BRP Inc.

Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY22 third quarter results conference call. For participants who are using 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 Deschenes. Please go ahead, Mr. Deschenes.

Thank you, Julie. Good morning and welcome to BRP's conference call for the third quarter of fiscal year 22. Joining me this morning are Josee Bourgelis, 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 risk 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 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 Josee. Thank you, Philippe. Good morning, everyone, and thank you for joining us. Please turn to slide four. In the third quarter, our team once again demonstrated its ability to successfully operate in a tough environment. Their strong execution on multiple fronts over the past nine months positioned as well to deliver on our guidance for the year. During the quarter, consumer demand remained at an all-time high across all product lines. Our recent product introduction, notably the Sea-Doo Switch, were very well received by consumers and the media. As a result, we registered record high pre-season consumer certificates for Sea-Doo personal aircraft and pontoon and pre-sold units for Can-Am off-road vehicles. Furthermore, we continue to gain market share in the transport industry. Although our low network inventory and global supply chain disruption limited our ability to grow retail, we continue to outpace the industry in North America, EMEA, and Asia Pacific. This is a testament to our strong brand and the dedication of our team. While we were impacted by supply chain pressure, the third quarter was marked by continued solid execution across the organization. As we expected, the availability of certain components was tighter in the quarter, which limited our wholesale and resulted in a higher level of units awaiting missing components. However, the situation has been improving over recent weeks. We also continue to execute on our key projects. Our new product development initiatives are on plan, and the ramp-up of our production capacity at URAS III and Querétaro is on schedule. That said, we've delivered better than expected profitability in Q3, driven by a higher product mix and tighter management of expenses. Given this performance and our ongoing initiative to mitigate supply chain issue, we are raising the lower end of our normalized diluted EPS guidance by 75 cents, narrowing the range between $9 and $9.75 per share. This represents a growth rate of 67% to 81% over last year. Let's turn to slide five for the key financial highlight of the third quarter. As expected, revenue were down 5% to $1.6 billion, primarily due to the supply chain constraint. However, our profitability was stronger than expected. Normalized EBITDA and normalized diluted earnings per share stood at $252 million and $1.48 per share, respectively down about 30% year-over-year. Turning to slide 6, as you can observe, Key financial metrics for Q3 year-to-date are all up significantly. Revenue are up 28%, normalized EBITDA is up 52%, and normalized diluted earnings per share almost doubled to $6.93 per share. These are all record results. In fact, our normalized EBITDA and normalized EPS on a year-to-date basis are higher than any single full year in BRP history. As a result, we are confident to achieve our annual guidance and deliver another record year in fiscal year 22. Turning to slide 7 for a look at our retail performance for the quarter. Our network inventory remained at very low levels. Therefore, our retail sales were roughly equal to our shipment of products. Overall, while our North American passport retail sales were down 12% in the quarter, When excluding snowmobile, we still outpaced the industry, which was down low 20%. When compared to pre-COVID levels, retail sales were actually up 1%. We're able to achieve this despite operating with very low level of inventory in the network. We expect retail to start to grow and improve in Q4, driven by the timing of snowmobile shipment, and the additional production capacity from UAS3 and Capitaro. Looking at the global retail picture on slide 8. Overall, we outpaced the transport industry in all key regions, including North America, EMEA and Asia Pacific. In North America, specifically, when compared to the industry, we did well with the side-by-side vehicle, ATVs and personal watercraft product lines. However, we're slightly below the industry in three-wheel vehicle and snowmobile because of the timing of shipment due to the shortage of components. Turning to consumer demand on slide 9. While our retail growth in the quarter was limited by product availability, we continue to see very strong consumer demand for product. We continue to attract a high level of new entrants with an estimated 36% year-to-date well above the historical average of about 20%. Website visits remain high and well above pre-COVID levels. For example, our Can-Am Off-Road website saw close to 60% more visits in October 2021 than the same period two years ago. The momentum with pre-season consumer certificates for personal aircraft is excellent. As of last Friday, we already had four times the number of certificates versus what we had last year. And recall that we had a record level of pre-season certificates last season. And the launch of ORV pre-orders has been very well received. We've launched it in November 8th, and customers' orders are already trending above target. So all in all, consumer demand remains very strong and does not show signs of slowing down in near term. Turning to slide 10 for an update on Sea-Doo Switch. Another key highlight of the quarter was the very successful launch of the Sea-Doo Switch. Media review and consumer response to our new product were well above our expectation. The launch represents the strongest reach ever for BRP products. It generated over 2.3 billion impressions and over 3 million website visits in the first 30 days. Also, SWITCH has an exceptional pre-season consumer certificate three times higher than we were expecting. Production is planned to start in the later part of the fourth quarter, with deliveries expected to be for the next boating season. We are very pleased with the great start we are experiencing with Switch. We truly believe it will be a game changer for the boating world. Now let's turn to slide 11 for year-round product. Revenue were down 8% to $736 million, mainly due to lower product shipment caused by supply chain constraint, and were partially offset by a favorable product mix and increased pricing for side-by-side and ETV. Few-wheel vehicles were most impacted by lower volume as we prioritized the allocation of components to product lines that were in the retail season. Now looking at side-by-side North American retail. In the third quarter, retail was down mid-20% in line with the industry, despite having lost units in the fire at our UAS2 facility at the end of July. Excluding the impact of the fire, we estimate that our retail would have improved by high 10% for the quarter and would have outpaced the industry. Still, Can-Am side-by-side is very well positioned to grow in the coming years. Consumer demand for our lineup remains strong, our new products are very well received, and we continue ramping up production at our UIS3 facility. Given the strong demand for side-by-side vehicles and our ongoing market share gain, we have decided to start the Phase 2 expansion at our UIS3 facility, which will effectively double production capacity at that facility. Construction is expected to start at the beginning of the calendar year, and the production ramp-up is forecast to start in the first quarter of fiscal year 24. Turning to ATV. For the quarter, Can-Am North American retail was down high single-digit percent, while the industry was down mid-20%. Our Can-Am ETV lineup continued to gain momentum with market share gain in the high CC category. Turning to three-wheel vehicle, the North American three-wheel vehicle industry completed its season 21 in October with retail up close 20%. Our Can-Am three-wheel vehicle retail was up mid-20% over the same period, gaining share in both the three-wheel vehicle and two-wheel motorcycle industry and ending the season with the number one market position in three-wheel and fifth in the motorcycle industry. We had impressive results even if we missed inventory in the back end of the quarter, which impacted our retail. Turning to slide 12 for an update on three-wheel vehicles season 21. It was another very good season for three-wheel. Not only did we gain market share, we made progress on our key priorities. We continue to generate strong momentum with the rider education program. The total number of riding courses completed since the launch of the program is now up to 44,000. The Rikers continue to attract a younger and more diverse consumer base. In fact, 55% of consumers are new entrants. Over 38% are women, a key buyer group. 70% are under the age of 55, and about half are from diverse communities. Moreover, the women of on-road community that we initiated last year has been very successful, now contains close to 12,000 members. All of these initiatives have helped us grow the three-wheel vehicle market. In fact, we tripled our annual retail sales in North America since the Riker introduction in season 2018. We are confident in our ability to continue to grow in the coming season. Turning to seasonal product on slide 13. Seasonal product revenue were down 14% to $437 million, mainly due to lower product shipment caused by supply chain constraints and were partially upset by a richer mix of personal watercraft and favorable pricing. Now looking at personal watercraft retail. For the quarter, North American retail was up high 80%, while the industry was up mid-70%, as SEDU continued to gain market share. The North American industry ended its season 21 on September 30th, with retail up mid-single digit. SEDU retail was up high 10% over the same period, ending the season with the number one market position in all segments in the industry, and achieving its highest market share ever. Once again, we ended the season with a very low level of network inventory, down 70% in comparison to the same period last year. In Australia and New Zealand, early in the season, SEDU is off to a good start with rated up over 90%. With low level of inventory and strong pre-season consumer certificate, We are experiencing another very strong year for personal watercraft business. Looking at snowmobile, while it is currently still early in the season, during the quarter, the North American retail industry was down mid-40%, and our snowmobile sales were also down high 40%. This is mainly due to low product availability given we prioritized the allocation of components to product lines that were in season during the quarter. Looking ahead, our retail is rapidly improving as we are now focused on the completion of snowmobiles that were awaiting missing components. Given this prioritization combined with a record level of units pre-sold to consumer, we are confident in our ability to deliver a strong fourth quarter. Continuing on slide 14 with a look at transport, parts, accessories and apparel, and OEM engine. Revenue were up 9% to $284 million for the quarter. This growth is driven by a higher volume of replacement parts due to the increased product usage combined with strong unit retail which generated increased accessory sales. Our strategy to develop accessories in parallel to vehicle continued to pay off and the Sea-Doo switch is another great example. With this strong success, we are well on our way to achieve our fiscal year 2022 revenue guidance which forecast to surpass the billion-dollar mark for the first time. Now looking to Marine on slide 15. Revenue were up 26% to $131 million, driven by a higher volume of both sold and lower sales program. Looking at retail sales, for the quarter, both Allumacraf and Manitou saw a retail decline as sales were made earlier in the season compared to last year. However, year-to-date, both brands perform well. Alumacalaf was down high single digit due to low level of inventory, and Manitou was up about 10%. This said, both brands finished the boating season in North America with low inventory. As for Tailwater, we are approaching the upcoming boating season in Australia, and retail is up high single digit for the year-to-date. We are pleased with the progress we have made in our marine business and are looking forward to launching new boats with the Ghost engine in each of the three brands in the second half of 2022. With that, I turn the call over to Sebastien.

Thank you, Josee, and good morning, everyone. As previously anticipated, we managed through supply chain issues throughout the third quarter, which impacted our wholesale and retail. However, the strong demand for our premium models and the continued tight management of our expenses allowed us to deliver better than expected profitability. Looking at the numbers, we generated $411 million of gross profit, representing a margin of 25.9%, and delivered $252 million of normalized dividends. Our normalized income came in at $128 million, down $71 million from Q3 last year due to lower volume of unit delivery, higher production and distribution costs, and a slight increase in operating expenses, which were partly offset by better mix, lower financing costs and tax expense, as well as favorable FX impact. This resulted in a normalized earnings per share of $1.48 coming ahead of expectations. From a cash flow perspective, we had negative pre-cash flow in the quarter as we continued investing in the business, notably with $136 million in capex to support our growth project and $485 million in working capital, given that we continued operating with a higher level of work and process inventory as we are managing through the supply chain constraints. Moving to our network inventory situation on slide 18. Year over year, our network inventory is down 44%, with all product lines seeing declines, despite lapping a very low level of inventory at this time last year. When looking versus Q2, our inventory is slightly up, driven by snowmobile shipments ahead of the winter season. As you know, in order to deliver on our commitment of fulfilling all dealer orders in the context of supply chain constraints, We are shipping incomplete units to dealers for which the retrofit is simple and rapid. This approach brings the product closer to the final consumer and should lead to timelier retail once the final components are received by the dealers. These incomplete units are excluded from our reported network inventory until we ship the required components. If we were to include these units on our network inventory, our inventory level would be down only 14% year-over-year instead of the 44% decline we reported, and therefore positioning us well to deliver on our wholesale and retail plan in Q4 as we accelerate the shipment of components to our dealers. and looking ahead, we still have a significant inventory replenishment opportunity representing roughly the equivalent of a full quarter of wholesale to get back to more normalized levels, a sizable growth driver for the quarters to come. Now moving on to the updated guidance, starting with a bit of context on slide 19. With just a couple of months to go in fiscal 22, we now have better visibility on our production for the rest of the year. While we expect to continue operating through a tight supply chain environment, the actions we took throughout the year to adapt our processes to this new reality are paying off, making the situation more manageable and allowing us to deliver increased volume in the fourth quarter. Looking at revenues, we have adjusted our year-round product guidance to reflect the impact of supply chain constraints on wholesale and the timing in three-wheel production, which is now concentrated more in fiscal 23 Q1, as we prioritize production capacity and components availability for snowmobiles in Q4. We have also adjusted upward the lower end of the guidance ranges for other product categories to reflect the increased visibility we have on our expected production output for the year. With these volume adjustments, we are increasing the lower end of our profitability metrics to reflect the expectations for a continued favorable product mix and lower than previously anticipated operating expenses. Our guidance also accounts for increased commodity and logistics costs, which are expected to be offset by improved pricing and lower sales programs. Finally, we are also increasing our capex guidance to a range of 705 to 730 million to reflect the opportunistic acquisition of the Juarez II and Querétaro facilities, which we were leasing until now. This transaction is expected to close in the coming months. Looking at the numbers on slide 20, with these adjustments, we now expect our total company revenue to grow between 25 and 30%, our normalized EBITDA to grow between 38 and 47%, and our normalized DPS is now expected to end between $9 and $9.75, representing a growth of 67% to 81%. While we are comfortable with our plan for the year, we expect to continue operating in a tight supply chain environment, which may lead to variability in the timing of reception of components from suppliers and in turn may impact our production and shipment schedules. Given this situation, we are operating with lower visibility than we usually do, and this is why we have kept a wider than usual guidance range for this time of the year. Still, we are confident in our ability to achieve our guidance, and given our expectation for a strong fourth quarter and continued stalling growth in fiscal 23, the Board of Directors has approved the launch of the normal courses through our bid, under which we will be allowed to repurchase up to 3.8 million shares over the next 12 months. On that, I turn the call over to Josee.