BRP Inc.

Good morning, ladies and gentlemen, and welcome to the BRP Inc.' 's FY24 fourth 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 Deschaines. Please go ahead, Mr. Deschaines.

Thank you. Good morning, and welcome to BRP's conference call for the fourth quarter of fiscal year 24th. Joining me this morning are Joseph Boisselis, 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. The forward-looking information is based on certain assumptions and is subject to risk and uncertainties, and I invite you to consult DRPs and DNA 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. So with that, I'll turn the call over to Jose.

Thank you, Philipp. Good morning, everyone, and thank you for joining us. Fiscal 24 was marked by sudden market share gain, successful product launches, and continued progress on our key strategic initiative. From a financial perspective, the year was more challenging than expected due to macroeconomic environment. We adapted to the situation, and as you know, we have proactively reduced our shipment to dealers. Despite unfavorable winter condition, which impacted our snow-related business, we've delivered ETS within our guidance range. Let's turn to slide four for key financial highlight for the year. Revenue increased 3% to reach $10.4 billion, a record high for BRP. Normalized EBITDA was stable at 1.7 billion, and normalized EPS was down 8% at $11.11. Our focus on cash management payoff as we've delivered a record free cash flow of more than $1 billion for the year. As for retail, our North American power sports sales were up 8% for the year compared to an industry of about 1%. The strong power sport retail performance further strengthened our position as the number one OEM in the industry, as you can see on slide five. With this additional growth in fiscal 24, our retail now stands 35% higher than pre-COVID level in an industry that has been flat. We added another 2% point of market share for the year with gain across almost all product lines. We have continued expanding our leadership position as the number one OEM in power support and the only one refilling more units per dealer than during COVID. Our success comes from our ability to constantly innovate by bringing new products to market that drive consumer demand, and we are well positioned to sustain our momentum going forward. Turning to slide six for a closer look at our retail performance in the fourth quarter. Our North American power sport retail was down 10%. as we were facing a tough compatible due to late shipment and retail of three-wheeled vehicle, personal watercraft, and Sea-Doo pontoon in Q4 last year. And yet, this year fourth quarter was our second strongest ever, even surpassing the COVID year, during which we had significantly depleted network inventory. Our performance was also impacted by unfavorable winter conditions, which led to a snowmobile decline in the high teens. Excluding snowmobiles, our retail for the quarter was down only 2%. Still, despite a more challenging dynamic in Q4, we are satisfied with our performance for the year. When excluding snowmobiles, our retail was up 12% compared to the industry, up low single digits. driven by a very strong performance in off-road vehicles and personal watercraft, and market share gained across most product lines. Turning to slide seven for an update on global retail trend. As mentioned last quarter, we started to see gradual signs that the macroeconomic environment was affecting our industry, leading to softer market conditions, especially in EME and Asia-Pacific. The fourth quarter played essentially in line with this view, as we saw softer demand in EME and Asia-Pacific, which retailed down 5 and 25% respectively. However, we had an excellent performance in Latin America, driven by the Brazilian and Mexican markets. Given these trends, we maintain a cautious approach entering fiscal year 25. Our priority is to tightly manage network inventory to protect dealer profitability. Now let's turn to slide eight for year-round product. Revenue were up 9%, reaching $1.4 billion in Q4, primarily driven by a favorable product mix and a return to normal shipment pattern for three-wheel vehicles. At retail, Can-Am side-by-side had its strongest Q4 ever, being up low 20%, firmly driven by solid growth in the utility category. Our performance is even more impressive as the first shipment of the new Mavic R occurred late in the season. This brand new platform already made its mark by winning the King of the Hammer race in California, two months ago, which would further stimulate consumer interest. This strong quarter concludes another exceptional year for our side-by-side business, where we grew retail at a high team percentage base and gained significant market share, especially in the utility segment. Our share reached 30%, achieving this objective a year earlier than our five-year plan. As for ATV, our retail was down low single digit as we lapping a very strong Q4 last year. That said, we are pleased with the success of our new outlander platform, which gained four points of market in the mid-CC segment. For the year, we gained almost two points, surpassing the 20% mark for the first time ever and getting closer to the number two position in the industry. Looking at three-wheel vehicles, we are in the off-season and Can-Am three-wheel retail was down high 20%. The decline is firmly due to lapping an unusually strong quarter of retail last year as we shipped units later than normal in the season. Still, given the interest of new entrants for the category, our strong lineup and enhancement to our Spider F3 and RT models, we are well positioned to have a successful season. Turning to seasonal products on slide nine. Revenue were down 28% from last year to about $950 million, driven by a lower volume of products sold, resulting from a different timing of shipment compared to last year. Looking at our retail performance, for personal watercraft, this was peak retail season in counter-seasonal market, and Sea-Doo saw retail decline of mid-single digit in Australia due to market weakness. This was partially offset by impressive growth in the low 30% in Latin America, notably driven by the Brazil market. As for North America, we are in the off-season and retail was down, probably due to a difficult compatible given late unit shipment last year. However, From a historical perspective, retail is performing well, up double digit from typical fourth quarter pre-COVID level. This trend also continued in February, which gave us confidence for the upcoming summer season. Looking at snowmobile, as previously mentioned, fourth quarter retail was impacted by unfavorable winter conditions in North America, leading to decline in the high tin percentage range. I have been in the business for a long time and saw several challenging seasons, but it's the first time that I see such difficult conditions across North America. That said, looking at historical trends, we know that the snowmobile industry is very resilient and typically bounces back following weaker seasons. We have a loyal and passionate customer base. Our Skido and Lynx brands are very strong and continue to outperform the industry with retail down low single digit for the season. Reflecting our commitment to bring innovation to market, we are strengthening our offering for model year 25 by introducing new features and technologies across the lineup. Furthermore, we have launched two new Ski-Doo and Lynx electric models designed for multi-use application, such as ski center and recreational resort. These model will also be available to consumers. With the strength of our lineup and recent addition, we expect to remain the number one industry player. Moving on to slide 10 with power support parts, accessories and apparel and OEM engine. Revenue were down 23% to $291 million due to lower product shipments to reduce network inventory level and lower demand for snow-related replacement parts. Moving on to marine, revenue were down 32% to $84 million due to lower volume of boat shipments as dealers continue to be cautious about taking on inventory given weaker demand trends. Looking at retail sales, we are in the off-season in North America, and Allumacraft retail was down about 20%, while Manitou retail was about flat. As for Quintrex, retail was down about 10% in line with the industry. Looking ahead, with software demand in the boating sector, we are seeing more promotion across the industry. For this reason, we decided to be more conservative with our plan for fiscal year 25 in order to manage network inventory and preserve the value of our newly introduced boat. As such, we expect marine revenue to remain above flat for the year. We are pleased with the consumer reception of the new Manitou boat and remain confident about the potential of our marine business for the coming years. With that, I turn the call over to Sebastien.

Thank you, José, and good morning, everyone. Our fourth quarter played out in a difficult context marked by unfavorable winter, which impacted our snow-related products and softening consumer demand in international markets. Still, through it all, the team executed well to tightly manage shipments and network inventory levels, sustained solid market share gains in side-by-side, and delivered bottom-line results that ended within our guidance range. Looking at the numbers, revenue stood $2.7 billion, representing a decrease of 12%, primarily due to lower shipments and higher sales program, notably as adverse winter conditions affected our snow-related business and led to higher levels of promotion. We generated $653 million of gross profit, with a margin of 24.3%, down 130 basis points from last year. This decline was primarily due to lower shipment volumes and higher sales program, partly offset by a richer mix of products, favorable pricing, and improved production costs. Moving further down the P&L, we generated normalized EBITDA for the quarter of $405 million and normalized earnings per share of $2.46. For the year, we delivered normalized EBITDA of $1.7 billion, roughly flat the last year, and normalized earnings per share of $11.11, a decline of 8% from fiscal 23, resulting from higher depreciation and financing costs. Success in our industry comes from innovation, solid cash generation, and diligent allocation of capital, and we strongly believe this is a core strength of BRP. In that vein, as you can see on slide 13, fiscal 24 was our strongest year ever, with over a billion dollars of free cash flow generation, representing a solid conversion ratio of over 60%. Furthermore, we continue to prioritize investments in the business by deploying over $580 million in CapEx. These investments primarily focus on high return growth projects aimed at sustaining our market share growth momentum and expanding our addressable markets. Our solid ROIC of 30% for the year reflects our unique ability to innovate and deliver industry-leading results on projects. Given our solid cash generation, we also returned over $500 million to our shareholders to a 13% increase in the dividend and by capitalizing on the dislocation in the value of our stock to repurchase about 6% of the shares outstanding. As our business is geared to generate solid free cash flow, we remain well positioned to continue investing in the business, all the while sustaining strong returns of capital to our shareholders. Moving to an overview of our network inventory on slide 14. Our dealer's inventory for the fourth quarter was up 36% from last year and up 30% from pre-COVID levels. As we mentioned last quarter, despite that we diligently improved our inventory returns over the years, our dealers are currently facing elevated inventory financing costs due to the increased dollar value of units and higher interest rates. To protect our dealer value proposition, we have decided to support them by aiming to reduce our network inventory levels by 10% to 15% this year. While there are opportunities for improvements across all product lines, the more pronounced decreases are expected to come from seasonal products and three-wheel as they end the respective seasons with higher levels of inventory than initially planned. From a cadence perspective, Q1 network inventory is expected to remain high than last year as it comps overall leaner inventory levels and will be impacted by snowmobile given weather-induced software retail trends. From there, we expect a gradual improvement until year-end. Now moving to the guidance for fiscal 25 on slide 15. We are entering fiscal 25 with a solid lineup and an exciting pipeline of product introductions that are positioning us well to sustain our market share momentum in our RV and maintain our leadership position in seasonal products. From an operational standpoint, our manufacturing sites are running smoothly, the supply chain environment has normalized, and we expect to continue benefiting from our lean initiatives and the expansion of our modular design across our lineup. From a financial standpoint, our guidance essentially incorporates the global trends that have developed during the second half of fiscal 24 and that we have shared with you during our last earnings call, notably softer consumer demand in certain international markets, weaker industry trends in marine, limiting dealers' appetite to take on inventory in a more elevated promotional environment. As previously mentioned, in this context, and in order to perfect our dealer value proposition, we have decided to adopt a more cautious stance in our planning to reduce our shipments in fiscal 25. Additionally, given the impact of unfavorable winter on our snowmobile retail, we are planning to reduce our snowmobile production by about 30% for next season. Accounting for all these elements, we expect our revenues for the year to be down from last year and end between $9.1 and $9.5 billion. In terms of profitability, we expect the headwinds from the reduction in volume to be partly offset by our richer product mix, favorable net pricing, and the aforementioned benefits of our cost improvement initiatives. Furthermore, we are taking the necessary actions to right-size our operating structure in line with the expected revenue generation, limiting the pressure on our margin profile. As a result, we expect our normalized EBITDA to end between $1.37 billion to $1.47 billion. and our normalized diluted earnings per share to end between 7.25 and 8.25, including a headwind of about 90 cents coming from higher depreciation and financing costs, as well as a higher tax rate. Note that we are providing a wider than usual guidance range to account for the more than uncertain market environment, both in terms of consumer demand and promotional intensity, especially in the context of our aim of reducing network inventory levels. From a cash perspective, based on the above and following a prioritization exercise of our project portfolio, which led to CapEx optimization, we expect to generate in excess of $750 million of free cash flow for next year. As such, we expect to have the financial flexibility to continue providing strong return of capital to shareholders, notably as we have announced a 17% increase of our dividend for fiscal 25. To conclude, we have provided a summary of the key drivers bridging our fiscal 24 results to the midpoint of our fiscal 25 guidance. As you can see, most of the client earnings is expected to come from volume in the mix as a result of our objective of improving network inventory return, driving a net negative impact of $2.50, and from a reduction in the shipments of snow-related products following a difficult season, representing an impact of $1.25. Note that we expect most of the net reduction in volume and consequently most of the decline in normalized dividends to happen in the first half of the year with Q1 normalized dividends down 35%. While fiscal 25 is expected to be a transition year from a financial standpoint, at the midpoint of the guidance range, our normalized diluted APS is expected to end above our original M25 target that we had launched in the fall of 2019 of $7.50. Additionally, fiscal 25 is planned to be another year of exciting product introductions and continued progress and efficiency gains throughout the business. We strongly believe that the actions we are taking will position BRP for continued long-term success. And on that, I will turn the call over to Jose.

Thank you, Sebastian. While market conditions have softened in the second half of fiscal 24, we were proactive and quickly adapted to the new reality. As mentioned in November, we have reduced our production volume in order to lower network inventory. And now, in light of our Q4 results, we are adjusting snowmobile production for next year and taking a more cautious approach for marine. We are known to be agile, and we never hesitate to reprioritize our investment to find the right balance between the short-, mid-, and long-term growth perspective. Looking at our EV plan, we have just launched two new electric snowmobile model, and we are looking forward to the upcoming launch of the Can-Am electric motorcycle at our dealer event in August. We remain committed to electrifying our product lines, but we have decided to delay some of our EV introduction and will provide an update in due time. In closing, I remain confident in our future What we have in the pipeline is very exciting. As you know, the best part of my job is riding our product. I was at our test center in Florida two weeks ago and had the chance to try many future off-road personal watercraft and boat products, including some of our electric models. Again, I'm very impressed with the ability of our design and engineering team to come up with market-shaping products and I look forward to introducing them to consumers. Innovation is at the core of our DNA and will continue to position the company for long-term success by pushing the boundaries of technology. Our diversified product portfolio is a significant advantage, while our agile manufacturing network allows us to respond quickly to evolving market conditions and still generate solid profitability. I want to thank our strong and resilient team for their hard work and dedication throughout the year. I also acknowledge our dealers for their support in making us the number one OEM in the industry, and we will continue to work in collaboration with them to further expand our leading position. On that note, I turn the call over to the operator for questions.

Thank you Sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touchstone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, you will need to lift the handset first before pressing any keys. And out of consideration to other callers on the line today, we ask that you please limit yourself to one question. Thank you. And your first question will be from Shabbat Khan at RBC Capital Markets. Please go ahead.

Great. Thanks, and good morning. I guess I think, Joseph, you made a comment about sort of managing the business for short, medium, and long run. You know, we obviously have the guidance here for the upcoming 12 months, but a lot of the questions we've been getting have been around kind of the medium-term outlook for BRP and the industry. Can you maybe... help us think through how you view call it calendar 25 playing out and just your view of how the industry evolves beyond this year. And, you know, maybe address some of the questions that people have had around, you know, how are the current year sales and earnings compared to what might be the new run rate for the company? So maybe just some perspective on the, your forward-looking views of VRP and the industry. Yeah.

Good morning. Then again, Just to give you a sense about the trend, the retail trend in February and March so far, and I will give you the number in North America without snowmobile. Then retail is up mid-single digits. Very good growth still in ORV. Treewheel is doing well. Watercraft and Switch is down, but we know it's slapping abnormal quarter last year. And just to give you a sense of our retail momentum in the beginning of the year, our retail is about 50% above pre-COVID level. Then very happy with the retail trend. This is for North America. International, basically no change. Soft in EME in APAC and very strong in LATAM. Then this is the trend so far in February, March. And as you remember, In 24 overall, the North America industry was resilient with ORV in North America. We saw softer international and marine overall is softer. Then for fiscal year 25, we're planning this overall trend to continue. Then we're planning North America to be down low single digit, positive momentum for ORV and three-wheel. We will outperform slow mobile, obviously. watercraft and marine. And at international, we lagging North America. Then basically we continue the trend that we saw in Q4 and what we see in February, March is continuing for the remaining of fiscal year 25 with downward of down low single digit in North America. Now, that being said, We have gained significant market share in the last few years, and our goal is still to continue to gain market share in the ORB business and maintain our solid leadership position on snowmobile and watercraft and continue to enter a new market segment. That's overall what I would say for retail trends.

Yeah, maybe it's still early to call out what fiscal year 26 could be. Obviously, as Josie said, we've got great momentum, and we've had peak retail for Q4 and side-by-side, and so that obviously is exciting. But for me, fiscal 25 is a correction year, and if you look at slide 16 that we have in the And the decks that we shared with you today, I mean, there's two elements that are, for me, are one-time elements that are hurting fiscal year 25, which is the adjustment of inventory for $2.50 and also the impact of snowmobiles. So obviously we're disappointed with the guidance that we have. We'd like to come up with a higher guidance. And if you take the midpoint of the range of $7.75, If you add these two one-time items, for me, fiscal 25 is almost more an 1150 year than a 775. We're doing what's right for the business, what's right for the industry, what's right for the dealers. But obviously, in the midterm, we anticipate that we will be producing results significantly higher than what we've announced today. Great.

Thanks so much for that.

Thank you. Next question will be from James Hardiman at Citi. Please go ahead.

Hey, good morning. I really like sort of the layout of that slide 16. I think it tells us a lot, so maybe using that. You know, three months ago, you guys gave us your initial view on fiscal 25, and I think most people landed on about a $9 earnings per share number. Is it as simple as to say that since then that $1.25 is really what's incremental in terms of the impact from the snowmobile-related products? And then, you know, you talked about that $2.50 also being one-timish. Is the entirety of that just inventory drawdown, or wouldn't there also be some sort of market-related, you know, demand weakness that ultimately gets worked into that 250 number as well. Just trying to make sure I understand how I should think about more of a normalized earnings number in a year where there isn't significant inventory drawdown. Thanks. Yeah.

Well, on your first question, yes, you're correct. What's changed versus when we talked last November is the snow season. And so that's the added headwind that we're seeing of $1.25. So it I would say 25, aside from Snowmobile, is in line with what our views that we had a few months ago. And obviously, in the 250, there's a combination of inventory, which is a big one. It makes us favorable. That's going to help. Obviously, market share gains as well. But the bulk of the 250 is us being proactive in managing network inventory and protecting the DVP.

Maybe we'd like to add, when we had the call in November, we were ahead of our planning for the snowmobile retail, and the momentum was good until Christmas time, and really the retail fell off mid-January about, and it never really catch up. And this is the main reason of our adjustment.

Got it. That's really helpful. Thanks, guys.

Thank you. Next question will be from Martin Landry at FIFO. Please go ahead.

Hi. Good morning, guys. I would like to touch on the snowmobile inventory in the channel. What's the retail increase in inventory for snowmobile year over year, and how long do you think it's going to take to flush out this excess inventory?

Good morning, Martin. Just maybe to give you some highlights on the snowmobile season. You know, if you look at the data of the last 15 years, basically we saw a few bad winters in those 15 years. We estimate about three bad winters. And what is interesting is the snowmobile is very resilient. Customers are passionate about it. They accept now to trailer more to go to find snow. And Canada is about stable, maybe less retail in the east, but more in the west. United States is slightly down, but if you look at the snowmobile business over the last 15 years, it's very between 95,000 units and 105,000 units per year. In Scandinavia, in Europe, And in Europe, and Europe is mainly commercial, it's about stable in the last 20 years at about 20,000 units. Then the point is, after a bad year, the industry typically remains quite stable because there is a lot of non-current into the pipeline, and there is customers that are happy to buy a new snowmobile at a discount. Then it's sad to have this... It didn't affect us on the wholesale, but obviously affected our sales program and our parts and accessories and apparel. But we are confident that next year the industry will remain quite stable.

Okay.

Thank you. Thank you.

And next question will be from Joseph Altabello at Raymond James. Please go ahead.

Good morning. This is Martin on for Joe. Quick question about the revenue behind your guidance. It's a little bit steeper than you implied three months ago. Was that primarily the snowmobiles? And can you remind us of how big as a set of sales is your snowmobile business?

Well, yes, you're right. When we look at the seasonal products business, obviously impacted by snowmobile. The impact of the production adjustment that we're doing, the 30% that we talked, is going to be about a $350 million impact on our top line next year. When you look at the other elements of the guidance, where we missed the P&A business was off guidance. That's driven by the softer snow season where we sold less accessories, less parts as well because people were riding less. And oddly enough as well, we sold less winter accessories for our ORV business, such as track kits and plows that go in front of the ORV. In the other business where we missed the guidance was the marine business where we are still seeing softness in the marine market, as we've seen in the last, say, 12 months. And dealers finish the season with more inventory, and therefore they are more hesitant, especially early in the season, to take on additional inventory. And so that's why the volume impact resulted in a shortfall on the guidance.

Got it. Thank you.

Thank you. Next question will be from Robin Farley at UBS.

Please go ahead. Great. Thank you. Just circling back to your inventory goals, you mentioned you want to reduce it by 10% to 15%. It sounds like that was mostly in the zero and three wheel. I don't know if you clarified what you hope to do with side-by-side and ATV dealer inventory. And then also on the retail side, just specifically for the side-by-side and ATV what assumption are you working on for kind of industry retail as you're trying to manage whatever inventory target you're about to tell us for ORV? Thank you.

Well, the bulk of the decrease in the inventory is going to come from seasonal business, so personal watercraft, sea-dew pontoon, and also snowmobile. We will also be making greater adjustments on three-wheel, And on the ORV side, obviously, we have a very good momentum on ORV. As you saw, our retail performance in the fourth quarter was quite amazing. And so, yes, we will adjust the inventory downward, but not as meaningful. It will be probably in the low single-digit adjustments for ORV. In terms of industry, Josée gave a bit of color as well. The industry is in good shape for side-by-side. Obviously, there's been a lot of product innovation, and that's driving good retail. But we are expecting a softer industry this year than we had. But obviously, market share gains will compensate, and we expect retail to be up for side-by-side this year.

So you're saying industry ORV retail has been good so far in the year, but you expect the full year to come in down year over year?

To be a softer than what we had in the last year, yes.

Okay. Thank you very much. Thanks. Thank you. Next question will be from Cameron Dirksen at National Bank Financial. Please go ahead.

Yeah, thanks very much, Chip. I guess my question is on capital allocation. So I just want to confirm that you sort of indicated that you expect to generate something like $750 million in free cash flow in the year. So I just want to confirm that number, and assuming that's the case, just wondering about capital deployment decisions here. Obviously, if you've redone your debt – Just thoughts about NCIB, substantial issuer bid. It would seem to me that you would have some excess capital if you do generate 750 million in free cash.

Yeah, for the record, I confirm that I did say 750 this morning. Obviously, we will be generating strong EBITDA capex in the range of 500 million. So obviously, that will allow us to generate solid free cash flow. I'm not expecting... Any headwind or tailwind from working cap, there are still some opportunities, but with the management of the network inventory, we'll probably see a bit more volatility on the working cap, so no tailwind there. But nonetheless, solid cash generation, which allows us to continue providing good returns to shareholders. As we have announced this morning, the dividend is increasing by 17%. And we will certainly be active on the NCIB. That's our intention. We still got over 2 million shares that we can buy under the NCIB. So we obviously want to deploy that capital towards that because we expect a certain dislocation in the share value in the next few quarters. Okay. Thanks very much.

Thank you. Next question will be from Craig Kennison at Baird. Please go ahead.

Hey, good morning. Thanks for taking my question. Seb, I think you mentioned some actions to address your overall cost structure in light of the difficult year ahead. I'm just wondering if you can help us quantify those actions and then maybe where they're targeted, whether it's in cost of goods sold or in your SG&A line.

Good morning, Craig. I will take the question. As you know, we said to the investor over the years that when a slowdown happens, we prefer to be ahead of the game and be very agile to readjust. And like I said in my remark, in my script, I mean, we reprioritize many programs into the company. Then basically we feel that with the softer demand, We're better to be prudent. That being said, I'm very confident that we have everything in line to be able to continue to gain market share in our key product line. But basically, we've done an exercise to reprioritize our project, and that's how we achieve lower OPEX than what was originally planned a few months ago. Thank you.

Thank you. Next question will be from Jean Xu at BNP Paribas. Please go ahead.

Hi, guys. Thanks for the question. Maybe also looking at slide 16, you kind of mentioned pricing, net of sales programs, the 50-cent benefit. I guess, you know, given a kind of more cautious outlook for the consumer, potentially, you know, retail is down, what gives you the confidence on pricing?

Well, obviously the inflation is still part of the business and running the business. And so we're seeing cost inflation happening. So we want to compensate that with some pricing. We will not be as aggressive and we don't need to be as aggressive on pricing as we've been in the past. The inflation is coming down, but every year we do adjust pricing upward. We do expect the promotional environment to be more competitive this year. And so we factored this in the guidance. We factored a – this year we had a headwind of about 200 basis points coming from promotion. We expect another 50 basis points next year. So that's the next pricing and promotion. But again, we're not thinking that the environment is going to be like fiscal 24. We're expecting it more competitive, and there's more non-current inventory in the network that needs to be addressed as well.

Got it. Thanks. And maybe just one quick one, just on gross margin versus SG&A, how are you thinking about, within the guidance, the EBITDA margin? It sounds like it's mostly expense-free leverage. Is that how we should think about it?

There's some expense deleverage planned, but if I look at the lower end of the guidance range, you're probably going to lose 100 basis points of gross margin, probably coming from a bit more promotional and obviously the volume impact. And at the higher end of the guidance range, I'd say gross margin flattish to what we had in fiscal year 24. Great. Thanks.

Thank you. Next question will be from Tristan Thomas Martin at BMO Capital Markets. Please go ahead.

Good morning. A lot of talk about the snow headwinds. Is the potential of maybe a less snow, warmer weather, a narrower start to the season a tailwind for some of your businesses?

I mean, I think obviously we're not experts in weather and it's not our job, but like I said in my answer a few minutes ago, you know, when you look at the snowmobile industry, it's quite stable. And if you look at the last 15 years, there was three bad snow seasons and the industry was quite stable between 95 and 105,000 units in North America. and very flat in Scandinavia and in Europe at about 20,000 units. Then for us, it's a bad winter. Typically, the following year, because of the non-current ratio available for consumer, the industry is quite stable. But it remains that we're happy to be more diversified than 20 years ago because, obviously, we have more product lines. But Snowmobile remained a very good business for us and our dealers, and we'll go to a bad season and we'll bounce back after.

And just to add on Jose's point, and as he mentioned, the beauty of our business is, yes, we are diversified, and so if a product is not going as good, we are seeing an uptick in other products. And anecdotally, we've had some dealers say, you know what, my Snowmobile business has slowed down significantly in February, March. But consumers are walking in and buying ORV product instead. So, yes, we've seen some of that. And, again, the beauty of being diversified. Got it. Thank you.

Thank you. Next question will be from Fred Wickman at Wolf Research. Please go ahead.

Hey, guys, just a quick question on the implied EBITDA margin. I think it looks a little bit lower than what you guys had alluded to last quarter. Is that just a matter of the incremental deleverage from the softer snow and marine performance, or is there something else going on there?

It's mainly related to the volume impact and the revenue decline. So, yeah, the snow impact is having a ripple effect on the overall margin. But nonetheless, we're still When you look at the guidance range, we're still looking to deliver EBITDA margin in the mid-15 percentage points, which is significantly higher than what we had versus pre-COVID. And so it's still very strong performance financially on our side. And we still see opportunities as we get through these one-time elements to continue improving our EBITDA margin down the road.

Okay. And then, Seb, you talked about just from a cadence perspective, a softer first half with a stronger back half of the year. Are you guys assuming rate cuts in that outlook? And can you maybe talk about how quickly you think potential rate cuts could start to either catalyze consumer demand or dealer orders if floor plan rates come down?

We've always said that we're not an economist, so we're not predicting any rate cuts in our guidance. We've assumed the current rates as they are today. If they happen, well, it'll be good news for our dealers, good news for our consumers, and hopefully we'll benefit from it as well with higher wholesale. But currently, no rate cuts.

Great. Thank you.

Thank you. Next question will be from Benoit Poirier at Desjardins. Please go ahead.

Yeah, so good morning. Could you maybe provide more colour on marine, given the impairment charge that was taken and the adjustment Just wondering how much of a drag could it be right now, either in terms of EPS or how diluted would it be in terms of EBITDA? And just trying to gauge kind of the rebound we might see in terms of contribution going forward as you continue to grow that business beyond fiscal year 25.

Well, the marine industry has had its struggles in the last year. We've obviously seen softer consumer demand and less demand from the dealer network. That obviously impacted our profitability, and we had our issues as well with the ramp-up in the marine, with the new Manitou boats, which obviously impacted profitability, and that is what drove the impairment charge we took this year. Obviously, our plan is to bring the marine business to a much more profitable level, and so I won't necessarily go into the details of the impact of that, but when we look at how we've designed these boats from a modular point of view and a more industrialized process of making these boats, our expectation is that the marine business should drive similar returns than some of the product lines that we have in the PowerSport group.

Okay. Thank you very much.

Thank you.

Next question will be from Jamie Katz at Morning Star. Please go ahead. Good morning. I just want to clarify something on that last question. It sounds like the impairment was more focused on the cost structure of the marine business rather than what you guys think about is the long-term revenue opportunity set. Is that right?

That's correct. When we look at the overall results that we've delivered in the last few years, the softness in the industry and the expectation for next year as well, that obviously is below our initial expectation, and that's the main driver of the impairment.

Okay. And then a lot of the expense deleverage that we're seeing this coming year is a function of sales decline. So if we get back to, let's say, a low single-digit top-line growth rate in the following year, there's nothing really holding back expense leverage, you know, from – from accruing and, you know, theoretically we should go back towards where we were. Is that the right way to think about it?

Oh, I mean, we're diligent in how we deploy our projects and where we increase our overhead. And so as the business, as the volume comes back next year and we increase revenue, obviously we'll have more flexibility in deciding which projects we do and which projects we don't. We'll increase overhead costs, yes, but we'll be selective in where we decide to increase it.

Perfect. Thanks. Thank you. Next question will be from Luke Hannon at Kennecor Genuity. Please go ahead.

Thanks. Good morning, everyone. Maybe just going back to the target to bring down network inventory levels by 10% to 15% for the year. Is that a number that you had established internally, what you felt like the dealers would be comfortable with, or is that a back and forth? That's what the dealers felt they'd be more comfortable operating with in the network going forward.

Good morning. You know, when we look at the inventory, we look at it internally. We look at it as days of inventory. And we want to have a good turn of inventory at the dealer level. And we believe that we have set a target to ourselves during the COVID time not to go back to the pre-COVID level. And this is why we were proactive. And on top of it, you have the pressure of the high interest rate for the dealers. Then working hand-in-hand with the dealers to try to maximize the Obviously, our business, but also their business. And this is a decision we've taken, we believe, to protect value proposition of the dealers, you know, the money they're making, the margin they're making with our product. We believe it's the right thing to do to continue to work hand-in-hand with them and continue to grow overall. And it's an internal target that we put together because we believe it's healthy for the dealer and us.

Got it. Understood. And maybe sort of a follow-up to that then is just broadly speaking, how is the, we'll call it the financial health of the dealer network as we stand today?

The financial health of the network is very good. The interest costs that they have to bear is an important cost, but it's not the bulk of what's driving their profitability. It's an important component, but not the bulk. For them, it's obviously volume. And as you see, the retail is still going strong. especially for their side-by-side and ATVs. And during COVID, the dealers made a lot of money. And so financially, they're in a good situation. The interest cost is higher because the value of the units are much higher than pre-COVID. The mix of the products is more side-by-side. The C2 switch pontoon, so for my dollar value per unit is much higher. And so they see a much higher interest cost. And that's why we want to be diligent. But we have no concern that we work hand-in-hand with our floor plan partners looking at the dealer health, that there is a high risk in that area. Okay. Thank you very much.

Thank you. Next question will be from Brian Morrison at TD Securities. Please go ahead.

Yes. Good morning. Just maybe what are you seeing in terms of pricing from your competitors across your verticals in general? Dealer inventory in dollars is up 60% since the pandemic. Units, I think you said 30%. So that indicates very strong pricing over that time, which takes inflation into account. But the question is, are competitors remaining disciplined right now? As within your guidance, I'm just trying to reconcile price increases and market share gains in what's an increasingly competitive environment.

It's obviously, yes, it's competitive. And we've been in this business for well over 50 years. So we know this industry very well. We know how to operate within these dynamics. But I'd say we're still below pre-COVID levels. There is discounting happening on non-current inventory. There's discounting happening on current models, but it's obviously a factor of higher interest rates where in order to stimulate retail, you want to offer certain promotions to bring the consumer in the store and give them a reason to buy the product and financing the interest rate by subsidizing it is certainly something that is helping to move the needle. So both us and other OEMs are using this as a tool to stimulate retail and it's working.

So you're not seeing any competitive intensity heating up at this time.

Again, it's a healthy battle. There is discounting that's happening, but I think nobody wants to buy market share. And so I think there's a good level of promotional activity happening, but it's nothing crazy. Okay. Thank you.

Thank you. Next question will be from Mark Petrie at CIBC. Please go ahead.

Yeah, good morning. Thanks for all the comments thus far. I don't know if you're able to or willing to, but could you quantify or give us a sense of the materiality of the revenue contribution of the new product introductions in the second half of fiscal 25? And just as a related question, I think, Jose, you mentioned you had planned to delay some of the innovation or introductions you had planned on electric vehicles. I'm just curious, the driver there, is that an internal constraint or is that a reflection of not wanting to overburden the dealers at this time, or what was the thought process behind that decision? Thanks.

yeah i think i think you nail it in your last part of your question i mean right now uh we we obviously we've looked at all the new products we are introducing and you need to understand that the dealer right now are focusing on reducing their inventory but many of them are catching up on the growth of recent years you know during covet they grew significantly In some areas, server shop is too crowded for the new reality. And the dealer needs to focus on their day-to-day operation. And on our side, obviously, like I said in the previous question, we prioritize many programs. And at the end of all this, when you look to be successful in a new product launch, The dealer needs to train his salespeople, his service people. He needs some space in the showroom. He needs to invest in the new product line. And when we look at the workload of the dealer and what was reasonable, that's why we decided to introduce in August the Canon two-wheel. That is, I think, will be very successful. And we decided to push the rise at a further date, and obviously this morning we don't want to go into too much detail. But basically this is what we've done. It's a question of balancing the workload of the dealers with make sure that we have a successful entourage.

And on the new product introductions, well, every year, Marc, as you know, you've been following us for now 10 years. We always have a lot of product news, and that's the intention this year. The majority of the new products will be delivered in the fourth quarter. And so that's why in the gating of the earnings this year, we're seeing a higher back half loaded earnings adjustment and inventory, of course, in H1, but obviously new product moves, especially in the fourth quarter. So that will hit the fourth quarter. A lot of exciting stuff to come, but as usual, we like to keep our cards close to our chest and we'll surprise the market in a few quarters.

Thanks for that.

Thank you. We have no more questions at this time. I will turn the call to Mr. Deschain to close the meeting.

Thank you, Sylvie. And thanks, everyone, for joining us this morning and for your interest in VRT. We look forward to speaking with you again on May 31st for our first quarter conference call. Thanks again, everyone, and have a good day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. We ask that you please disconnect your lines.