BRP Inc (DOOO) 2023 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY '23 Fourth Quarter Results Conference Call. (Operator Instructions) I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Thank you, Judie. Good morning, and welcome to BRP's conference call for the fourth quarter of fiscal year '23. Joining me 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 and that actual results could differ from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult BRP's MD&A for a complete release 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'll turn the call over to Jose.

Thank you, Philippe. Good morning everyone and thank you for joining us. Please turn to Slide 4. I am very pleased with our Q4 performance, which was our strongest quarter ever. It allowed BRP to conclude fiscal year '23 with record sales, normalized EBITDA and normalized EPS. It was a very dynamic year, marked by our ability to respond to continued strong demand for our innovative products while showing tremendous resilience by working through supply chain pressure and a cyber incident.

Our teams once again demonstrated its incredible agility. We adapted to evolving market condition and executed diligently in a challenging environment. As a result, we've delivered solid retail growth and outpaced competition by recording an exceptional 5 percentage point market share gain in North American Powersports industry.

During the year, we continue positioning the business for long-term success. We accelerated investment in product development, completed our side-by-side capacity expansion project at Juarez 3, introduced multiple market-shaping product, notably our new award-winning pontoon generation and completed 3 strategic acquisition.

As you can see, it was a very busy year. Let's turn to Slide 5 for key financial highlights of the year. We've delivered record results on both top and bottom line. Revenues increased 31% from the previous year, surpassing the $10 billion mark for the first time in our history. This was driven by higher volume and favorable pricing across the portfolio. Normalized EBITDA grew 17% to $1.7 billion, representing a very strong EBITDA margin of 17%. Normalized EPS increased 21% to reach $12.05 above the higher end of our guidance.

As for retail, our North American Powersports sales were up 6% for the year or 5% excluding the Sea-Doo Switch pontoon compared to a decrease of about 10% for the industry. We ended the year on a strong note, as you can see with our outstanding fourth quarter retail performance on Slide 6. In Q4, our North American retail sales were up 21% or 19% excluding the Switch compared to a low single-digit industry decline.

Our performance was also very strong in other market with retail up 36% in EMEA; 32% in Latin America and 16% in Asia Pacific. In addition to strong demand, the solid performance was driven by our strategy to produce and complete unit that were retrofitted at our plant or by dealers when missing components were received. As the supply chain improved in the second half of the year, we were able to rapidly convert unit to retail, allowing us to significantly outpace the industry in Q3 and Q4.

You can see this outperformance on Slide 7. We ended the year with nearly 35% market share in the North American Powersport industry, representing a percentage point increase for the year and a 15 percentage point gain since fiscal year '16. Our performance was very solid across the product portfolio with important gain in off-road and snowmobile.

We also maintained our leading position in three-wheeled and personal watercraft despite shipping model 22 units passed the peak retail season. This performance was driven by sustained strong consumer demand across our portfolio, which demonstrate the strength of our lineup. On this topic, let's turn to Slide 8. In calendar 2022, we won 16 product awards, one of the best years for BRP. The Sea-Doo Switch and the new Manitou pontoons were notably recognized in multiple competition.

And just a few weeks ago, our new Rotax S outboard engine with Stealth Technology won the Outboard Engine Innovation Award at the Miami Boat Show. On top of these product achievement, BRP was named Brand of the Year by Strategy Magazine. We celebrated the 100 year of success for Rotax and we've launched a new corporate social responsibility plan with ambitious target.

I'm proud of these milestones that show that our innovation mindset is not just applied to product, but also across all areas of our business. With these achievements, we gained further traction with dealer as shown on Slide 9. Our success stands from our ability to constantly innovate as we bring new product to market that drive consumer demand and by our unique value proposition, which drive dealer to sell our product to maximize their profitability.

To such initiative, we have attracted the best dealer and gain floor space in their showroom. Early in fiscal year '23 for the first time ever, we become the #1 OEM in terms of average retail unit per dealer, a position that further extended in the second half of the year. Achieving this #1 position was a great moment of pride for me. When BRP was launched almost 20 years ago, becoming the best OEM in the industry for consumers and dealer was one of my objectives.

I can say, mission accomplished. Turning to Slide 10 for a quick update on consumer interest. Like everyone else, we monitor the ongoing macro concern, but based on our indicator, consumer interest for our product remains. In fact, we've delivered our strongest Q4 ever in terms of retail with growth across all our product lines. And looking at demand indicator, the trend remained positive.

Traffic at trade shows and at dealership continue to trend positively. Early season '24 snowmobile booking is trending as expected. The influx of new entrant remain high. Website visits and Google search for our brands remain higher than pre-COVID levels. We are monitoring the used vehicle market and value segments that are slowing down. Retail trend also seems to indicate a return to more seasonal patterns. Finally, some OEMs and dealers are beginning to offer incentives on certain models. But in general, consumer interest for our industry and more particularly for our product remains healthy.

Now let's turn to Slide 11 for year-round product. Revenue were up 47%, reaching $1.3 billion in Q4, driven by strong shipments across all product lines. As for retail sales, Can-Am side-by-side and it had the strongest Q4 ever, benefiting from additional production capacity at Juarez 3 and from an improving supply chain.

Our retail was up high 30% in the quarter and season to date significantly outpacing the industry. I will get back to this category in a few moments. As for ATV, retail was up low 20% in the quarter, driven by the momentum of the Can-Am brand and improved product availability. Looking ahead, we just introduced an all-new platform for our Outlander mid-CC lineup. This long-awaited platform is our most significant upgrade in ATV in almost 10 years. It offer more performance, comfort, storage and ease of ownership for the category at a competitive price.

Moreover, we introduced specific pro-package that cater to a more utilitarian consumer base for which demand tend to be less cyclical. With this new platform, we strongly believe that Can-Am is very well positioned to gain market share in the mid-CC category, which represent more than 50% of the ATV industry.

Looking at three-wheeled vehicle. Although we are in the slow part of the retail season, Can-Am retail was up over 150% in Q4, driven by improved product availability, following late shipment of model year '22.

We are pleased with the retail trend for three-wheel, and we are well-positioned for the upcoming season. On Slide 12, let me come back to side-by-side vehicle, which has been a key growth area in recent years. We have been growing retail and gaining market share at a fast pace since introducing the Defender in 2015. During that period, our annual retail volume has increased by almost 4 times.

The Can-Am brand has gained traction with consumers as we experienced a significant boost in brand awareness over the past years. Their perception of the brand is also improving. As you can see on the right side of the slide, despite rapid growth and solid momentum, we still have plenty of market share gain opportunities, especially in the utility segment.

We believe our strong lineup and added production capacity will support our growth in that profitable business. Turning to seasonal product on Slide 13. Seasonal product revenue were up 26% from last year, reaching $1.3 billion, driven by higher volume of personal watercraft and the introduction of this Switch.

Looking at the retail. Our retail of personal watercraft in the quarter was up over 300%, driven by late deliveries of model year '22 product, most of which were presold to consumers. The trend is also very good in counter seasonal market with season-to-date retail up about 10% in Asia Pacific and mid-20% in Latin America.

As for snowmobile, with most of the season behind us, we are pleased with our performance as our retail is up low single digit, outpacing the industry, which is about flat. With this achievement, our global market share now exceeds the 65% mark. Turning to our recent snowmobile news. For MY24, we further strengthened our lineup by expanding the REV Gen 5 platform to more models and introducing new key technologies, notably the industry first water injection system for high-performance model.

These additions were well received and early trends in spring unit booking are as expected, which is promising for season '24. Furthermore, we introduced our initial electric model, the Ski-Doo Grand Touring and Linx Adventure Electric. For the first year, these snowmobile are designed exclusively for guide to our operators. These are the first electric model to be introduced following our commitment made 2 years ago to launch electric models in each product line by 2026.

We are proud of this first step, which is a testimony of our market leadership. Snowmobile Industry experts have tested the product and they were impressed by our technology, the riding experience and the fit for the segment. You can expect more product introduction along these lines in the coming years.

Moving on Slide 14 with Powersports part, accessories and apparel and OEM engines. Revenue were up 22% to $378 million for the quarter driven by our growing product portfolio. In our parts and accessories growth strategy, every new product is designed to be highly customizable with our accessory portfolio. For example, the recently introduced Can-Am outlander platform is compatible with 125 link accessories.

We are pleased with the performance of this highly profitable business segment. Moving to marine on Slide 16. As in last quarter, Marine was the last business unit to restart operation after the cyber incident and combined with some supply chain issues. It impacted production ramp-up for the new Manitou into Q4. As a result, revenue were down 8% compared to last year, ending the quarter at $124 million.

Looking at retail sales. In North America, Q4 is off season for boating with typically less than 10% of the annual retail. While our retail performance suffered primarily due to the supply chain factor, we remain positive about our plan and prospects for that business as evidenced by the announcement of the new facility in Mexico.

As for Australia, retail was down about 20% in the quarter, in line with the industry. We are excited about the future of our Marine business. For instance, our recently introduced Manitou pontoon and Rotax S outboard engine with Stealth technology continue to win recognition from the media and the industry and consumer demand is very promising.

With that, I turn the call over to Sebastien.

Thank you, Jose, and good morning, everyone. We completed fiscal '23 with another record quarter as we continue to experience solid customer demand for our products and demonstrated strong execution in delivering our production plan. Looking at the numbers, our revenues for the quarter were up 31% versus last year, passing the $3 billion mark in a quarter for the first time ever.

We generated $788 million of gross profit, representing a margin of 25.6%, slightly down in comparison to last year's level, primarily due to inefficiencies related to the ramp-up of production, the new Manitou pontoons and some overhead investments. Worth noting, however, for the first time in many quarters, the pricing actions that we took over the last few months that the inflationary costs that we were subject to. And we expect this trend to continue into next year.

Continuing down the P&L, we generated record normalized EBITDA for the quarter of $528 million, representing a margin of 17.2% and our normalized net income reached $309 million, resulting in a normalized earnings per share of $3.85 for the quarter, ahead of expectations and resulting in a full year normalized diluted EPS that came in above our guidance range. Supported by these strong results, we ended the year with a robust balance sheet with over $200 million of cash and a healthy net leverage ratio of 1.5x, providing ample flexibility for further investments in the business and capital distributions.

One thing I want to highlight about our financial performance is the structural improvements we delivered in the recent years that significantly enhanced our normalized EBITDA margin profile. You can see this on Slide 18. In fact, our normalized EBITDA margin is up 370 basis points over the last 3 years, primarily driven by sustainable improvements, such as the Wind Down of the Evinrude Outboard Engine business, which helped by about 60 basis points. The positive impact generated by volume mix and cost improvements coming from our volume growth, especially as we leverage our Mexican manufacturing footprint.

Our richer product mix, notably driven by the growth of our SSV business and the development of modular design across more models. These elements helped our margin by about 110 basis points, and we gained about 300 points coming from a more efficient operating structure driven by our ability to leverage our marketing, R&D and administrative spend across more product lines of meaningful size. For instance, we gain efficiency in R&D by being able to develop technologies, components and engines that will be leveraged across multiple product lines, all of this unlocked by our modular design approach.

It was the same on marketing by leveraging our website technology, CRM dealer events and our teams across multiple brands. We gained about 470 basis points driven by these structural improvements, bringing our normalized EBITDA margin to about 18%. Now there were also elements that were more temporary in nature that impacted our margin over the last 3 years.

Notably, the lower sales program driven by the low product availability and the network and the tight supply chain environment, which drove higher inflation and turbulence costs, especially in fiscal '23. The net of these temporary elements was a negative impact of about 100 basis points. As these temporary elements normalize over time, the structural changes will mean that we will be well positioned to continue delivering strong normalized EBITDA margin of at least 17% in the coming years.

Moving to Slide 19 for an update of our network inventory situation. Driven by the better utilization of our production capacity and the improved supply chain environment, we have been able to continue increasing our throughput in Q4, allowing us to further replenish our dealers' inventory. As a result, we have seen a healthy increase of 66% in product availability as the dealership driven by SSV, ATV and snowmobile.

And when you account for a slightly higher than usual inventory for three-wheel and personal watercraft for this time of the year due to the late shipments of model year 22 units in the fall, our overall network inventory is up 130% from last year's level. Still, given our significant market share gains over the last few years, our network inventory remains below optimal levels.

So as unit availability continues to improve across our product lines over the next quarter, we will be in even better position to serve our dealers and customers and support our market share momentum. Now moving to the guidance, starting with a bit of context on Slide 20. As we build our guidance for fiscal '24, we are cognizant of the environment in which we operate with inflation remaining above historical levels and higher interest rates.

While it is difficult to forecast how these factors will evolve throughout the year, though they will impact the industry, based on our current environment, we expect our industry to remain about stable when compared to fiscal '23, representing a decline of low single digit from pre-COVID levels. That, despite all the momentum we have with new entrants and the fact that we were not able to fully meet customer demand over the last year due to limited product availability.

Still, in this context, we are well-positioned to continue to grow as we enter with significant momentum. We've gained 5 percentage points of market share in fiscal '23 driven by the robust demand for our product lineup, especially in side-by-side. We have strong momentum with our dealers, driven by a unique dealer value proposition, which led us to reach the #1 position in the industry in terms of number of units per dealer.

We have key new products such as the Sea-Doo Switch and the Manitou pontoons that have won multiple awards and are still in the early stage of their growth phase. And we have demonstrated our ability to adapt and execute in a challenging environment to outperform the industry, all the while maintaining strong margins.

As such, we are well-positioned to continue our growth trajectory in fiscal '24 with expected revenue growth of 9% to 12%, driven by continued market share gains in year-round products as we further gained traction with the Can-Am brand, benefit from our increased production capacity for side-by-side, leverage our new mid-CC platform for ATV and sustain our momentum with Ryker. Moreover, we expect our growth to be supported by the first full year of production of the Sea-Doo Switch and the Manitou pontoons and by the continued momentum in PA&A driven by a growing fleet of units and usage and the continued innovation in our extensive lineup of accessories.

And to put things in perspective, while some may perceive fiscal '24 to be less predictable than typical, we are comfortable with our guidance given that the full year impact of price increases we did the last year is expected to contribute to our revenue growth by low to mid-single digits. As usual, we have been conservative in our assumption for the upcoming snowmobile and personal watercraft season. Over 50% of our expected revenue for the year are coming from more predictable sources such as utility products, new introduced models and PA&A. And we also have a strong pipeline of exciting products coming out this year for which it shows shipments to the network are expected to support our growth.

On the margin side, our guidance assumes a normalization of the supply chain environment. And as such, we expect the following impact on the normalized EBITDA margin. A reduction in turbulence costs for a benefit of 150 basis points, a positive impact from pricing net of inflation for about 100 basis points, which will be offset to a return of sales program for about 200 basis points and a slight increase in OpEx as a percentage of revenue for about 50 basis points.

As a result, we plan to deliver normalized EBITDA growth of 9% to 13% and to maintain our strong normalized EBITDA margin of 17%. Continuing down the [P&L] the increase in our normalized EPS is expected to lag normalized EBITDA growth due to higher depreciation and interest expense. The increase in both expenses is expected to represent an incremental $1.35 per share. Still, we believe the fundamentals of our business continue to be very strong as demonstrated by our expectation of solid growth in normalized EBITDA, providing us with the means to offset these elements over time.

Moreover fiscal '24 is expected to be a solid year in terms of cash generation, driven by a strong normalized EBITDA in the expectation for solid positive working capital contribution as we reverse some of the investments we made in fiscal '23. In fact, we are very well-positioned with the flexibility we have to consider multiple capital allocation options in fiscal '24.

Turning to Slide 21 for capital allocation priorities. For fiscal '24, our priorities remain to continue investing in growth projects and to return capital to shareholders. As such, we expect to allocate between $750 million to $800 million to CapEx, focusing our investments on growth projects that have attractive expected returns. Our ability to identify and execute on these projects is at the core of our success and is what is allowing us to outperform our industry, as you can see from the chart, which shows our track record of delivering very high return on invested capital.

Furthermore, we plan on continuing to provide strong returns to our shareholders in fiscal '24. And as such, we have announced the increase of our dividend by 12.5% and we are planning to be active with share buybacks as we still have 3.5 million shares available under our current NCIB program.

Note, however, that our guidance does not factor in any share repurchases. Now to wrap things up, a summary of our guidance on Slide 22. As mentioned, we expect fiscal '24 to be another solid year for BRP with revenue growth of 9% to 12% and normalized EBITDA growth of 9% to 13%, sustaining our strong normalized EBITDA margin of 17%.

Our normalized EPS is expected to end between $12.25 and $12.75 representing a growth of more than 300% over the last 3 years and making continued progress towards our M25 objective of reaching $13.50 to $14.50 of normalized EPS by fiscal year '25.

Finally, while we expect to deliver solid quarters throughout the year, note that a stronger growth is expected to come in H1 notably with Q1 EPS up between 40% and 50% as we are lapping a quarter that was significantly impacted by supply chain challenges last year. On that, I will return the call to Jose.

Thank you, Sebastien. I am very proud of our team achievements in fiscal year '23. We are now looking forward to a promising future and we are well-positioned to deliver solid growth in the years ahead. In fiscal year '24, we will continue to progress on our strategic initiative. We are confident that our investment in innovation and R&D will lead to further market share gain in the Marine and Powersports industry, more particularly in side-by-side vehicle supported by additional production capacity.

Furthermore, in the past 2 years, we prioritized output over efficiency. Now with the supply chain stabilizing, we are focusing again on execution and efficiency. Over the midterm, we remain on track to deliver our M25 objectives. Looking beyond, we are maintaining our focus on the 3 addressable market that we have presented last June at our Investor Day.

And we are committed to growing sustainably as we make further progress on our journey towards electrifying our product line. In conclusion, I want to thank all our key contributors to our success. This includes all BRP employees whose dedication, resilience and constant efforts are second to none. I also acknowledge the strong support of our dealers and suppliers who help us get to market the industry-leading products that forge our rotation. On that note, I turn the call over to operator for the questions.

(Operator Instructions) Your first question comes from Mark Petrie from CIBC.

I was hoping that you could shed some more light in terms of the commentary with regards to consumer demand. And I guess just units and value segments as well as some OEMs and dealers returning to more typical levels of incentives. If you could just share a little bit more detail on that would be helpful.

Yes. Good morning Mark, on consumer demand, obviously, like I said in my intro and I will try to give you a bit more color. There is many, many positives. Our Q4 retail was up high numbers. The traffic at shows and dealers are still good and better than what some were expecting.

Our snowmobile booking with dealers is as expected and our preorder sales and we're looking at the trend on a daily basis is tracking to pre-COVID numbers, then very strong and on snowmobile, about 1/3 of our production typically is presold to consumers. And our website traffic and Google Search are again above pre-COVID numbers.

Now on other elements that we're watching, the used market has slowed down. Obviously, dealers still own used units that were trade at high value and the dealer are a tendency to maintain their pricing right now, then the retail has slowed down on the used unit.

The seasonal pattern is coming back to a more normal, I would say, pattern. And some OEM and dealers started to give some incentive. Then when you look at all this, there is a lot of mixed signal in the industry, but we feel confident that we can continue to grow despite that macroeconomic situation. And if I could add, the unemployment rates are still very low compared to many years ago and also access to credit is pretty good.

Okay. Actually, I wanted to follow up on that last point you mentioned, Jose. I mean, in the wake of some of the develop -- recent developments in the U.S. around liquidity and access to credit, I'm just curious to hear your perspectives on the availability of financing for your customers? And any views on that in 2023 or maybe any recent conversations with some of your finance partners that you could pass along?

Good morning Mark, if I look at the Q4 numbers, they were in line with what we were seeing in Q2 and Q3. So no slowdown in terms of availability. What we are seeing quarter-to-date is that the actual number of applications is going up significantly. And so people are curious in assessing what the credit market is. And overall, the closure rate, the take rate is higher than what we've seen pre-COVID. So one interesting trend that we see is that, yes, obviously, interest rates are higher. So the cost is higher, but what we've seen is that people have extended the financing terms. So instead of doing a 54 months, they'll go to a 60 months and we're seeing that trend across all of the product lines. So some of them are shopping for a monthly payment and the way to achieve their monthly payment with higher interest rates is to extend the financing term. But the FICO scores are still trending higher than pre-COVID as well.

Our next question comes from Robin Farley from UBS.

I also had questions on kind of some of the -- your mention of what competitors are doing with sales programs. Would you describe the types of programs out there as being just kind of typical what they were to pre-COVID or maybe even not quite that aggressive. I wonder if you could characterize it? And then also, are you seeing that from some of the newer entrants in the market? Or is there -- is it really more the sort of more entrenched OEMs maybe responding to some of the newer entrants from a market share incursion perspective?

Robin, obviously, it's a very wise question. I would say programs are not as aggressive as they were pre-COVID, but more than last year, obviously. And I would say it depends of the dealers and the OEM, but I would say it's about maybe halfway to what they were pre-COVID. And we don't see more program from some of the new OEMs that are more present in North America.

So you're saying you're not seeing it from the newer entrants. So I just want to make sure I understood.

No, we don't see it.

Okay. Great. And then just for my follow-up question. Can you just remind us on your side-by-side capacity with Juarez 3, kind of what -- how ramped up are you? And what additional capacity you would have sort of by the end of the year or any other future planned additions? Just kind of remind us of your capacity.

Yes. On the side-by-side on Juarez 3, if you remember, Juarez 3 Phase 1 was having 50% more capacity and Juarez 3 Phase 2 was another 50%. And basically compared to -- with Juarez 2 and Juarez 3 together, we have doubled the capacity that we had with Juarez 2. And right now, it's up and running.

Yes. We've had a quite capacity growth for side-by-side, Robin, in the last several years or since we've been more targeted on side-by-side. And every time we've added capacity dealers have given us the floor space, and we've obviously gained market share. So this new capacity obviously coming online is another great opportunity to continue growing.

And I know the capacity -- the facility is done, but is it fair to say that you're not -- you still have room to go in terms of actually utilizing all the capacity that is available in this new phase. Is that fair to say that, that's still kind of incremental?

Absolutely. We were probably running at in fiscal '23 with the supply chain constraints at 80% capacity and the plan this year is to run now with this new capacity probably running between 80% and 85%. So we'll have more room to grow if the market shows there.

Your next question comes from James Hardiman from Citigroup.

This is Sean Wagner on for James Hardiman. I guess going back to sort of the market share thing. Now that shipments in the Powersports industry are a little more normalized across the industry, how confident are you in your ability to protect particularly those side-by-side share gains? And what's the risk of competitors being more aggressive than they are even now on pricing and promotions to regain that lost share?

Yes. First, the industry is still healthy, and we gained share with the strength of our product, obviously, that's the basis, but also with our momentum with the dealers. And we will continue to bring new products to the pipeline. We have -- we're investing quite -- we're investing a lot in R&D and particularly on side-by-side. Then we are confident to continue to grow our market share with our product innovation and the momentum that we have with the dealers, plus the capacity that we just had.

Okay. And I guess the follow up on that, obviously, you've spoken about momentum and utility being a main driver for 2024, new products as well. Your biggest competitor, I guess, has also identified those same 2 drivers, particularly sort of increased shipments from them due to sort of their supply chain issues improving. I mean, is there room for both of those to happen, it's just a matter of you have confidence in your business and your products and the execution that you've had and that we'll see how it shakes out from there?

I mean it's our confidence in our execution. Last year, we were quite aggressive to run production at a high rate with producing unit with missing part that we either retrofit ourselves or the dealer were retrofitting it, and I think it gives us a head start versus our competition. And this combined -- and this is mainly one reason why we've gained so much share last year for all our product lines.

Now we continue on this in the sense that now supply chain is stabilizing, but we have the production capacity. And again, we have very competitive lineup -- very innovative, competitive lineup and we have the dealer momentum. When you put all this together, we're confident that we can continue to grow.

Okay. Can you quickly remind us sort of how -- what level of market share you would need to take with that expanded production capacity to be margin neutral given the higher overhead?

Well, it's -- obviously, as you saw in the margin bridge that I gave on the call, our expectation is yes, yes, volume is going to increase. We're going to see a positive coming from pricing. We're going to see a positive coming from reduction in turbulence.

We are going to invest in sales program this year, and so we are planning to be about up 50 basis points on gross margin and also higher investments in OpEx by 50 basis points. From an EBITDA margin point of view, neutral, yes, we are expanding the plans when these costs are absorbed with the additional volume that we will be producing.

Your next question comes from Martin Landry from Stifel Genty.

My first question is on the industry and your guidance. It looks like from what I read on your slides, the North American Powersports industry was down low single digits in 2022 in North America. And I think in your guidance, you expect stable industry growth in '23. So am I reading this correctly that you're expecting some sort of an improvement year-over-year in the industry in North America this year?

No. What we said, Martin, in the prepared remarks was a flat industry, and that industry was actually so flat year-over-year, and that would be down versus pre-COVID down single digit. So flat industry is the assumption.

Okay. And I know it's a tough question to answer, but what gives you confidence that given the macroeconomic environment that we're not going to see the industry decline this year?

Yes. First, it's -- if you look at the dynamic -- I mean you see the demand, and I just answered to the first question about the consumer demand, but also I'll give you some other data. The new entrant is still about 40% up versus pre-COVID. 70% of those people are saying that they are there to stay into the industry. And those customers are more wealthy -- healthy.

Basically, the household income of our customers is today 35% higher than they were pre-COVID. This is an incredible number. And on top, when you look at our -- you know that we are more high end than entry level. And when we look at our customers, 1/3 of the population in U.S. earn household income below $100,000, and our customers, 2/3 are above that $100,000. Then new customer higher household income, and we are more high end, obviously, than low end than some of our competitors. And I think we're well positioned to the industry to continue to grow.

Your next question comes from Xian Siew from BNP Paribas.

Maybe following up a little bit on that. You guided a flat industry for calendar '23. Can you help us think about how much share do you think you can gain? Is it -- you gained 5 points of share this year, '22. Is it the same level again in '23? And are there any kind of different areas we should be thinking about? You highlight utility but are there other kind of areas where you should be getting more share?

Yes. Well, the first thing is, from a share growth perspective on the seasonal product business that we're not expecting share growth. We are planning for a conservative industry, which would be down versus pre-COVID, and we're already at 60% and above market share for these products around the world. So on that segment, we're not expecting any market share gains. On year-round products business, if you were to look at where is the growth coming from just maintaining our market share in side-by-side, the one -- the market share that we gained in fiscal '23 would bring 7% revenue growth.

The pricing impact is a 4% revenue growth. And obviously, we will not stop at the market share that we have in '23. So our expectation is to gain further market share. And that could be another 5% to 10% revenue growth driven from those gains. And as we said, obviously, we have a solid lineup, but we also have exciting product introductions that are coming this year, which will obviously help the fuel -- further fuel market share gains and growth in that business.

Okay. Got it. And then maybe on the OpEx deleverage, you mentioned 50 bps. Maybe can you just talk about some of those investments? Is it just the fixed cost from the increased capacity? Or are you investing more in kind of sales and marketing, R&D? Some color there would be helpful.

Well, as you saw on our return on capital slide that we showed this morning, obviously, we have a solid track record, and that doesn't come by magic. It comes through investments and obviously, talented people. And so we'll continue investing in R&D, continue investing in marketing in order to drive future growth for this business.

We're in this business for the long term. And so that's been the secret of our success and we're continuing that. So as we grow the business, we expand into new segments, obviously comes with higher investments.

Your next question comes from Craig Kennison from Baird.

Slide presentation has been great. I guess I wanted to ask about first-time buyers, Jose, you mentioned that metric had stayed strong. I'm curious if you've been able to track first-time buyers from early in the pandemic purchase cycle and whether you've seen any behavior trends evolve in terms of trade-in cycles or their willingness or desire to upgrade?

Yes. Obviously, we're doing a lot more data. We're looking at a lot more research about this on a quarterly basis. But basically, before COVID and we've said that number before, new entrant, our products sold in new entrant was about 20%. And now like I say, in '20 -- fiscal year '21, '22, it was slightly above 50%, and now it's 42%, and it's very, very healthy.

And what is interesting is the intent to stay in the industry have increased. Now it's at 70%. And the other factor is the household income that we're watching carefully. And I think that explains also the reason why access to credit remains high. Then when you combine all this together, I know there is a lot of macroeconomic concern in the macro environment, but we feel quite good where we stand in the industry.

And I wonder if I could just follow up and ask about the health of your dealer network. Clearly, you've gained share at dealers and you're now the most significant brand in many of those dealers. Just maybe comment on the health of those dealers, given that they face tighter margin and some rising costs in terms of floor plan expense.

I mean overall, we were at the dealer meeting for snowmobile and the new ATV 1.5 months ago now. And the dynamic is excellent. And dealer like OEM that push, and we introduced again on snowmobile, a lot of novelties, the electric snowmobile, they see that transition to this new technology coming in, and you see the first product reaching to the market.

They were very impressed with the new ATV. Like I said in my remarks, we were like more than 10 years before -- since we invested in this and we revamp that new platform. Then when they look all of this, how dynamic we are and how pushing we are and they're making more money with our product line, then the relationship we have with our dealers is the highest I ever saw.

Then when you see all this, we feel happy. Obviously, they would like to keep the margin that we had in the peak of the demand during the COVID, but they are realistic that this time is probably past and it will come back. I would not -- I hope it won't be to what it was pre-COVID, but then in between of pre-COVID and what we had last year.

Your next question comes from Jonathan Goldman from Scotiabank.

So I just wanted to circle back to the macro, I guess, seems to be the topic du jour. Some investors, at least myself are looking to an analog to compare the current environment to past cycles. We -- you guys obviously have a much larger sample size with the company and with the industry. But maybe looking at where we are right now and obviously a lot of uncertainty, but in formulating your guidance, how does the current environment compare to past cycles? And in what ways has the industry changed? Obviously, the GFC was an extreme event. But even cycles before that, any changes structurally in the industry would be helpful.

But like we said in the remarks, we see some slowdown into the used market, but I think this is a temporary thing. Everyone is on the fence right now to maintain high value or high cost. And I think when the spring will come, some dealer will start to reduce their MSRP for use, and this will come back to a more normal level.

The other thing is a lot of OEMs and dealers talk about the slowdown into the entry level. We have the Spark and the Ryker, which is preorders is a bit lower than on the high end, the watercraft and high-end three-wheel vehicle, but it's still higher than pre-COVID on the pre-orders. And we are not much into the entry-level segment. Most of our product line, we're selling high-end product with better margin for the dealer and us, and I believe it will be less active than the others. Then when I look all this, I think, overall, we are in a good position.

If I would just add, obviously, the unemployment rates are still very healthy, and that's obviously, people have a job and that, that is good for our business, and that has been the biggest indicator of a slowdown when the unemployment rates go up. But as a business, BRP, obviously, if I were to look versus other cycles that we've had, we are a very different business, a much more diversified from a product line point of view, from a geographic point of view as well and from a manufacturing effectiveness. Our cost structure is not the same with the Mexican manufacturing footprint. So I'd say a much more resilient business than we were 10 years ago and that obviously is a big plus if we were to face a certain economic slowdown.

No, I appreciate that. That's very helpful. And then maybe one more for you, Sebastien, on the working cap. I think last quarter, you mentioned you'd start to see some unwind of the buildup that $500 million in the second half of this year. Has that time line or a quantum, I think you obviously said you can get the full $500 million. Has that quantum changed since the last call?

Well, the timing of it has not changed. So obviously, yes, as I said in the past, we've invested a lot in working capital last year due to the supply chain turbulence and having the raw material inventory as a buffer and having some retrofit units. In terms of overall opportunities, I'm looking for this year, obviously, with a growing business, keep to our guidance that we're expecting to grow again this year is going to require some investment in working cap, but I do expect that we will recover some of the investments we made last year. So it's north of $400 million cash benefit that I expect to see this year coming from better management of working capital.

So just to clarify that the $400 million gross before investments is the growing top line?

That will be a net.

Your next question comes from Fred Wightman from Wolfe Research.

I just wanted to come back to the EBITDA margin bridge. It sounds like you're baking in 200 basis points of incremental headwinds from promos next year versus this year. But I think that, that was a 300 basis point tailwind. So what gives you the confidence that you'll be able to hold on to some of that favorability, especially just inventories normalizing and competitors starting to promote again?

Well, we're not -- obviously, we're already a few months in the new year. And yes, there is a bit of promotion, but we're not seeing the levels of promotion that we've seen in the past and what we are seeing is promotion is much more targeted towards interest rates or, we'll call it, subsidizing interest rates for retail financing.

So what we're seeing now and providing some contingency for the end of the year, we believe that holding at least 100 basis points of sales program saving is certainly feasible. And also, we've got more sophisticated in how we manage programs over the last years, and that sophistication is helping us to be much more targeted. And when you're targeted, you get some savings because you're not spreading the money in regions that is not needed. So that's another reason why we are confident in that ability of protecting the 100 basis points.

Makes sense. And then just to come back to the used commentary, it sounds like you guys are expecting used pricing to come down as we move into the spring. And I know that trade-in values maybe aren't quite as important as some other vehicle categories. But do you think that, that is going to result in more negative equity and potentially impact the trade-in cycle as we move through the spring or not?

I think this will go very fast. At the minute that the dealer will start to reduce their MSRP, I think the trade-in will restart at a faster pace.

But the trade-in has kind of protected as well. There's been a very high pricing increase that have been done over the last 2, 3 years, something like 14%, 15%, 16% in some product lines. And so some of the used value will be protected by those increases in MSRP as well. So yes, they are very high. Today, they use values, there will be a normalization happening. But I'm not -- because of those price increases, I'm not seeing a significant devaluation and used value that would be equal to what it was pre-COVID.

Your next question comes from Joe Altobello from Raymond James.

I guess first question is on inventory. I'm trying to figure out how much below optimal your network inventory situation is. I think you mentioned it's about 8% below where it was in fiscal '20. But given your retail growth, where should it be or maybe asked another way, where are dealer terms today and where should they be? It seems like there's still a channel fill opportunity. So any color you could provide there would be helpful.

And if we give you and this data is at the end of Q4. Then if we give you some colors. On the ATV side, we are about 20% in units. We're about 20% below pre-COVID. But in days, because we've been growing so much during the COVID during the last 2 years, we -- in days, we're minus 40% versus pre-COVID. On side-by-side, we're somewhat equal in units, but we still in number of days, 50% because then when we look at the growth we had, you just need more inventory to fuel the retail. For watercraft entry wheel, we're slightly above pre-COVID volume because of the model year '22. But the preorder for watercraft is like 4x pre-COVID numbers and three-wheel 3x pre-COVID number [and then slow]. Season '23 will end at the end of March.

We believe we will be at about the pre-COVID volume. Our booking with dealer is on plan and the tracking for preorder to consumer is also tracking to more normal. And when we look at all this, we feel confident that we are in the right position with inventory by product line. And in terms of refilling the pipeline, should be done by the end of Q1.

Very helpful. Maybe a quick follow-up on M25. You mentioned earlier, you're tracking well there. Is that still -- even with the higher interest expense and higher depreciation, I think you mentioned it's $1.35 a share. Are we still looking at a $14 number in fiscal '25 for EPS?

Yes. Obviously, we have solid momentum. We have exciting products coming out this year, next year and so we're in line to deliver on our M25 commitment of $13.50 to $14.50 EPS in fiscal '25.

Your next question comes from Jaime Katz from Morningstar.

I have just one quick one. I know it was mentioned in the prepared documents that there were still production inefficiencies and higher production costs. And I'm curious how you guys expect that to play out over the course of the year given that the haves could be sort of lumpy lapping the introduction of the Switch and then also the closures or this slower manufacturing maybe at certain points in fiscal 2023. So I guess, how does the expense leverage or pressure sort of play out over the course of the year?

Well, we are -- we've seen some favorable results in the fourth quarter coming from the turbulence, so year-over-year, that was favorable. So that's expected to continue in Q1 because Q1 last year was the more challenging quarter from a supply chain point of view. So we're expecting some benefits to materialize this quarter already.

But the back half theoretically could be much weaker on the top line. And so maybe there is a little bit more pressure at least from a growth perspective.

There could be a bit of pressure. But overall, we're expecting solid quarters throughout the year. And so again, depending on how the end of the year materializes. But there's obviously going to be a big benefit coming from the lower turbulence in all of fiscal '24.

Your next question comes from Derek Dley from Canaccord Genuity.

Just a clarification on you're mentioning flat industry, but is that volumes you're referring to? And then on top of that, you're expecting to get the low single to mid-single-digit benefit from pricing?

I'm sorry, I didn't hear fully your question, Derek.

Yes. Sorry, just on the flat industry expectation that you have, is that volumes that you're referring to?

Yes.

Okay. Good. And then just coming back to the cash flow statement a little bit. The incremental CapEx this year, the $750 million to $800 million. Given that the business has gotten bigger and it seems like you have a material innovation pipeline, is that level sort of what we should expect as a new normal for the next few years?

Yes, it's the -- should be the new normal.

Your next question comes from Cameron Doerksen from National Bank Financial.

Just wanted to follow up on, I guess, the working capital. You mentioned the $400 million tailwind. So can you give us any kind of sense as to when we might see some of that unwind? I'm just wondering if that's more of a second half of the year? Or is that something we might see in the next couple of quarters?

Yes. Obviously, as I've said, we've invested in keeping some unfinished inventory on the books last year and also higher raw material as we wanted to have greater safety stock to adjust for any unforeseen changes in supplier capacity. We will still run with some buffer in H1. And so my expectation is that the benefit of the working capital will happen in the second half of the year once we work with our suppliers, stabilize their production and adjust their capacity as well to ship. Obviously, the logistics is improving. So that's why we're seeing an H2 benefit happening with that.

Okay. That's helpful. And just on, I guess, sort of, I guess, debt and interest expense. I mean, obviously, you've had this big investment in working capital. So you got more and more money here to fund that. I mean free cash flow profile still looks quite strong for at least the next couple of years. I'm just wondering what can you do, I guess, to reduce debt and by extension, reduce your interest expense? Because I think your guidance assumes a fairly healthy increase in the net interest expense.

Well, probably balance sheet point of view, first, I think we are at a healthy point. I mean our leverage is 1.5x at the end of the year. So it's a healthy leverage. Obviously, we've experienced higher interest costs coming from the adjustment in the base rate. We have the advantage that some of our debt is hedged. And so overall, we're assuming an average LIBOR of 5.6%. And even if the rates were to go up an extra 1%, it probably have an impact of, let's say, USD 5 million on the P&L.

So the priority is not to deleverage. At some point, interest rates will come back down. And obviously, we have strong EBITDA growth, which is allowing us to offset more than the increase in interest expense and depreciation that we're seeing.

Right. So from a capital deployment priority I would -- I guess what you're saying is that maybe NCIB is a higher priority item than deleveraging?

Absolutely, the returns are much higher to do NCIB, and we plan on being active on the NCIB this year as we have in the past years as well. It's a much better return of capital to shareholders and being done.

Our next question comes from Brian Morrison from TD Securities.

I want to follow up on Cameron's question. With your financial guide and your reversal of working capital, that's $1 billion of free cash flow. Over the last 2 years, you've done an SIB. What's the trigger point historically to proceed with this form of return as opposed to NCIB?

Well, obviously, we've been active in both in terms of NCIB and SIB. The NCIB, there's a certain maximum you could do within a 12-month period. The current NCIB, the maximum shares we can buy back is 3.5 million shares. So as you said, our expectation is for solid free cash flow. And we've always executed opportunistically on the SIB. Obviously, today, our multiples are low when you compare to our historical averages. And so any option is on the table, but we plan on being active with buybacks this year.

Okay. And just as you reiterated your M25 targets, valuations probably flipped to 2025, any granularity on the details there? Is there any change to your $7 billion in year-round and your $1 billion on marine. It looks like your EBITDA margin is a bit higher than your high 16s earlier. Any granularity on changes within that guidance?

No material change. Obviously, the plan is what we communicated about 6 months ago in June at the Investor Meeting. The good news is some of the momentum we were planning to have over the 3-year period up to 2025 happen more quickly in side-by-side, so giving us the confidence that we can achieve our '25 targets with the more rapid momentum than we saw in certain product lines.

And obviously, from a dealer value proposition point of view, dealers like doing business with us, and they see that we're bringing new business to them. And just if you look at the last few months, we've announced the Switch. That's a brand new product line for them. We announced the Sea-Doo rise as well, gets a lot of market and dealer excitement. So everything is lining up from a product line dealer point of view for us to be able to deliver on our commitment.

Any increase to your $500 million target on the Switch?

No, not for now.

And your next question comes from Sabahat Khan from RBC Capital Markets.

Just a quick question, I guess, on the marine progress. Obviously, a big growth number you're giving for next year, but it seems like you called out some supply chain issues. Maybe if you can share some color on what specific kind of parts or areas you're having issues and maybe the cadence of this ballpark 50% growth that you're pointing to for this year?

Obviously, I mean, I won't go into -- because it's between us and suppliers. But I won't go into detail, but basically, it's a brand-new platform and we were quite innovative the way we designed the product to obviously reduce costs and give to the customers some features and with one supplier, particularly, it's more difficult than what obviously we had planned and we are in the middle of resolving it, then we believe that things will improve in H1.

Okay. Great. And then just a quick one on kind of the Powersports P&A side. There's a view out there that the sales of this segment could go up during a downturn as maybe people spend on lower-cost periphery items if there is a macro slowdown. Is there some sort of -- that sort of expectation built into your number here for the guidance for fiscal '24? How are you thinking about the evolution of that segment through the cycle, at least over the next 1.5 years?

Well, obviously, you're right that when there is a slowdown, it is a business that is more sustainable because people still -- are still riding and they still need to maintain and repair their vehicles. But again, in our assumption, we're not building an assumption for the economic slowdown in the guidance. The growth is obviously coming from a higher number of units that are out there being used by our customers and also the introduction of models like the Can-Am ATV that we're on, that we've just launched, obviously, has a high accessory attachment rate to it, and that's obviously driving accessory sales up. And so that's where the growth is coming with pricing as well.

There are no further questions at this time. I will turn the call back over to Mr. Philippe Deschenes to close the meeting.

Thank you, Julie, and thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our Q1 earnings call. Thanks again, everyone, and have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect. Thank you.