BRP Inc (DOOO) 2014 Q3 法說會逐字稿

All participants, thank you for standing by, the conference is ready to begin. Hello, ladies and gentlemen. Welcome to BRP's fiscal 2014 third-quarter results investor call. The call is about to begin. I would now like to turn the meeting over to Mr. Jon Reider.

Thank you, operator, and good morning to all of you on the phone and the webcast. Welcome to BRP's fiscal 2014 third-quarter results call. With me are Jose Boisjoli, BRP's President and Chief Executive Officer; Claude Ferland, Chief Financial Officer; and Pierre Pichette, Vice President of Communications and Public Affairs. I would like to remind everyone to please refer to page 2 of the third-quarter update slide presentation currently available on our website at www.BRP.com under the Investor Relations section, to view our caution regarding forward-looking statements and the risk factors pertaining to these statements.

And with that, I would like to hand it over to Jose.

Thank you, Jon. Good morning and thank you for joining us today for our 2014 fiscal third-quarter earnings conference call. I am pleased to share with you that the year is evolving in line with our expectations. As we reported during our earnings conference call last quarter, we expected to see strong results during the second half of the year, and that's exactly what we have delivered so far.

In fact, the results registered in the quarter are the best quarterly results in the history of our Company. We achieved record sales in the quarter with revenue growth of 18%, driven by a 38% increase in seasonal product revenues, as we delivered an increased number of snowmobiles to meet strong demand for our products. In addition, our international operation continues to demonstrate strength, posting a revenue increase of 17%, despite that several of our global markets are still facing weak economy climates.

With respect to our growth-focused products, we enjoyed an increase of approximately 38% in side-by-side vehicle. While sales for Spyder were down slightly, it was on very small volumes, as Q3 typically contributes less than 5% to overall Spyder annual sales. We have recently realigned our marketing campaign for the upcoming season, and we remain optimistic about the future trajectory of the business.

Gross profit margins were up 170 basis points in the quarter to 25.9%, driven mainly by higher seasonal product volume, but partially offset by the ramp-up of personal watercraft production capacity in Mexico. Overall, this performance resulted in an increase in normalized EBITDA of 42% and normalized EPS of 19%. Despite our stronger than expected performance in Q3, we continue to track on plan for our full-year revenue and normalized EBITDA guidance. Our outperformance in Q3 was primarily driven by the fulfillment of stronger demand for earlier deliveries of our seasonal products.

However, as a result of our revision to our expectation for our effective tax rate for the full year from 28%, 29% down to 26%, 27%, we are revising our full-year guidance for normalized basic earnings per share up to a range of CAD1.49 to CAD1.54 from the previous range of CAD1.45 to CAD1.50. In terms of business highlights for the quarter, with regard to the North American market, retail sales are seasonal and year-round product were up 13% in aggregate in the quarter. And as far as an update on the model year 2013 season ending for personal roadcraft and roadster, we registered market share gain in personal roadcraft for a fourth consecutive season. And our roadster retail sales growth was slightly above motorcycle industry growth.

On the snowmobile side, although early in the season, the snowmobile industry is up low double digits and Ski-Doo is gaining market share. With regards to our international markets, as I mentioned, despite continued weakness in some economies, we post a strong performance in our global markets. In addition, we began deliveries of the new Sea-Doo Spark to 29 different countries, focusing on counterseasonal markets. And on the operations side, we officially opened our Queretaro, Mexico facility on November 7.

During our IPO roadshow, we introduced our key strategic initiatives -- continue our focus on product innovation, grow revenue from year-round products, expand our North American dealer network, grow our international sales, and drive margin increase. We have made solid progress with regard to these key strategic initiatives to fiscal year 2014 with our third-quarter being particularly active.

Focusing on product innovation, in September, we had the very successful and well-attended Club BRP in Orlando, Florida, with 2500 people representing 99 countries to witness the launch of our model year 2014 Can-Am and Ski-Doo products. At the Club, we launched several new and exciting models, including the mod version of our maverick, the Commander four-seater, a six-wheel ATV developed by our engineer in Finland, and the Spyder RT 1330 with its new triple-cylinder engine. To date, the reception to all of these new models has been exceptionally strong on the part of dealers, consumers and media.

But there is no doubt that the highlight of the Club was the launch of the Sea-Doo Spark, our revolutionary new personal watercraft offering, that we believe will respark the personal watercraft market. The Spark is priced between CAD4999 and CAD6499, more than 35% lower than its nearest competitor. Consumers can finance their Spark in the US for as low as [CAD79] a month. With its affordable price, we believe it will be an attractive option for individual looking to make an initial purchase of a personal watercraft. As I mentioned, we have already begun shipment to key countries, and the early indication are encouraging.

Our second initiative is to aggressively grow revenue from year-round products. Year-to-date, we have registered growth of 13% in year-round products, primarily driven by significant growth in side-by-side, a market we only entered in late 2010. Year-to-date, side-by-side is up 35%. At the same time, there is good momentum in ETV, despite limited industry growth. And while not as strong as we'd like to be, the Roadster continues to outpace industry growth. We also believe that the new model year 2014 Spyder RT 1330, along with our new marketing approach, will trade strong momentum in the marketplace.

As you can see from this slide, for model year 2014, we have introduced a competitive lineup with eight new models of our Commander and Maverick. Looking at our third initiative, we remain on track for [35 -- 40] new parts for dealer in North America by the end of our fiscal year 2014, and continue to focus on the US South and Southwest regions. We remain on track for 200 to 300 new dealers over the next four years.

In term of our fourth initiative, to grow international sales, through the first nine months of the fiscal year, our international revenues have grown 15%. We continue to see strong performance from our international operation as we capitalize on the increasing popularity of our side-by-side products, benefit from the introduction of our well-received model year 2014 highlighted by the new Sea-Doo Spark, which we expect will be a major factor in developing the personal watercraft market in emerging markets; begin shipment of the Spyder in Japan following the product launch this past October; and start deliveries of the Outlander 6-by-6 in the spring.

With regards to our fifth initiative, to drive margin increase, in addition to increased volume, one of our key strategy for improving our overall margin is the expansion of our operation in Mexico. On November 7, we celebrated the official opening of our Queretaro plant in Mexico. The ramp-up of the new facility is progressing well. As we mentioned last quarter, our first offroad vehicle engine came off the line in November 2012. Our Sea-Doo Spark production began in August, as planned. It is important to note that we would not have been able to meet the significant vehicle cost reduction required to launch Spark without the Queretaro facility. We are planning for all personal watercraft to be produced in Mexico by fiscal year 2017.

Finally, the ramp-up of our personal watercraft, all production began this past October. All of this will result in margin improvement of CAD20 million to CAD25 million by fiscal year 2017.

Now let's look at our performance on a segment-by-segment basis. Focusing on seasonal products, dealer orders for model year 2014 snowmobile were higher than model year 2013, due to strong end-of-season in model year 2013, as well as the positive reception to the model year 2014 lineup. Due to the short season for snowmobiles, as well as dealer requirements to have product in the showroom as soon as possible to meet customer demand, model year 2014 incremental orders were mainly shipped in Q3, driving the 38% increase in seasonal product revenue in the quarter. We expect Q4 snowmobile shipment to be comparable to last year levels. While it is still early in the season, the snowmobile industry is up mid-double digit and BRP market share is increasing.

On the personal watercraft side for the season ended September 30, the North American industry was down low-single digit, and BRP North American retail was up low-single digit to register market share gain in both Canada and the US. And lastly, we began deliveries of Spark in Q3.

Our year-round product revenue increased 1% in the quarter. The US side-by-side industry is up low-double digit thus far in season 2014, while BRP retail continues to significantly outpace the industry. We saw strong growth in side-by-side sales in Q3, with revenue up by approximately 38%, due to lineup expansion and market share gain worldwide.

Looking at the North American ATV market, four months into the season, the industry is up mid-single digits, and we are gaining market share, as our ATV retail sales are up both in Canada and in the US. Our ATV sales were down approximately by 20% in the quarter, primarily due to the fact that our fiscal year 2013 third-quarter ATV sales were positively impacted by the introduction of eight new ATV models, and the resulting first shipment of new models in the quarter, which included the highly anticipated Outlander two-passenger family and Outlander moderating models.

This surge in demand is very common when a new product is anticipated in the marketplace. I do want to remind you that for the nine-month period fiscal year 2014, ATV industry retail was up low-single digits, while BRP ATV retail was up high-single digits, so we are happy with our ATV momentum.

Now let's take a look at our Spyder business. The motorcycle season, which ended in North America on October 31, was up low-single digits. Our Spyder retail was slightly above the industry growth, but this was lower than our plan. Additionally, while our Q3 Spyder sales were down, it was on very small volume, as Q3 typically contribute less than 5% to overall Spyder annual sales.

We have recently realigned our marketing campaign for the upcoming season, where we plan to increase awareness with non-non customers, those customers who have never owned a motorcycle or any other powersport product, and who represent the biggest potential market for Spyder. Our plan is ready to be deployed early in the new year. The Spyder RT 1330 with the new 3-cylinder engine has been well-received by dealers, customers and media. And with the new marketing campaign, we are ready for a good season 2014.

Our propulsion system revenue grew by 9% in the quarter. Four months into the season, the North American outboard engine industry retail was up high-double digits, while BRP retail sales were up low-single digit. This is explained by industry growth that is mainly driven by an increase in outboard engine sales on new boats versus the repower business, which referred to putting a new engine on an existing boat. As we said in Q2, we expect this trend to continue for the next model year. Evinrude has traditionally focused on the repower segment, but we are actively working to be more present in the new boat segment.

Last June, we introduced three new outboard models directed at the fastest-growing boat segment, the Pontoon category. On the Rotax propulsion system side, we saw low-double digit revenue growth in the quarter, mostly driven by aircraft engine sales. On the Part/Accessories/Clothing side, which also include other incidental revenue, the overall business was up 12%. Growth in PAC was primarily driven by offroad and snowmobile-related vehicle parts, accessories and floating.

And with that, I will pass it over to Claude.

Thank you, Jose, and good morning, everyone. We posted record third-quarter revenues of CAD866 million in the quarter, an increase of 18% over the same period in fiscal 2013. Our gross profit of CAD223.9 million in the quarter or 25.9% of revenues equated to an increase of 170 basis points over last year. Normalized EBITDA came in at CAD119 million or 13.7% of revenues, which represented an increase of 42% over the same period last year. Finally, all of this resulted in a bottom line of CAD59 million in normalized net income, an increase of 39% compared to Q3 fiscal 2013, or CAD0.50 per normalized basic earnings per share.

In terms of our Q3 performance by product category, 44% of our sales came from seasonal products; 29% were from year-round products; 17% from parts, accessories and floating; and 10% from propulsion systems. On a geographical breakdown for the quarter, 40% of our sales came from the US, 25% from Canada, and 35% from international. After nine months, our revenues grew by 13% excluding sport boat, which, as you know, we exited in the fall of 2012; 32% of our sales came from seasonal products; 40% were from year-round products; 16% from parts, accessories and floating; and 12% from propulsion systems. On a geographical breakdown year-to-date, 45% of our sales came from the US, 21% from Canada, and 34% from the rest of the world.

We have provided you with a graph illustrating the bridge from our fiscal year 2013 year-to-date normalized net income to our fiscal 2014 year-to-date normalized net income. The CAD64 million increase in volume and mix was offset by a CAD22.5 million increase in sales program cost, while the increase in production and operating cost was mainly due to the expenses supporting the initial stage of the transfer of PWC manufacturing to Mexico, higher investments in research and development projects, and higher stock-based compensation in relation to the IPO.

Now turning to the balance sheet, cash is down CAD536 million versus the beginning of the year, mainly as a result of the CAD529 million distribution to shareholders during the first quarter of fiscal 2014. At the same time, our long-term debt decreased by CAD220.6 million, mainly due to the CAD258 million US turnkey repayment following the IPO. Negative free cash flow of CAD52 million in the first nine months was down versus the nine-months period in fiscal 2013, primarily as a result of an abnormally low level of accounts payable at the end of fiscal year 2012, due to early payments to suppliers, which positively impacted the first half fiscal 2013 free cash flow.

Now, a quick update on the BRP's North American power sports dealer inventory year-to-date. As compared to the same period in fiscal year 2013, dealer inventory was up 7%, 5% up in year-round products, and 2% up in seasonal products. The reasons for this were twofold -- growth in our side-by-side business as we continue to fill the pipeline with our new Maverick models, and slower than expected retail of PWC and roadster, due to lower than expected industry growth for the year. We are comfortable with our current inventory position.

On slide 24, you will see our guidance for the current fiscal year. We are very pleased to be reconfirming our expectations as follows. We are expecting growth in company revenues in the high-single digits. We are expecting normalized EBITDA to be up low-double digit percent. And as Jose mentioned to you earlier, we are lowering our effective tax rate to 26% to 27% from 28% to 29%. The decrease in the tax rate results from a favorable mix of accounting profit or losses amongst tax jurisdictions. As a result, our guidance for normalized net income goes from up low-double digits to up mid-double digits percent.

And our guidance for normalized basic earnings per share increases from a range of CAD1.45 to CAD1.50 to a range of CAD1.49 to CAD1.54, reflecting the approximate CAD0.04 impact from the lower effective tax rate. To be clear, outside this lower effective tax rate, our full-year guidance remains unchanged. While Q3 posted stronger than expected results, we have not altered our full-year revenue and normalized EBITDA guidance, as our outperformance in the quarter was primarily driven by the fulfillment of stronger demand for earlier deliveries of our seasonal products.

As you can see, we continue to forecast a strong finish to the year. And on that note, I would like to turn it back to the operator to open the lines for Q&A. Thank you.

(Operator Instructions) Martin Landry, GMP Securities.

Your ATV sales are down 20% year-over-year. I was wondering if that performance is in line with your sales at retail of ATVs?

Good morning, Martin. Just to explain the -- what happened with ATV in the third quarter, our most popular platform in our ATV lineup is the Outlander. That's where we have the bulk of our models. And we did transition from the Outlander G-1 platform to G-2 platform in June 2011 with only two models. And in June 2012, we introduced a variation of that Outlander G-2 platform. And it was anticipated by the dealer network. It was anticipated by the customers. And we had heavy production and heavy shipment of the Outlander in the Q3 of fiscal year 2013.

What we have delivered this year in fiscal year 2014 was about in line with what we had planned for the second half of the year. There is always a situation from one quarter to the quarter; but for the second half, it's about what we had anticipated. And I would like to highlight, like I said in my opening remarks, that we are very happy with our retail. The industry in North America is up low-single digit and we're up low-double digit, and we're happy with our ATV momentum worldwide.

Okay. The retail sales that you are giving are for year-round product overall, right?

The retail sales that I just gave you was for ATV nine months.

Okay. Nine months, okay. And just wondering how long is it going to take until we anniversary that tough comparable for ATVs?

How long it will take for?

To lap that it was strong sales last year.

I'm not sure I understand your question, Martin. Can you be more specific?

Yes. You're just -- you're telling us that last year you had a lot of product launches during that period, and for that reason, your sales were a little lower than this year, a little lower than last year. Like -- is that product launch was only in Q3? Or it was (multiple speakers) --?

Yes, it was a phenomena that happened. Every time an OEM introduces a new platform, there is always those surge of deliveries. And that's happened in many industries, and that was a phenomena that happened mainly in Q3 last year. We don't see any big fluctuation going forward.

Okay, good. And just lastly, on your operating expenses, they were down year-over-year when we look at them as a percentage of sales. And that's even when we exclude the restructuring cost that you incurred last year. By my count, it's a decrease of 800 bips. That's the best performance of the year so far. I was wondering, is this a scale effect or it's due to some specific cost reductions?

Good morning, Martin. In the quarter, as you correctly pointed out, when compared to a year ago, we have to be careful because we had a restructuring charge last year in Q3, if you remind, for the -- relating to the closure of the Spark business. So that accounted last year for a charge of about CAD17 million. And when we look in the quarter, obviously, we tried to manage our expenses as tight as we can do. And we did a good job in Q3, managing those operating expenses. Therefore, with the growth of revenues on a percentage basis, we see a good improvement versus a year ago.

So it's a scale effect?

Yes.

Okay, thank you very much. Congrats.

Thank you.

Robin Farley, UBS Securities.

I just wanted to get some clarification on the retail sales front on both ATVs and side-by-sides. I understand that year-to-date, you were tracking above the industry for retail sales. But it looks like in Q3, something may have happened on the retail front. Part of it is, I guess, that I'm comparing your comments about retail sales to a September quarter for the industry. But unless there was something very off just specifically in the month of October, it looks like retail sales were below in Q3 here for ATVs, and possibly in the side-by-side business as well for the third quarter. So I wonder if you could give a little bit of color on side-by-sides and ATVs separately, in terms of retail sales, just in Q3 specifically?

Good morning, Robin. Yes, first, on the side-by-side front, the industry in Q3 is high-mid-double digit. And we -- high -- low-double digit -- sorry, we high -- we -- over 20%. Then we are outpacing the industry. And this is the fact that we introduced eight new models for 2014 and now we have 17 models of side-by-side. We started deliveries of the Maverick Max in June; the Maverick XMR, the mud-ready vehicle, in October; and the XC model, Maverick XC model, also in October.

Then we have a very good momentum worldwide with our side-by-side business, and we are outpacing the industry every quarter, and we're very happy with that. And the ATV sales is a bit different. We -- in the past, we -- at the beginning of the season, we were not as aggressive to clean out noncurrent. And this year, when we switch over from the season 2013 to 2014 in June, we follow the industry and we were aggressive like the others with noncurrent program.

Then this year, we had very, very good retail in Q2, very happy with that. And in Q3, we were a bit behind the industry. But because, compared to last year, because we upfront or frontloaded our programs on the non-current very early in the new season. But like I said before, we are very happy with the momentum. We don't look at it quarter-by-quarter; we look at it in the trajectory, and the industry is up low-single digits. We're up low-double digits so far and we're very happy.

And then on the Spyder, you talked about for the roadster that you're launching new marketing, it sounded like, in January. So should we sort of think about our expectations for Q4, for Spyder maybe won't look that different than Q3, because the new marketing campaign is really kind of next calendar year, and maybe wouldn't change Q4 sales to be much different than Q3?

Basically, Robin, you're right. The season changeover between 2013 and 2014 is at the end of October. Then for us, Q3 is a very limited shipment or we ship very, very limited volume of roadster. We will start shipping more in Q4 and accelerating in the first half of next year. And we believe that our old sales will be about in line with what we had a year ago.

Okay. Thank you.

Gerrick Johnson, BMO Capital Markets.

I just wanted to ask a follow-up on the Spyder, just to be clear precisely when the 1330 was hitting dealers. Is that hitting dealers now? Or do we have to wait until early in the calendar year next year to see those hit dealer floors?

We're starting shipping before Christmas. The 1330 is on the line since a week, and we're starting shipping before Christmas.

Okay, great, thank you. The US-Canadian dollar relationship and how it affects your business -- I just wanted to ask a few questions on that. Do you have hedging benefits in one of the other lines? And is there basically a rule of thumb -- we've gotten this from other companies I cover -- a rule of thumb, basically 1% change in the Canadian dollar relative to the US dollar would equal a certain amount of impact to the bottom line? Do you have any sort of rule of thumb that might be helpful in understanding that relationship between the two dollars?

Yes. Claude speaking, Gerrick. When we look at our overall business and we look -- as you will understand, we have a lot of our revenues that are US dollar, our financial statements are in Canadian dollars. And when we look at the overall US dollar cash flow over a 12-month period, I would say we are pretty much hedged over a 12-month period. So we don't -- we did not hedge the US dollar to the Canadian dollar during the current fiscal year because of that natural hedge position.

This being said, we might see some variations from quarter to quarter because inflow, cash inflows and cash outflows in US and Canadian dollar and US dollar are not necessarily easily predictable on a week to week basis. As you have seen, the Canadian dollar has been moving quite rapidly in the -- or quite steeply in the last weeks and months. So, that can create an unbalance within a given quarter.

Overall, on a full-year basis, basically, we are not being impacted by the fluctuation of the US dollar (multiple speakers) -- other than an increase in revenues, obviously. If the US dollar strengthens versus the Canadian dollar, you'll see an increase in revenues. But on the bottom line, you should see very little impact also, other than the translation of our long-term US dollar debt into Canadian dollar, which is a non-cash element, as you well know.

Okay, great. I'd love to sneak one more in on Rotax. Did you have any shipments? I guess you had some shipments of jet propulsion to boatmakers in the quarter. Were they meaningful? And when do we see more meaningful shipments to rec products and those other boatmakers? Thank you.

We ship a few units in Q3. There will be more units in Q4, but you will see a traction in the jet propulsion system in first half of next year.

Great. Thank you very much.

Thank you.

Craig Kennison, Robert W. Baird.

Thanks for taking my questions as well. With inventory up at the dealer level due to some new products that you've launched, are you displacing competitors at the dealer level? Or are those dealers simply carrying more product lines from you and others?

Very difficult to answer. I hope we are displacing competitor products. Very difficult to answer, Craig. And again, the increase with our additional product like the eight new models of side-by-side, we are creating sometimes subsegments like the Mudready side-by-side and the XXC. And those, I believe, are quite unique in the industry. Now, is the dealers' order less from our competitor to take on? I hope so, but very difficult for us to comment.

Thank you. And then with respect to the Spark product launch, which seems to have met with some early success, partly driven by its lower price, do you see that as a trend in power sports? And is there an opportunity for you to come out with innovative products at lower price points in other categories?

I have been asked that question many times since the Club -- the introduction of the Spark at the Club last September, as you can imagine. Definitely, basically, what we have done with the Spark, we came back to what we were doing in the mid-1990s. And basically, the same price range, the same performance, the same size, the same fun factor that we had in the mid-1990s. And there is definitely an opportunity there.

And so far, the reception in Brazil, New Zealand and Australia are very encouraging. The dealers that received their first shipment have almost sold out what they have. They are waiting for the second wave of shipment and they have deposit on the second wave of shipment.

You need to understand that the watercraft -- the entry-level watercraft was quite expensive. And if there is one product line where the price have increased too fast in the last 10 years, it's the watercraft side. If you compare snowmobile, you have more affordable snowmobile in the lineup than you had watercraft. Then definitely, there is some opportunities. We'll see how the Spark will be successful. But I think the watercraft industry was quite unique because of all the technology that the OEM have introduced, the price have escalate significantly more than the inflation. And that's why we came up with the Spark.

Thank you and good luck.

Thank you.

Tim Conder, Wells Fargo.

Congrats on the quarter also and the year-to-date results. A couple of things -- Jose or Claude, in your margin opportunities that you outline here of CAD20 million to CAD25 million coming from Mexico by fiscal 2017, how do you see that ramping? I mean, is it more of a gradual steady slope? Or is it a little more back-end loaded? Any clarity that you could give there.

And then on your comment regarding the Spyder roadster market share versus the market, just more of a housekeeping item -- if you could just remind us of what you are using as the benchmark for the market.

Yes, then let's go with the roadster. We're losing in North America on the highway motorcycle above 500cc. That's what we are using as the industry.

Now, on the watercraft or the Mexico plants for watercraft, and that will start -- in close, you can compliment -- it's a -- we transitioned ATV from Canada to Mexico in less than 18 months because it was moving the assembly. What we're doing in Mexico is moving the assembly, which is quite fast, but we're starting a fraction of haul and back. And this has started in October. We started production of haul in Mexico for -- since October. And those haul produce and ship right now to Canada to be assembled in Canada.

And we didn't want to take any chance on quality because the haul is the structure of the vehicle. Then in fiscal 2015 -- [14] this year, some haul are made in Mexico, shipped to Canada. And there is no saving when you do that. The saving you have on the production, you burn it on the cost of transportation. Next year, there will be about half of the watercraft produced and assembled in Mexico in fiscal year 2015; the other half in Canada.

But again, the cost of ramping up and the cost of transportation to ship haul here, that's much gained there. The following year, fiscal year 2017 -- the last transition will happen in fiscal year 2016, when everything will be done there in Mexico and you will have the significant -- the CAD20 million -- CAD25 million cost improvement in fiscal year 2017. And that's why it can seem slow for you guys that it would take so much time, but it's a complicated transfer, because it's a fabrication to haul and deck.

And just maybe to add -- just to add a little bit on this -- important to note that we were not manufacturing haul and deck in the past. We were purchasing haul and decks from an outside supplier. And then we are insourcing that fabrication at the same time as we are moving into Mexico, which makes the project a much bigger project than the transfer of the ATV assembly.

Okay. Okay. And one last question, gentlemen, if I may. On your outlook for channel inventories, and this may be difficult to answer, but what are your expectations as you ramp up your southern and southwestern US dealer count? What are your expectations that that will add to channel inventories? I guess another way to frame it is, we would anticipate channel inventories growing going forward due to that dynamic. So if you could sort of give us a baseline from that and then we could measure that versus anything that would be related to expansion of models or anything else.

What Claude has shown on the chart is the number of unit -- the inventory in units. The way we do it internally, we also measure it -- obviously, you have the whole volume but you measure the days of inventory. That's what is, I believe, is the most important, to measure the days of inventory out there.

Then, obviously, the new dealer will have inventory, but our sales will grow up in those regions. And the days should remain about what we have. And we believe that's what is important. But the number of units, when we introduced new models or when we introduce new dealers, is increasing directly.

So I guess the key metric from the channel inventory perspective that we should focus on, all-in, obviously, is what you're saying then is, your days should remain constant going forward at where they are currently?

That's what we're trying. And in time with the new management system, we hope to reduce our days of inventory.

Okay. Great. Thank you, gentlemen.

Thank you.

(Operator Instructions) [Shah Perone Pashi], Desjardins Capital Markets.

Congratulations for your quarters. My question is about your international sales. You mentioned that you got increasing sales in year-round products in most regions internationally. Can you provide more color on which region you see most traction? And also for the Spyder in Japan, how is it received in that market?

First, the -- our sales at international are growing, and the year-round product is mainly side-by-side and ATVs. That's where the growth is there. And the growth is coming mainly from Scandinavia, Russia. We have a good traction also in Australia, New Zealand. One area that is going right now as planned is Western Europe, but this is slowly improving. The region that is more difficult this year versus last year is Brazil. It is still growing but at a lower pace than last year, and slightly lower than what we had hoped for. And overall, the year-round product is derived by ATVs and side-by-sides in those key markets.

For your question about the roadster in Japan, we introduced the vehicle in Japan in October. We introduced the roadster in Japan in October, and the deliveries will start with the RT 1330 in the next few days. And that will be the first shipment that we will do in Japan. So far, the reception by the media and consumer and dealers is very good. And as you know, the Japan market is one of the biggest markets for cruiser bike outside North America. And we are quite excited with the roadster potential in Japan.

Okay, and of course, my question, I forgot to mention, is on behalf of Benoit Poirier. But my other question is about the Spark introduction. Do you have any like feedback on excitement you got from dealers in North America ahead of the summer season that is coming for next summer?

Yes. We need to be careful here. We ship in 29 countries, and except for the countries in the south hemisphere, we ship typically two units to dealers for demo or showrooms, and for the boat shows that are coming right after Christmas. Now, we see many dealers that have deposit already for their Spark.

Then -- and if I give you more colors in Brazil, Australia and New Zealand, we shipped the first wave of product to the dealers. All the units available are sold right now. And the dealers are waiting for the second wave of shipment, and many have deposit on the second wave. Then all of this looks very good, to be honest. And it's creating momentum in the dealership. Some customers go in the store, they are excited about the Spark, but they buy, at the end, an RXP, and that's what we wanted, is to energize that market.

It's too early. I think everything looks extremely positive. The reception of the customer and the dealer are good, but it's too early to say how big will be Spark. I think we will need probably six months before we have a good sense of how big this will be. But so far, we could not be more happier than what we see.

Okay, thanks, guys.

Thank you.

Marc Petrie, CIBC.

I just had a quick follow-up on the Spark. Based on the chart that you guys provided, with your Q2 results around the seasonality of the PWC business, it looked like about 20% of the shipments would happen in Q4, and then, obviously, the bulk happening in Q1, greater than 50%. Does the strength of Spark in international tend to shift that? Or do you expect it to shift that seasonality at all, so that it's less of a seasonal business? Or is it just because of the lower price points, it's not material enough to affect that?

The intention going forward is to produce Spark on 10 months in Mexico instead of six months in Canada. And the distribution of watercraft are -- their wholesale should be more stable going forward. We cannot do that now because right now, the building in Mexico has been done. The line of Spark was installed last summer, started operation in August. But we will need to stop the assembly of Spark for about three months in the summer to permit the people, to our people to install the main assembly line for watercraft for the reception of the traditional watercraft in the fall of 2014.

Then the vision is to have production and shipment of Spark on a 10-month basis instead of six months. That's one benefit, and that should benefit that we had going to Mexico. But this will not be possible before fiscal year 2016, because next year, we need to transition the production line.

Okay. That's helpful. Thank you very much.

Thank you.

Gerrick Johnson, BMO Capital Markets.

Hey, I'm back. The question on insurance gains -- were we supposed to get an insurance benefit in the quarter? And what's the status of that? Thank you.

Gerrick, Claude speaking. We did record an CAD11 million insurance gain at the end of Q2. This CAD11 million gain is an item that is -- that was normalized; therefore, not impacting our normalized EBITDA or normalized EPS guidance. So, at the end of Q2, we booked the entire estimate of our insurance claim in relation with the rebuilding of our R&D center here in Valcourt.

Okay, great. So that's done and over with. And lastly, I'm not sure if you did this, but can you, in a little bit more granularity, perhaps, break down gross margin, 170 basis points -- how much of that came from different aspects? What came from volume? What was an adverse impact from Mexico? If you could break that all down by basis point, if that's possible?

Okay. Well, the increase in gross margin -- most of that came from the increased volume in seasonal product, mainly the increased deliveries of snowmobile. Also, as Jose mentioned, we have very strong mix in the snowmobile deliveries, with our performance improving mainly in the mountain segments. On top of that, we had a CAD12 million gain on foreign exchange in the quarter.

As I mentioned it to you, we are pretty much naturally hedged on the US dollar, but rapid fluctuation may create some increases or losses within a quarter. Those increases have been partially offset by the increase in the ramp-up cost for our Mexico facility.

Okay. Any benefit from input costs?

No. I would say they were pretty much similar to what they were last year.

All right, great. Thank you.

Thank you.

[Shah Perone Pashi], Desjardins Capital Markets.

So, you can clearly see a trend in -- I mean that the US sales are growing a bit more than the Canadian sales. And we know that Canada is a big market for snowmobile. My question is, in the snowmobile market, how much growth do you see coming from the US and Canada? Is it like different from a country to the other one?

To be honest, Shah, right now the snow condition of the winter is starting very well. And so far, we're having good traction in both countries. Now, we always had higher market share in Canada than in US. Then for us, it's easier to gain market share in the US than in Canada. And when -- the US being a bigger market, when the US gets better, it's good. And that's why our model year 2014 order was very strong versus -- very strong. But I would say at this point, and it's still early in the season, both markets are growing about at the same pace. But US is bigger than Canada.

Okay. Thank you.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Boisjoli.

After three quarters, we remain on track to deliver solid results for our first year as a public company. I am happy with our performance, especially given the fact that we are still operating in a difficult economic environment in some of our key markets around the world, highlighted by a US recovery that is much slower than expected, and a European market that is still facing tough economic times. Despite this, we are gaining momentum, and will continue to focus on product innovation, aggressively grow revenue in year-round products, expand our North American dealer network, grow our international sales, and drive margin increase.

Next Wednesday, December 18, we will be celebrating our 10th anniversary as a standalone company. There will be celebration around the world with all our employees, whose dedication, hard work and support has allowed us to become the Company that we are today. I am very proud of our achievements.

Thank you again for your interest in BRP, and I wish you all a very good holiday season. And most importantly, for all of us in the North, a lot of snow. Thanks.

Thank you. The conference has now ended. Please disconnect your lines at this time.