostly like from entering some of the whitespace areas that you hadn't previously been operating in. So I'm curious how some of the demand for the legacy products were as well in the quarter.

And it would appear that you guys are taking share. Do you think that's from other North American competitors or from international competitors?

Good morning. As you know, the Maverick X3 the reception is very good and it's clear that the Maverick X3 will obsolete the older platform Maverick [TURBO], and this was planned. The Defender, as we said before, is cannibalizing the Commander. We see a customer who used to buy (inaudible) that now are buying the utility side-by-side.

But at the end of the day, all of that was planned and we are basically on the cannibalization estimation we had done. But the net of all of this is very positive overall.

Okay. Then I think you had mentioned some expenses being deferred from the third quarter to the fourth quarter. Can you elaborate on that?

Yes, we had planned some marketing expenses in the quarter for the ramp up of side-by-side. It's a big season in the fall and some of the expenses were transferred to being invested more in November-December. So that's basically a question of timing.

Okay. Then, lastly, I'm curious what you guys are sort of thinking for just a general economic outlook for both North America and Canada, together and separate. If you have any economic thoughts on what you are expecting in the year ahead.

Obviously, I think the big dark cloud above our heads is everything related to NAFTA and the new president-elect in the United States has made several comments. We've received a lot of questions from investors on that topic and it is -- today we do not necessarily want to speculate what the outcome of future NAFTA agreements will be, because, one, I don't know and I don't think anyone knows what the outcome will be.

However, one thing is for sure is when we look at the whole campaign, while president or president-elect Trump's message was focusing on growth, focusing on infrastructure, and also focusing on keeping jobs in the US. The way we look at that is that is very, very positive for the power sport industry.

Obviously, like all OEMs, especially the automotive ones, with global operations, we are monitoring this situation closely and we will learn more as times evolve. But for us today we see it as business as usual until there's more clarity as to what, if any, changes will be happening to the NAFTA agreement.

In terms of overall economic outlook for Canada, positive. I think we have lapped some of the issues that we have had out West and in Eastern Canada the outlook as well is good, so we are optimistic for next year.

Thank you.

Tim Conder, Wells Fargo Securities.

Thank you, just a couple here. Wanted to follow up on the first question that was asked regarding Spyder and looking at any potential changes to that business. Wanted to ask it related to Evinrude; any color there?

Then on your dealer adds, you are seeing that that's progressing. You're very pleased with that. If you could -- any additional color that you would have given competitors' challenges in ORV, if that has made it easier or if you're getting into dealerships that you thought you might not, being added to multimillion dealers?

Good morning. First, for sure, the momentum that we have right now -- parts clearly with the mid-cc ATV and with the Defender and now the Maverick X3, dealers are quite optimistic about BRP and regaining share in the dealership. You know that one of our objectives was to gain more space in the South/Southwest and so far the strategy is working quite well and I would say the Maverick X3 have accelerated the pace in certain areas. Then, overall, we are quite happy with that.

On the Johnson Evinrude -- the Evinrude situation, since the introduction of the G2 we have been able to sign about 160 dealers; more than 40 new boatbuilders. The G2 is getting traction.

I would like to remind to you that the new G2 range from 150 to 200 started deliveries in Q3 and is just starting to ramp up. But, overall, we are quite optimistic about the G2 momentum into the industry and this industry is going well. Then we have -- things are going according to plan, I would say, for the Evinrude business.

Okay. And so just to clarify, on the dealer adds you are very pleased getting it in the core areas. Has it been easier given some of the challenges that have been faced by some competitors in the industry?

I would say, for sure, what happened with one of our competitors in the sport side-by-side category is giving us an opportunity. Our booking for the Maverick X3 was very good and we tried to take advantage of this, but for me this is short-term things.

What is more important is we have opportunity to get faster into dealers that are multiline and if they are successful retailing our product, I think we will be there for the long term. Then, for us, we are trying to benefit of the situation as much as we can, but overall it's very positive.

Okay. Lastly, gentlemen, just maybe a little more color related to the US election and everything. A little color on the commentary I guess on retail trends that you saw right before, say the month before, and then since the election in the US.

Tim, I can't say that we saw a difference in terms of retail trend. Don't forget that we were bringing a lot of new products to the market, so I think that is what influenced more the retail than the outcome of the election. The Maverick X3; last year we didn't have the Defender for Q3, which we had, and in November as well. So all of that great product that we've been introducing in the last few years I think is the main catalyst for driving retail.

As well, as we talked when we met in September in Mexico, all the efforts that we've put over the last few years on focusing on the dealers, we've opened up a lot of new dealers. Also presented a model where the dealers have the primary market areas and we are focused on making sure that the dealers are profitable. All of that is paying off and is what's driving the retail success that we've seen.

Okay, great. Thank you, gentlemen.

Martin Landry, GMP Securities.

Good morning. The first question is with regards to the acceleration of shipments into the quarter versus Q4. Can you talk about what product lines and what products were shipped a little earlier and then what was the reason behind that?

If I look at the impact versus what we have (inaudible) for Q3, the two main items are the lower expenses; probably comes in the range of about CAD20 million. In terms of early shipments, the two product lines that we shipped a bit earlier were ATV and PWC and that has an impact of about CAD5 million for the quarter.

What drove that is, as you have seen in our numbers, we have good retail in ATV and we have also had a great season in PWC. The industry was up and we were up 10%. Obviously, dealers' inventory levels are low and, therefore, they have asked for a bit more inventory earlier and that's what we've done.

Okay, thank you. That's helpful. Then just on the Maverick X3, you are obviously seeing some very good sellthrough. Just wondering; are you able to satisfy the demand currently? Do you have any capacity constraint issues on the X3?

Good morning, Martin. Let's say that the ramp up -- we're trying to accelerate the ramp up as much as we can, but right now we are -- we are not able to meet 100% the demand, but we are ramping up as fast as we can. But this season, the peak of the season is ending in a few weeks. Then we are doing our best, but we were behind the demand in October and November. We will catch up December, January.

So how long is the backlog right now for customers to get an X3?

I spoke to many dealers who -- we are delivering, obviously, everything we can every day, but if you talk to a few dealers -- and again my information date of November -- but every dealer in the South/Southwest has typically a few units sold. And when the unit arrives, delivered to the customer right away then. We've tried to ask the dealer to hold one unit on the floor, but you don't have much inventory out there.

Okay, that's helpful. Then just lastly, we're just about to start the snowmobile season. What do you see in terms of snow coverage and what do you see in terms of traffic at dealers and momentum at dealers for the upcoming snowmobile season?

Snow coverage is definitely better than last year, no doubt about that. I'm sitting here in Vancouver and it's white outside and it's better than last year. But, overall, customer up north in North America and in the mountains are already riding. It's not great conditions yet, but at least they can try their machines.

Then traffic is good. At the minute that snow hit the ground at this time of year in December you always have good traffic in the store. Then we believe that North America is positioned for a good season, normal season I would say.

In Scandinavia and Russia, same thing. The snow started normal, I would say, compared to the previous year; better than last year obviously and normal. Then everything is positioned to be a good season, but we're too early to conclude on this.

Okay, thank you very much.

Craig Kennison, Baird.

Good morning, thank you for taking my questions. Curious about the agricultural market. I think BRP generally has been underindexed there because you didn't have quite the product they needed, but with Defender clearly you do. How are dealers reacting to that and what are your overall comments on the ag market?

If I give you some colors on the ag market for the ORV business and if I include ATV, give you the ATV statistics, right now in the Q3, ATV in the US was down high single digit. And into the [HAG] state, the six states that we consider HAG, it was something like a 15% down. Then there is definitely some lag.

That being said, for us, we -- it's a white space for us. The Defender is gaining traction every month and I think the farmer is a new customer for us, but our dealers are getting better to talk to them. And the product has a good momentum right now, a good reputation in terms of performance and overall it feels good. But there's definitely some sales decline in those states versus the non-ag or [all-patch] states.

Thank you. And then, with respect to NAFTA, I appreciate your comments that you've got a highly-diversified manufacturing footprint, but could you talk about the NAFTA trade agreement elements that you benefit from today? To the extent that were to change, what would you be most concerned about losing?

Obviously there was a lot of talk between trade between US and Mexico and, as you know, we have three plants in Mexico. We've been in Mexico since early 2001 and we were extremely successful with our operations there and we've got a solid workforce as well. However, I can appreciate that you guys probably want a bit of color as to the level of trade that we are doing between Mexico and the US, so let me try to help you out a bit and give you a few numbers.

When we look at BRP's trading volume between Mexico and the US, it was about a little over $1 billion of goods transacting between the two countries. So from Mexico to the US and that's in the form of personal watercrafts, ATVs, and side-by-sides. Now let's say -- and obviously there could be many scenarios with many variables and a lot of moving parts, but some trade experts have discussed about the US pulling out of NAFTA. Well what would that mean for us in terms of Mexico-US?

The first thing is the six-month notice that would have to be given, so we would have six months to look at various scenarios. But after six months, what would happen is Mexico would fall under what we refer to as a most-favored-nation certification status and the tariffs that would be charged between the two countries would be, depending on the product line, between 1.4% and 2.9% per transaction.

So overall, when you look at the annual impact on $1 billion of transaction, it would be in the range of let's say $20 million to $25 million a year in terms of impact. Obviously if that were to happen, well, the whole value chain would have to be addressed and the increased costs could either be passed down to -- some of it could be passed down to the suppliers, some of it passed through pricing increase, and also doing what we do when we have inflation is addressing it through cost structure improvements and improving operations. So that's the scenarios that we are looking at.

Should we expect changes to NAFTA? Well, the Canadian government and Mexican governments have also indicated that they were willing to sit down with the US government and renegotiate the agreement. After 25 years, they feel it was normal.

And so, for us, until there is more clarity it's business as usual. Obviously $20 million to $25 million is something which is important, but not too material for us; something we could manage. We prefer not spending that money obviously on tariffs, but we do not feel and I don't feel that the objective of the US government is to hurt the industry. As I said, they want to create growth in the US, maintain jobs in the US, invest in infrastructure. For me, all of that is positive for the power sport industry.

Just a final point of clarification. Is that CAD1 billion figure a retail or wholesale metric?

It's a wholesale metric.

Great, thanks for that explanation.

Benoit Poirier, Desjardins Capital Markets.

Good morning, gentlemen. Just to come back on the previous question, Sebastien; looking at the financial impact of CAD22 million, CAD25 million, would it be a fair statement to say that probably you would consider keeping your operation in Mexico rather than moving those locations elsewhere?

Obviously at that level, yes; the benefits of being in Mexico with access to skilled labor force obviously there's a cost advantage there, but also having access to the supply base in Mexico is very beneficial to us. When I look at this it's almost the cost of inflation at CAD20 million to CAD25 million a year. Again, it's something that we address regularly and it's part of managing our business. So, yes, on that scenario we obviously remain in Mexico.

Okay, perfect. Now when we look at your dealer inventory levels, it was up 7% versus last year so good color there. Just wondering what we should potentially expect in Q4 in comparison to a year ago and on a sequential basis, given the impact with the Maverick X3 and also the Defender.

When I look at a few weeks down the road obviously snow season is a big factor in where we are going to end in inventory. But assuming a normal snow season and achieving the retail objectives that we have, I would expect the network inventory to be up high single digits, mostly coming from ramp up of the Maverick X3 and also the Defender. Last year we had started shipments of Defender, but we were in just the preproduction ramp up. Now we've just launched a new Defender HD5 and so we will be shipping those units to dealers December-January.

These are the two factors that are going to be driving increased inventory. And also probably a bit more of ATVs ahead of the spring season retail that is going to be starting.

Okay, perfect. Just on the snowmobile front, why did it take so long to ramp up? Was there any delay in terms of production schedule on the new platform?

No, production schedule was right in line with what we had planned, but I would like to remind you that the Ski-Doo REV Gen4 was a brand-new snowmobile with a brand-new engine then the production was -- we had a small production batch in September, but the mass production started in October. That was planned.

What happened, Benoit, is last year with the bad snow the order came out a bit different than what we had planned. We have a lot more orders for the new snowmobile, the REV Gen4, novelty into the industry, less on the current product line. And because we were stuck with production data that we could not advance, we are delivering later. We communicate all of this to the consumer and the dealers that we are on plan, but it's a question of timing. Those situations happen from time to time when you introduce a brand-new platform and you don't want to risk on the production quality and the warranty and all this.

Okay, perfect. When we look at your free cash flow, obviously pretty strong in the quarter. You've been able to deliver the balance sheet. Your share buyback now is done for the year, so I'm just wondering if you could provide more color about the cash deployment opportunities, because on the debt side you've got some pretty attractive interest rates. So I'm just wondering what's your thinking right now in terms of deployment opportunities.

We deployed about CAD230 million of cash this year, call it on cap structure. You mentioned the NCIB for about CAD75 million and we also reimbursed about CAD150 million or CAD130 million of debt at the -- in Q2. So part of the cash gen that we will be generating this year is towards that.

Obviously your objective is to continue to focus on growth, the organic part of it, so the products that you know. But as we highlighted when we met in Mexico in September, we have a team in place looking at various alternatives to grow the business outside of what we traditionally do through M&A, so obviously keeping a bit of dry powder for that will be key.

Sebastien, any color on the timing; when we could potentially see those alternatives?

No. Obviously we are not in a rush to do something. We will do something if it's right and so we are waiting for the right opportunity before making a move.

Okay, perfect. Last one for me. It's probably a little bit early, but looking at fiscal 2018, anything we should consider when assessing the outlook, either in terms of expense, in terms of industry growth rate? Any color for fiscal 2018?

Obviously, as customary, we will be providing full fiscal year 2018 guidance when we talk in March. Obviously we're optimistic for next year with the strong retail momentum that we have, the good momentum with the dealers in all of the markets, the great products we have. So we are optimistic for next year. And that's as much color I can give you this morning, unfortunately.

Okay, perfect. Thank you very much for the time.

Cameron Doerksen, National Bank Financial.

Thanks, good morning. Just a question on sales programs; that was a tailwind for you in the third quarter. I'm just wondering if you can talk about what you're seeing so far in the fourth quarter on sales incentives programs. And from what you're seeing out there in the industry generally, has anything changed from what we've seen in the last couple quarters?

Good morning. Watercraft, we had less program overall this season. As you know, we are only two major OEM in that industry and it was a good season. It was less costly on the watercraft overall and that was till the end of the season.

Right now on ATV, promotion is higher in the mid-cc category where we compete with the (inaudible) family, and is driven by some of our competitors who has a lot of inventory. Then ATV more competitive.

In terms of side-by-side, there's two elements. There's a lot of new product hitting the market from all OEMs and some, not all, but some of our competition are very, very aggressive with programs because they want to clear inventory. And so I would say too early to say. It's a normal start of the year with some programs, but I would consider it normal.

Then, overall, good on watercraft and snowmobile and off-road more competitive than last year.

And just maybe a modeling question, just on the depreciation expense; you've taken down what your estimate for the full year is. I'm just wondering what's driving that and how the trend might continue into next fiscal year on depreciation.

Two things, Cameron, driving that. First, the timing of the CapEx. We've pushed out a bit of the CapEx later in the year versus initially planned, and the other one is the nature of the CapEx. Obviously with the strong demand we've had for fuel product lines we've shifted CapEx priorities from I'd say a short-term CapEx to more longer-term CapEx, which are depreciated over longer lives and that impacts a bit the depreciation costs that we have hit this year.

In terms of the trend, we will obviously -- you've seen our trend terms of CapEx investments over the last two years in the range of $200 million. Our depreciation expense is lower than that, so the depreciation expense will creep up next year, naturally.

Perfect. That's all I had. Thanks very much.

Thank you. There are no further questions registered at this time, gentlemen.

Great, thank you and thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again in March for our year-end conference call. 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.