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BRP (DOOO) Q2 2024 Earnings Call Transcript

BRP Inc. (DOOO)

Q2 2024 Earnings Conference Call

Company Participants

José Boisjoli - President, Chief Executive Officer

Sébastien Martel - Chief Financial Officer

Philippe Deschênes - Director, Investor Relations

Conference Call Participants

Mark Petrie - CIBC World Markets

Robin Farley - UBS

James Hardiman - Citi

Xian Siew - BNP Paribas

Fred Wightman - Wolfe Research

Cameron Doerksen - National Bank Financial

Craig Kennison - Baird

Martin Landry - Stifel

Jaime Katz - Morningstar

Joe Altobello - Raymond James

Luke Hannan - Canaccord Genuity

Brian Morrison - TD Securities

Tristan Thomas-Martin - BMO Capital Markets

Michael Kypreos - Desjardins

Jonathan Goldman - Scotiabank

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the BRP Inc.’s FY24 second quarter results conference call. For participants who use the telephone line, it is recommended to turn off the sound on your device.

I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.

Philippe Deschênes

Thank you Julie. Good morning and welcome to BRP’s conference call for the second quarter of fiscal year ’24. Joining me this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien 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 the actual results could differ from those implied in these statements. 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 list 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.

With that, I’ll turn the call over to José.

José Boisjoli

Thank you Philippe. Good morning everyone and thank you for joining us.

I am pleased to report that we delivered a very solid quarter driven by continued strength in consumer demand for our line-up and the ongoing support of our dealer network. Solid execution of our plan led to an impressive market share gain and record results for our second quarter. Given this strong performance and our positive outlook for the rest of the year, we are increasing our normalized EPS guidance to a range of $12.35 to $12.85.

Let’s turn to Slide 4 for key financial highlights. Revenue reached $2.8 billion, up 14% from the previous year driven by higher volume and pricing. Normalized EBITDA grew 13% to $473 million and normalized EPS increased 9% to reach $3.21.

Turning to Slide 4 for a look at our Q2 retail performance, our product portfolio continued to gain traction with consumers, leading to significant market share gains. In North America, our retail sales were up 41% compared to an industry that was up mid-teen percent. Given our retail performance, this implies that BRP accounted for most of the industry growth in the quarter. We were also very strong in international markets with retail up 23% in EMEA, 36% in Latin America, and 33% in Asia Pacific.

Looking more closely at the numbers, we see that demand for products remains robust despite ongoing macroeconomic concerns. We just had our strongest second quarter ever at retail except for the first few months of COVID, where we experienced significant inventory depletion. Not only was our retail up 41%, but it was up 37% versus Q2 of fiscal year ’20, showing continuous gains. With this strong performance, we reached record market share for side-by-side, ATV and personal watercraft, all of this with retail incentives below pre-COVID levels.

We believe those results are driven by the evolution of our customer profile over the last four years. The influx of new entrants remains high at 39%. We also continue to see high FICO scores, and the average household income from our customer survey is 40% higher than pre-COVID at slightly above US $160,000. Those customers are looking for more high end product, which explains our momentum in this category across our line-ups. Bottom line, the typical BRP product buyer remains in very good shape financially. This puts us in a favorable position entering the second half of the year.

Turning to Slide 7 for an overview of key products introduced at our BRP Club held in Atlanta two weeks ago, this year’s club was one of the largest ever with 5,300 total participants in person and virtually. The highlight was the launch of the Can-Am Maverick R, our flagship model in the sport category. It brings a new dimension to riding with an industry-leading 240 horsepower engine, industry-first dual clutch transmission, a unique suspension geometry, and [indiscernible] technology. With this new offering, we are well positioned to gain market share in the high end sports side-by-side category.

This was not the only product news, as shown on Slide 8. We improved our entry level offering with the first major evolution of the highly successful Sea-Doo Spark since its introduction. We also launched many new side-by-side models, notably the Can-Am Defender XT HD7, as well as the Maverick X3 RS Turbo, the industry’s most affordable mid-HP 72-inch wide side-by-side. These models offer a lot of value at price points that reach a wide range of consumers.

We also continue to push innovation in the premium segment, which has seen the fastest growth in recent years. We introduced a full range of high end models, such as the Manitou Explore Max 300 HP, a pontoon with dual rotax engine, and the larger Max Deck, the Sea-Doo RXP-X and RXT-X with 325 horsepower and the Sea-Doo Switch Cruise Limited. We also added a touch screen with Apple CarPlay to our Spyder models. These additions represent a historic level of product news, which will help us to gain more market share and grow our addressable market while further improving our margin profile.

All our new products were well received. The order process is ongoing, volume is as expected, the mix is currently trending slightly better.

Now let’s turn to Slide 9 for our year-round products. Revenue was up 8%, reaching $1.5 billion driven by strong shipments of side-by-side vehicles and ATVs. At retail, Can-Am side-by-side had its strongest Q2 ever with retail up high 20% and solid growth in all segments and price categories. We also finished the season with a 6 point market share gain to reach the high 20% range in North America. With this performance, we are very close to delivering on our M25 objective of reaching a 30% market share by the end of fiscal year ’25, but of course we will not stop there. Moreover, for the first time ever, Can-Am side-by-side reached the number one position in Canada with a market share in the high 30%.

As for ATV, our retail was up mid-30%. This performance was notably driven by strong growth in the mid-cc segment, reflecting the success of our newly introduced mid-cc Outlander platform. Also, ATV also closed its North American season with the strongest share gain in the industry, passing the 20% mark for the first time ever. We are pleased with the momentum of our off-road business and with recent product introductions, we are in a good position to continue outperforming the industry.

Looking at three-wheel vehicles, retail was down high single digits compared to an industry that was up high single digits. While consumer interest remained high, the Ryker’s retail performance was softer in the quarter. As seen across the industry, buyers of entry level product are more hesitant to purchase at the moment; meanwhile, the Spyder F3 and RT models, which are higher end, had solid growth. With the upgrade on the model year ’24, we are well positioned for next season.

Turning to seasonal product on Slide 10, revenue was up 30%, reaching almost $900 million driven by higher volume of snowmobile and Switch pontoons as well as favorable pricing. Looking at our retail performance, we had a very strong quarter for personal watercraft with retail up about 60%, again an easy comparable to a year ago. Remember that we had limited product availability in the network during Q2 last year. Still, this performance was exceptional from an historical perspective; in fact, our season-to-date retail is the strongest in the last 15 years.

These results demonstrate the strength of our line-up and our ability to create new segments with models such as the Wake, Fish and Explorer Pros. These products bring new entrants to the category, which drives industry growth, and with our new product introductions for ’24, we are well positioned to sustain our momentum.

As for our Sea-Doo Switch, our retail was up over 200% and we had the number three position in the U.S. pontoon industry over the three-month period ended in May. This is a great example of how we can disrupt categories by developing market-shaping product.

Finally for snowmobiles, we are currently in the off-season. We are confident for the peak season with a high level of units pre-sold to consumers.

Moving onto Slide 11 with power sport parts, accessories and apparel, and OEM engines, revenue was up 14% to $294 million. We continue to benefit from our growing product portfolio and vehicle fleet in use, which led to higher replacement parts and accessories sales driven by the Link ecosystem. We expect a softer second half than originally planned for our PA&A business as we anticipate dealers to de-stock inventory mainly for the Sea-Doo pontoon and three-wheel vehicle line-ups.

Looking at our recent acquisition, a key highlight was the introduction of Pinion motor gearbox unit, commonly called MGU, which combines a full power electric bicycle motor in our industry-leading gearbox in one compact package. This promising technology got excellent reviews following its introduction in June, notably winning the prestigious Eurobike Gold Award in Frankfurt.

Now moving to marine on Slide 12, revenue was down 5% to $125 million, reflecting a lower volume of boat shipments. The revenue decrease is due to the slower than expected production ramp-up of the new Manitou platform, namely because of a supplier issue for an esthetic component which limited product availability. This issue has now been resolved.

Looking at retail sales from an industry perspective, the boat category has seen weaker demand so far this year. Demand was affected by higher financing costs and poor weather in many markets, especially in the Great Lakes region which is key for both Alumacraft and Manitou. In addition, our retail performance was impacted the supply issue for Manitou, and we still had lapping months retailing welded boats for Alumacraft. For Quintrex, retail was down in line with the industry in Australia.

Given the slower production ramp-up for Manitou and softer industry trends in the boating sector, we decided to realign our plan for this year focusing on season ’24. While the year has not unfolded according to plan, we are encouraged by consumer reaction to the new boats and we remain confident about our strategy for the marine business.

With that, I turn the call over to Sébastien.

Sébastien Martel

Thank you José and good morning everyone. We once again delivered solid results in the second quarter driven by robust top line growth, fueled by the sustained strong demand for our power sport line-up which continues to translate to market share gain and growing momentum with our dealer network.

Our focus on efficiency also paid dividends as we ended the quarter with lower than anticipated turbulence cost and operating expenses. These elements combined with stronger than expected revenue growth allowed us to offset inefficiencies on the marine side to deliver results slightly ahead of plan.

Our revenues for the quarter were up 14% versus last year, ending at $2.8 billion. We generated $698 million of gross profit, representing a margin of 25.1%, up 40 basis points from last year primarily driven by the favorable impact of pricing net of cost inflation and lower turbulence costs as we operated in a more normal production environment. These benefits were partly offset by inefficiencies related to the marine business, increase in sales programs which remain below pre-COVID levels, higher interest rate on floor plan financing, and unfavorable foreign exchange rate variations which impacted margins by 180 basis points in the quarter.

Continuing down the P&L, we generated normalized EBITDA for the quarter of $473 million, representing a margin of 17%. Our normalized net income reached $255 million, resulting in a normalized earnings per share of $3.21, up 9% versus last year. Our free cash flow generation was also strong at $387 million, driven by a strong operational performance and positive working capital contribution.

With a healthy balance sheet and the expectation for future cash generation in the back half of the year, we are well positioned to continue investing in growth projects for the business while retaining the financial flexibility to continue returning capital to shareholders.

Moving to Slide 15 for an update on dealer inventory, our network inventory is in a good position, striking the right balance between having sufficient product availability all while operating more efficiently with a lower number of days of inventory compared to historical levels. In fact, our network inventory is only up 24% versus pre-COVID while our retail volumes have grown 49% over that period, driven by industry growth, the addition of a new product line, the Sea-Doo Switch, and more importantly significant market share gains. We still have opportunities to further improve availability on ORV while continuing to work through the remaining inventory for summer product as the season is winding down. Looking ahead, we will continue to diligently manage our network inventory to ensure that we are well positioned to seize retail opportunities while continuing to operate more efficiently to limit the cost of inventory for both us and our dealers.

Turning to Slide 16 for an update on our guidance, we are entering the second half of the year in a strong position, having delivered strong financial results and retail performance in H1. With just five months remaining in the fiscal year, we are well positioned to deliver on our guidance, which calls for a solid year for year-round and seasonal products as our line-ups are driving consumer demand, and the positive response to our recent product launches reinforces our confidence and ability to sustain our market share momentum in H2.

The competitive and promotional environments remain in line with our initial expectations and we now have better visibility into our shipment plans thanks to a strong booking of pre-sold units in snowmobile and as we will be filling initial dealer orders for multiple new products we just introduced. As such, we are comfortable re-affirming our year-round and seasonal product revenue guidance ranges.

As for power sports, PA&A and OEM engines, we are adjusting our guidance to reflect softer trends in accessory orders as dealers are working through more elevated levels of inventory in the network. Similarly for marine, we are revising our guidance to incorporate our decision to realign our shipment plans for the year to focus on positioning the business for a solid season ’24. Following these adjustments, we expect our revenues to grow between 7% and 10% for the year.

Continuing down the P&L, since our last guidance, the supply chain environment continued to improve; consequently, we now anticipate incurring less turbulence cost than initially projected. This adjustment and an improved product mix translates into an additional 50 basis point improvement in our gross profit margin for the year. Combined with our better than expected Q2 results, this margin benefit offsets the impact of lower than anticipated shipments for PA&A and marine, therefore we are re-affirming our normalized EBITDA guidance with a solid growth of up 9% to 13%.

This, when coupled with the benefit of a lower share count resulting from the buybacks we have completed at this point, yields a normalized EPS guidance of $12.35 to $12.85. Additionally, within the context of our realigned marine plan for the year, we have decided to postpone our boat capacity expansion in Mexico by 12 months. This strategic decision combined with timing of investments in other projects allows us to reduce our capex guidance by $100 million, now ranging from $650 million to $700 million. This capex reduction is expected to further reinforce our already robust free cash flow generation for the year....

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