BRP Inc.

Good morning, ladies and gentlemen. Welcome to the BRP Inc.' 's Fiscal Year 25 First Quarter Results Conference Call. For participants who use the telephone line, it is recommended to turn off the sound on your device. And I would like to turn the meeting over to Mr. Philippe Deschaines. Please go ahead, Mr. Deschaines.

Thank you, Sylvie. Good morning and welcome to BRP's Conference Call for the First Quarter of Fiscal Year 25. Joining me this morning are José Bocelli, President and Chief Executive Officer, and Sébastien Marcel, 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 uncertainty, 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 flights, 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 Joseph.

Thank you, Philippe. Good morning, everyone, and thank you for joining us. The first quarter of fiscal 25 play out essentially in line with our plan. Financial results were as expected and reflect our focus on managing network inventory to support our dealers. From a retail standpoint, our product portfolio performed relatively well despite softer market conditions. As the year continues to unfold, our dealers are very cautious with respect to inventory as uncertain economic conditions and high interest rates are impacting them more than anticipated. Moreover, many OEMs are turning to more aggressive promotional activity and dealer profitability is under pressure as they are selling at low margin to move inventory. On the marine side, the industry has been softer than expected since April, and dealers are taking a limited number of new boats. As you know, we have always been close to our dealers and proactive in taking market conditions. Therefore, in light of the current context, we are adjusting our production to further reduce dealer inventory. This is reflected in our updated guidance. Let's turn to slide four for key financial highlights. Revenue reached $2 billion, normalized EBITDA was $247 million, and normalized EPS was $0.95. all as expected and consistent with our planned volume reduction. As for retail, our North American transport sales were down 5%, in line with the industry, with a solid performance in year-round product, offset by softer trends in seasonal products, as you can see on slide 5. In fact, our year-round product retail was up 11%, with solid growth and market share gain across all product lines. Meanwhile, seasonal products were down, reflecting a soft end of season for snowmobiles due to unfavorable winter conditions, softer overall industry trend in marine, which also impacted the sea-dew switch, and a difficult compatible for personal watercraft as Q1 last year was unusually strong. Still, while the industry was down mid-10% versus last year, it was up about 10% versus pre-COVID. In summary, despite more challenging market conditions, we continue outpacing the industry across most product lines. Turning to slide six for an update on the global power support market. First, looking at geographical region. Canada remained relatively strong, with retail up 18% in the quarter, excluding snowmobile. The U.S., however, is softer, with retail down 4%, also excluding snowmobile. Latin America is continuing to show strength, with retail up 11%. EMEA and Asia-Pacific are still seeing softer demand, with retail down 13% and 2% respectively. From a consumer preference standpoint, we continue to see more traction globally for premium vehicles. In the off-road category, trends are more positive in the utility segment compared to recreational products. One element that has evolved during the quarter is that many OEMs have been more aggressive with promotion and pricing. We expect this trend to continue throughout the year. As I said earlier, our focus is on managing network inventory. In March, our objective was to reduce transport shipment by 10% to 15% by the end of the year. Now, with consumer remaining forces, a more competitive landscape, and the high cost of carrying inventory, dealer profitability is under pressure. Our revised plan calls for 15% to 20% reduction, and to accelerate depletion, we will limit Q2 shipment. In parallel for marine, we are also further reducing production until the end of the year. In addition, we are increasing promotional support for power sport and marine to accelerate inventory returns. Bottom line, we will support our dealers through this more challenging environment. This is a priority. Now let's turn to slide 8 for a more detailed look at year-round products. Revenue went down 13% to $1.2 billion, primarily due to reduced shipment. At retail, Can-Am side-by-side had its strongest Q1 ever. Retail was up 19%, primarily driven by solid growth in the utility category and in premium model, notably the defender cap. We are pleased with the sustained momentum of our side-by-side lineup as our numbers of units retailed during the first quarter has nearly doubled compared to pre-COVID level. ATV also had a solid quarter, reaching its highest quarterly market share ever, which retailed up high single-digit percentage. This performance was driven by the continued success of our new Outlander platform, which delivered market share gains in the mid-CC segment. Looking at three-wheel vehicles, Can-Am is off to a good season start, which retailed up low single-digit. These strong results are driven by the positive consumer reaction to the recent upgrade we made to our Spyder F3 and RT lineups. Turning to seasonal products on slide 9. Revenue went down 23% from last year to $535 million, probably reflecting reduced shipment. Looking at our retail performance, in Snowmobile, we've closed the North American season on March 31st. which retailed down high single digits, once again outpacing the industry and further increasing our record high market share. We also ended the season with the number one position in each segment in which we compete. In Scandinavia, the season had a late start, resulting in retail down low 10%, but we remain we maintain our industry-leading position with market share over 70%. This performance demonstrates the strength of our Ski-Doo and Lynx brands. Now looking at the upcoming season, we just completed our spring booking. While volume came in broadly in line with expectations, the mix is not as rich as anticipated. Looking at Ski-Doo products, Retail was down as we were facing a difficult comparable due to late shipment last year. However, from an historical perspective, retail is performing well with SEDU up about 18% from a typical pre-COVID first quarter. As for the SEDU switch, it also faced the same dynamic as personal watercraft with late shipment in Q1 of last year leading to a decrease in retail this year. Given software trends in the marine industry, increased promotional activity and high level of dealer inventory, we are also taking a more cautious stance with our Sea-Doo Switch business. As such, we have decided to reduce our shipment for the balance of the year. However, we remain confident in the long-term prospects for this business, especially with new products in the pipeline for the coming years. Moving to slide 10, with power support parts, accessories, and apparel, and OEM engine. Revenue were up 1% to $289 million, driven by higher volume and favorable pricing, offset by higher sales program. From a product standpoint, our parts and accessory business, or off-road, continued to increase, driven by the growing fleet of vehicles in use and the positive retail momentum. However, unfavorable winter conditions negatively impacted sales of parts and accessories for snow-related products. Moving to marine, revenue were down 58% to $50 million, driven by the lower volume of boat shipment. Looking at retail sales, Allumacraft retail was up in the low 20%, while Manitou retail was about flat. Our retail increase in North America was the result of good pre-sales at both shows. As for Quintet, retail was down low 10% in line with the industry trend. Although the marine industry has been challenging in recent quarter, this business is for us a long-term role play. With that, I turn the call over to Sébastien.

Thank you, José, and good morning, everyone. Our first quarter results came in essentially in line with our expectations. Looking at the numbers, revenues were down 16% to $2 billion, primarily due to lower shipments and higher sales program. We generated $480 million in gross profit, representing a margin of 23.6%, down 210 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 cost efficiencies. Note that an important margin headwind was related to our marine business, as we significantly reduced shipments and introduced new promotions during the quarter. Meanwhile, our PowerSport gross profit margin remains strong at 26.2%. Continuing down the P&L, our normalized dividend ended at $247 million and our normalized earnings per share at $0.95. Free cash flow came in stronger than anticipated at $66 million, driven by our tight management of CapEx and working capital. From a usage perspective, we continued to actively return capital to shareholders with a 17% increase in the quarterly dividend and through $47 million of share repurchases. Now for an update of our network inventory. Our dealer's inventory ended the first quarter up 23% from last year. This increase was in line with our expectations as we faced a difficult comparison with last year's overall linear inventory levels, and we ended the snow season with more inventory due to the unfavorable winter we just experienced. Note that snowmobile accounted for 43% of the year-over-year increase. From Q4, we began making progress in right-sizing and improving the quality of our off-road inventory, which was down 6% sequentially, including more important reductions in non-current models and in categories that are experienced software retail trends. As for other product lines, the inventory evolved from Q4 levels following the traditional seasonal pattern with declines at the end of the season for snowmobile and a buildup ahead of the core retail period for personal watercraft, switch pontoon, and three-wheel. Despite operating with better inventory returns versus pre-COVID, as Jose mentioned, the uncertain macroeconomic environment, higher interest rates, and increased competitive dynamics are putting pressure on dealer margins, making them more cautious about taking on more products. To support them, we decided to further reduce our network inventory compared to our initial guidance. Accordingly, we plan on limiting shipments in Q2 to accelerate the depletion process, which will continue throughout H2. Our objective is to gradually improve our overall inventory levels to reach a year-over-year reduction of 15% to 20% by the end of fiscal 25. While these actions are expected to impact our financial results, we strongly believe that supporting our dealers in this challenging operating environment for them is essential to ensure our long-term mutual success. With this in mind, let's turn to slide 14 for an update of the guidance. We have adjusted our guidance to reflect the impact of the initiatives we have put in place to further support our dealers in the form of lower shipments and increased promotional support, the result of our spring booking for snowmobile, and the ongoing softer trends in marine. Accordingly, we now expect revenues to end between $8.6 billion and $8.9 billion, with greater adjustment made to seasonal products and marines. Considering the decrease in our top line, along with the benefit of additional efficiencies and cost reduction efforts, we now anticipate our normalized diluted APS to end between $6 and $7. As you can appreciate, these expected results do not represent the true earnings power of the business, as the one-time 15% to 20% expected reduction in inventory is impacting our revenues unfavorably by $575 million to $775 million this year. From a cash perspective, we further optimize our CapEx plan by $25 million. The saving combined with expected working capital improvements and lower tax outflows still positions us to deliver approximately $750 million of free cash flow for the year. As such, we expect to have the financial flexibility to continue providing a strong return of capital to shareholders. Before turning the call over to Jose, I would like to provide further color on the adjustments we made to the guidance by taking a look at slide 15. As you can see from the chart, about $1.65 of the adjustment in the guidance is coming from power sports, notably driven by the additional measures we are taking to support our dealers in this challenging environment for them. As for marine, we expect additional impact of about $0.50 versus last guidance. As a result, marine is expected to represent a drag of more than $1.50 on our earnings for the year. To offset these, we have put in place additional efficiencies and cost reduction measures that are expected to generate an incremental 75 cents benefit for the year. Looking ahead, as previously mentioned, our plan is to further limit shipments in Q2 in order to accelerate the network inventory depletion process for our dealers. Consequently, we expect revenues for the second quarter to be down high single digit and normalized EBITDA to be down about mid 20% from Q1 level. Our results are then expected to improve in H2 with a return to growth over last year in Q4. Once again, fiscal 25 is expected to be a transition year from a financial standpoint as we focus on supporting our dealers. Still, with our strong business fundamentals and continued focus on efficiency and innovation, we are well positioned to sustain our long-term success. And on that, I'll turn the call over to Jose. Thank you, Sébastien.

Over the short term, we are focused on protecting our dealer value proposition by managing network inventory and proactively adjusting our shipment. Looking beyond this correction year, we remain confident in our long-term strategy. Our agility is a significant advantage, and we have proven many times over that we are geared up to respond to evolving market conditions and continue to outperform the industry. We are managing the business to ensure continuing success, and we are committed to investing in the development of market-shaping products in true BRP fashion who will keep on innovating to strengthen our leadership position in the power sport industry. On that note, we look forward to hosting our dealer event in August, and you are invited to join us in Hanaheim, California. As usual, we will introduce new technologies and products to bolster our lineups. We are also on plan to launch a promising new Can-Am electric motorcycle, which will allow us to enter a new industry. I thank all our employees for their hard work and dedication. Their capacity to adapt to changing market dynamics enables us to continue to succeed in a challenging context. I also acknowledge our dealers for supporting our lineups and for their confidence in our ability to provide them with a superior value proposition. On that note, I turn the call over to the operator for questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your touchtone phone. You will hear a prompt advising that your hand has been raised. And if you should wish to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. And we ask that out of consideration for other callers on the line today, you please limit yourself to one question and one follow-up. Please go ahead and press star one now if you have any questions. And your first question will be from Craig Kennison at Baird. Please go ahead.

Hey, good morning. Thanks for taking my question. You talked about inventory. I'm wondering if you could share with us the percentage of your power sports inventory that is non-current.

Good morning, Craig. Obviously, the non-current inventory is a subject that we've heard quite a bit about. And we're actually, when I look at the overall retail numbers for the first quarter, about 65% of the total retail that we did was current inventory. So we're actually a very good position from an inventory point of view. And that's pretty much in line with the industry as well, where they were trending in that percentage as well. The inventory that we have is, Let's say non-current model year 23, less than 1% of the total inventory that we have is model year 23 and over. So what we have left is model year 24, and that is relatively clean. And the rest is current inventory. And as I mentioned, for Q1, 65% of our retail was current inventory. So that's an indication of how healthy it is.

Thanks. I'll get back in the queue.

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

Hey, good morning. Thanks for taking my call. So on the last call, I thought it was really helpful, you know, sort of your view as we looked through some of the noise. I think you said something along the lines of, you know, it felt like from an underlying earnings power perspective that more of an 1150 type year in terms of earnings. Once we add back some of those, if you want to call them one-time-ish costs, I guess a couple months later, the guidance is down another $1.25. I guess maybe if you could take us through a similar exercise, does this bill feel like an 1150-type year once we sort of get past some of these one-time-ish costs. Yeah, good morning.

First, I will just give you high-level what have changed since March. And I would like to put things in perspective to start with. The inventory in UNIT is up 36% pre-COVID. But our retail is up 50% versus pre-COVID. Then our turn of inventory is better than pre-COVID. And we're fully aware that the increased value of the unit have changed. There is new product line that's switched. Size of the product has got bigger. And obviously, the cost of carrying an inventory is putting pressure on dealer to move product and retail and de-retail at a low margin. What has changed since last guidance is the high level of snowmobile that is confirmed, the softer trend in marine, and the U.S. market that is softer for the first time in a while. And if you combine all this to the macroeconomic context, the competitive landscape, and the high interest rate, this is a lot at the same time. And we were aware of those elements, and it's no surprise to us, but to be honest, we have not anticipated how dealers react to the accumulation of those factors. And this is why we decided to reduce inventory by an additional 5%, now up to 15% to 20% by the end of the year. We will also limit shipment of seasonal products outside of the core retail season. And we are investing in more promotion support to move inventory faster. All of this is obviously impacting the financial performance, and you can be sure that we don't like having to reduce our guidance just one quarter into the year. But again, we believe it's essential that we protect our value proposition with the dealer, and it's the right thing to do for the long-term success of the business.

Yeah, if I give you a bit of color to this year, and it is in fact a transition year, and we do have a few headwinds, as you mentioned, that will turn into positives in the near future. And I would bucket them into three categories. Obviously, the first one is the impact of the snow season, where we're reducing deliveries and being more promotional this year. The other element is the marine business, which I highlighted this morning. It's a drag on earnings of $1.50, and obviously that's unacceptable, and we're obviously going to work to fix that. And the other element is the one-time element of reducing inventory. Inventory returns are better than pre-COVID. Usually they gave you some color on the retail versus the inventory. So the inventory is in a healthy situation because of the higher interest rates, obviously. dealers are more cautious on taking on inventory, but that 15 to 20% inventory reduction is a drag to revenue, as I mentioned, of $575 to $775 million. So when I package all of these three elements together, is there like a three to four bucks of EPS that will come back to our earnings post-fiscal year 25? Yes. Does it all happen next year? Obviously, we're going to certainly work to make sure that we crystallize that as quickly as possible. But obviously, these one-time headwinds are certainly impacting our financials this year, and on a normalized basis, the earnings potential of BRP is much higher than what we're presenting as a guidance this morning.

Got it. That's really helpful. And then maybe as a follow-up, I mean, you noted a couple times about you know, limiting inventory carrying costs and wanting to protect dealer profitability. And I think implied there is that it's at the expense of your own profitability in a lot of cases. So this sounds like somewhat of a sort of a goodwill play, right, that dealers will appreciate the support that you're giving them. I guess maybe speak to what you're seeing in the broader industry and, you know, if there's broader sort of industry support to protect the dealers. And ultimately, do you get that back, right? Does that goodwill, as we look forward, benefit you in some tangible way or some financial benefit? Thanks.

Then maybe just to add, you know, over the years, we are the OEM who invest the most in R&D and in CapEx, and we're pushing to gain market share in all the product category, and we proved that over the last few years. And we always say to our dealers, you can't expect from us that we'll push for market share because we're investing more than the competition and we deserve it. with the product innovation and the investment we deserve to gain market share. But you can count on us that if there is a hiccup, we will support you. And this has been our speech for the last 20 years with the dealers. And here we are in a situation where we are after the COVID bubble, and we want to make sure that we support our dealers. And we are sure that it's the right thing to do for the long term of the business.

Got it. That's helpful. Thanks, guys. Thank you.

Next question will be from Jonathan Goldman at Scotiabank. Please go ahead.

Good morning, and thanks for taking my questions. Maybe to start off, Jose, and you did discuss this in your prepared remarks, but can you discuss specifically how the competitive environment has changed since Q4? And relatedly, what gives you confidence that the additional actions you've taken to right size production will be sufficient and that competitive intensity won't accelerate through the year?

First, like we said, there is more promotional activity and also some OEM have reduced their pricing on the new model and this is putting pressure and some OEM are still pushing the dealer to take more. You can say if this will play in your favor or not, but I would like to remind you the dynamic for multi-line dealers. We're convinced that reducing inventory will increase inventory turnover and reduce the floor plan cost. And for a multi-line dealer, they have a credit line for each OEM. It's not one credit line for all the OEM. Each OEM brings its financial partners. And by reducing our inventory does not mean that the other will fill the credit line. Then the other thing that is different versus other OEMs, we are more than an ORV business. We are the leader with high market share in watercraft and snow. And we'll make sure that we're reducing shipment that will help the dealer and will ship closer to the retail peak of those big product lines for us. Overall, and you could see some market share play from month to month, depending on the action of the other OEM and the sales program and the dynamic in the industry. But for this year, we're still planning to gain share in ORV and maintain our leadership position in watercraft and snow. And again, we're convinced it's the right thing to do.

I appreciate those comments. That's very helpful. And I guess to follow up then, do you have any visibility or do you have a sense of how much excess inventory is in the industry generally related to current demand levels?

Well, as I've mentioned, I mean, our inventory levels are healthy. Our returns are better than pre-COVID. I don't think it's a question of having way too much inventory. It's much more a question of the cost. higher interest rates, the current macro environment, the marine business that is softer, and that's making dealers more hesitant on taking more inventory for the fear of having that huge floor plan interest expense that they have to pay. And again, the floor plan cost for dealers is probably in the 13 to 14% range, and so it is quite expensive. And in a context where dealers are more cautious on inventory means they're more discounting, hence making less profit. And when you add that for planned costs, it obviously puts more pressure on their profitability. So it's not a question of having too much inventory. It's more a question of dealers being more cautious given the current context. And again, us as OEMs, we have that ability of reducing our deliveries in order to give them a bit more breathing room.

Thank you very much. I'll get back to you.

Thank you. Next question will be from Joe Altabello at Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. I guess first question sort of broadly, has your North America power sports industry retail outlook, you know, changed at all? I think last quarter you were talking about, you know, an industry down low single digits.

We've done a few tweaks to the outlook, especially on the seasonal side, and that's where we've adjusted the guidance more for seasonal on Sea-Doo Switch and on the Sea-Doo Watercraft. But overall, pretty much in line with what we had versus last guidance. And one good indication of this is that we've maintained our P&A guidance equal to what it was previously, because retail is a big driver of the P&A business. So overall, no big changes other than the seasonal business.

Okay. And just to follow up on that, the increased promotional activity and support that you cited in Power Sports, is that across the board or is it concentrated in particular product categories? And how does that compare maybe with the competition? Are you guys generally more or less promotional than other players?

It varies by product category. Obviously, for snowmobile, everyone has been more promotional because everyone ended with more inventory. We are in a relatively good position when you look at our market share versus the inventory that's remaining. What we've seen as well is that OEM has introduced new models with price reductions. And so that's a new phenomenon that we're seeing. But overall, yes, the industry is more promotional. Dealers are more promotional as well. And OEMs are more promotional because they see that dealers are hesitant to take on inventory and therefore offer higher wholesale incentives or even retail incentives as well.

I guess just in terms of all of our vehicles, are you seeing it in that space as well?

The promotional, yes, it's in that space as well for RV. And marine, I would say, if I were to be the pure traditional marine business, is significantly more promotional than the power sport industry. Okay. Thank you.

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

Yeah, thanks very much. Good morning. Just want to ask about Marine. I mean, obviously, it's difficult to predict when that market will start to rebound. But just wondering what actions you can take if we don't get a return to more healthy market conditions. I mean, obviously, you've mentioned the $1.50 drag on EPS, but is there something you can do to try to make that business more profitable, even if we don't get a significant rebound in underlying demand? Yeah, good morning.

Obviously, it's not the start that we were planning, and when we were up and running, we were ready and up to run. The industry softened, more promotional activity, and this season, dealers are very hesitant to take inventory. It's a difficult environment, and obviously, nobody could plan that. What I would say is right now, what we have done, we have reduced to a minimum Our production between now and the end of the year for both Allumacraft, Manitou and Swish. In Australia, Quintrex is in line with the industry and the reduction is lighter. But basically, we reduce production to a minimum and now we're working to deplete the inventory of the dealer than you can expect. Minimum production of model year 25, and we will restart in 26 with more normal volume. Then this is a transition year. We need to go through that bubble of inventory. Early in the year, we were thinking that it would be a one-year correction. It might take to the industry, not us, a bit more than one year, maybe 18 months to correct this bubble of inventory. Obviously, every business in our portfolio needs to contribute, and marine is no different. We believe we have the right strategy. We just need to go through this industry normalization or the inventory normalization.

Okay. That's helpful. Obviously, you've reduced your workforce, I think, for some of the marine segments, but Is this going to represent a challenge when you do restart production? I mean, obviously, there's a fair bit of, I guess, skilled labor required, and I think production inefficiencies have been somewhat of a challenge as it is. Just wondering how you sort of manage that re-ramp once it does come.

No, you're totally right. There is a lot of no-sector know-how, and we did make sure that we keep the right level of people to be able to ramp up when things get better.

okay that's great i'll pass the line thanks very much thank you next question will be from mark petrie at cibc please go ahead yeah thanks good morning uh mostly just wanted to follow up on a couple of the topics you've hit on um i guess just specifically you know the guided decline for Q2 would imply that the second happy bid will actually be modestly higher than what you had previously guided to, I think. And just hoping you can help square that up. Is that mostly sort of unchanged revenue and gross margin, but just lower costs? And that's tied to the cost reductions you've put in place? Or can you just clarify that, please?

Yeah, it's a combination of elements. We're taking a harder adjustment on the volume deliveries in the second quarter. Some of these units will be delivered in the third quarter. But in order to give immediate relief to the dealers from an inventory point of view, that's why we decided to reduce shipment significantly. So we'll be shipping some of the snowmobiles that were initially planned in the second quarter in the third quarter. closer to retail season as well. And also, yes, obviously, as you saw on the bridge, we're driving higher cost efficiencies, which are going to pay off in the second half of the year, helping the overall EBITDA and EBITDA margin as well.

Yeah, okay. And could you just elaborate on the actions you took with regards to the cost structure and that 75 cents? I mean, you alluded to that being mostly in marine, but any color would be helpful. And do you think of those as permanent cost reductions and efficiencies or mostly temporary?

Some of it are permanent, some of it are temporary. I'd say the reductions we've had probably split half is variable compensation, given the lower profitability, and the other half is efficiency. Obviously, over the last four or five years, our business has grown significantly, and the operations team have been hyper-focused on adding capacity and producing units in challenging COVID times. And sometimes we were producing these units at any cost. Now, obviously, with reduced volumes, the teams are able to rethink the way they operate, reassess the efficiencies in the plant. And we're actually getting a lot of savings coming from a greater focus from our teams on driving lean practices in our business, which, as you see, is helping compensate some of the headwinds we have this year.

Okay, so it's fair to say that, oh, sorry, go ahead.

That would be permanent, Mark, yeah.

Yeah, yeah, understood. But I guess just to clarify, so that half of the 75 cents, which you're calling efficiency, most of that would actually be outside of marine, it sounds like?

Yes, yes.

Okay. All right, thanks for that. Take care, all of us.

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

Hey, guys. Good morning. I just wanted to come back to the promotional outlook. And you did talk about some incremental promos in power sports and marine. And I think in the past, you talked about still being a little bit below pre-COVID levels. So can you sort of level set where that current expectation would put you? Are you going to be higher than sort of normal pre-COVID levels for this year?

Yeah, currently, when I look at the forecast, we're pretty much in line. I'm looking at a power sport business. We're in line with where we were pre-COVID. That is in a context where interest rates are higher and any retail financing promotions are more expensive as well. So from a percentage of revenue basis, we're pretty much in line with where we were pre-COVID.

That makes sense. When you take a step back, you talked about interest rate headwinds, retail has been mixed across different categories. What gets dealers comfortable ordering again? Do you need to see a pickup in retail? Is it really just a matter of a couple of rate cuts, lowering these floor plan rates? What is the big catalyst that gets people comfortable going forward?

Well, certainly, I mean, financing is probably, let's say, 500 basis points higher for them versus pre-COVID. So it's obviously a big dent in their profitability. And so if we were to see rate cuts happening, who knows when, that would certainly provide more comfort for the dealers and their appetite to take on more inventory. Certainly, that's something that is going to help. Okay. Thanks a lot.

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

Yeah, good morning, everyone. Just looking back at Marine, obviously, you provide great color about the weather, the promotional activity. We know there's been sizable investment with the stealth technology. So, any more color? How would you qualify the market acceptance of your new stealth technology? any change in the strategy for marine going forward i'm just trying to to know how committed are you to the segment given the uh contribution right now yeah good morning benoit uh you know so far uh and again the product have not been there long but so far uh

what we call the max deck. And the max deck, you know, is the platform extension in the back of the boat. You're gaining four feet or six feet, depending if a single or dual engine. This is a big value for the consumers. And this is only feasible if you have the Rotax stealth engine package. So far, Manitou is available with MagZec. Alimacraft is coming with their model right now. And this is basically what we were betting for when we developed this new technology. And this is, so far, well received by the consumers. Obviously, like I said in my remarks, The timing to introduce those new boats with that feature is not ideal, but we need to first deplete inventory and be patient with the strategy.

Okay. And with respect to PWC, it seems that you're looking market share when you look at your trends versus the industry. It looks like Canada right now is much stronger than the U.S. with respect to PWC and ATV. So I'm just wondering the discrepancy between two countries, whether it's more weather-related or the competitive landscape there. Is it more aggressive right now in U.S. versus Canada? What explain basically the discrepancy between both countries?

Then first, our market share in Canada is very high. It's over 75%, and Canada has always been a good market for watercraft. I would say it's a bit too early, but I don't want to conclude anything. The big retail season, for watercraft is May, June, July. And the watercraft customer is impulse buy. It's relatively low-priced product, and it can go very fast up or down depending of the weather, obviously, depending of the overall situation. Then I think we have good momentum in Canada. softer in U.S., but I think it's too early to call if it will be a good season or a very good season or a not so good season. I think it's too early. But so far, Canada is doing well, a bit lag in U.S. We'll see how things evolve.

Thank you very much.

Thank you. Next question will be from Robin Farley at the GBS. Please go ahead.

Actually, I had a similar question on the marine outlook. Just, you know, given you've had in ORV and snow, you know, great market share and great share growth. And marine, you know, maybe doesn't have that sort of position to recover back to even when the market gets better. So I wonder if you could... kind of give us a thought on it. It seems like it would actually be fairly additive to earnings if you exited the marine business and just wondering how you see that longer term. Thank you.

Just a comment, Robin. You know, with the high market share we have in watercraft and snowmobile and we're gaining in off-road, many and us, we need to continue to plan for to grow the business. And if you remember the addressable market, we have a third of the power sport industry, and we need to plan mid to long-term where we will continue to grow because we will continue to grow in power sport, but we need to plan what's next. And marine, obviously, it's the same scale that we have on power sport, and it's a big market, and we believe we can be successful there. Again, like I said, The timing of our production could not be worse, and we didn't execute perfectly either. But this is a long-term play. We just need to go to the bubble, and this is a long-term play. And we will next year reduce our expenses in that product category.

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

Good morning. How is May trended at retail?

I would say, first, we don't have industry data yet. But so far, May is a bit softer than what we were initially anticipating. We've just been through the Memorial Weekend in the U.S. We don't have all the registration yet in our system, but the feedback we have from the dealer is a bit softer than what we thought. But again, like I just explained, Memorial Weekend is the start of the season in the U.S. for all the marine products, and it's a bit too early to say how it will go. So far, BRP off-road is performing good. Watercraft switch is a bit lower than what we were planning, and obviously the marine product is lower than what we were planning. Then this is basically where we are, but again, we'd be careful because we are very early into the marine season.

Okay, I'm just going to sneak in one more question. You've alluded to one of your competitors cutting pricing a couple times. Is that something you would consider?

Of reducing pricing? Yes. Well, obviously, when you look at the whole lifecycle of a product, if we're able to drive cost efficiencies in our product, obviously pricing is something that we would consider. But the pricing adjustments we've made over time to increase pricing was in line with the inflation that we saw. One thing that we're mindful about is people who brought a product six months ago or 12 months ago, if you come out with a new model year and you're discounting the new model year, obviously it reduces the whole value proposition for that consumer. And so, obviously, our focus is let's bring innovative products, let's bring great products to market, let's make sure we price that PVA for the customer, and that in the end, consumers see the value that you're bringing, that they're willing to pay for the innovation, the novelty. And in situations where markets are more tougher, we prefer to use retail incentives in order to drive consumers to the dealer and stimulate sales.

So it's a complex balance, Tristan, and all of that. Got it. Thank you.

Thank you. Next question will be from Martin Landry at P4. Please go ahead.

Hi, good morning. I may have missed it, but did you change your assumption for your retail sales in North America this year and for industry retail sales as well? And I was wondering if you can just update us on these assumptions.

Yeah, we had that question a bit earlier, Martin. Maybe you missed it, but we did a few tweaks on the seasonal business, and that's why we adjusted the guidance. That's where we've made some adjustments internally. But nothing more significant on the ORP side.

Okay. And I heard in your opening remarks, Sébastien, you talked about PowerSport gross margins being around 26.2%. And despite sales being down in the high teens, can you just, it looks like it's pretty solid. And despite, you know, sales decline, can you just talk a little bit about what's like, how are you able to sustain your margins despite the lower sales?

Well, it's been part of our long-term strategy of obviously leveraging our growth through our Mexican footprint, driving innovation to the consumers, and also insourcing some technologies. We've talked about turbocharging. We've talked about modularity with our engines, with our platform. I think when you take the sum of all of that and also the focus of the teams on efficiency, When you take the sum of all of that, even though we have lower volumes, even though we've put more programs in the quarter, we're still able to drive very healthy gross margins for the power sport business. And so the long-term strategy we've had, as you can see today, is paying off. Okay. Thank you. Thank you.

Next question will be from Brian Morrison at TD Cowan. Please go ahead.

Good morning. Seb, I know you made tweaks to your assumptions. What are your assumptions within your guidance with respect to retail sales volumes and your net pricing? And is the message that your destocking will be complete by the end of Q3?

Well, the destocking is going to happen throughout the year because snowmobile destocking is going to be a Q4 element. ORV, dealers are going to feel it right away in the second quarter. and so it's going to be progressive, but a big part of it will happen in the second quarter. Inventory could probably be down versus Q1 in the second quarter. It's probably down 15%. In terms of pricing, obviously, we're going to club, as Jose mentioned, in a few months, and we'll obviously be introducing new products, a new model year, and we'll revisit our assumptions then. We'll appreciate that for competitive reasons. We won't necessarily disclose what our plan is. But as I mentioned earlier, we want to make sure that we price the value that we bring to our consumers. And also, we prefer using incentives as a way to stimulate retail sales when things are tougher.

Maybe to add on this, on the pricing from your question, but the previous question, this is a very... It's a science. We always measure the technology we have in our product versus the competition, all the feature, and how much the customer is ready to pay for that feature and that feature. And that don't mean because another we reduce pricing that automatically we will follow. It depends on how product is competitive and what are the value of our feature and our technology and our product versus others. Don't take for granted that because another one do it, we will follow automatically. We're doing our homework right now, and we're preparing for the model year 25 lunch at Club in California.

Okay. Sorry, just to clarify, I appreciate that color. To clarify, in terms of your retail sales volumes, do you expect them to be flat to down? And then just to follow up, Seb, within this base level of earnings that everyone likes to focus upon, what is your normalized EBITDA margin within those $10, $11, whatever you want to call it?

Well, in terms of retail, obviously, to give you a global number probably doesn't give you the full appreciation of what we're driving. But the expectation is that for RV, retail will be up in the low single digits. And for seasonal products business, we expect retail to be down. Softer, obviously, personal watercraft market. We had a very strong retail last year switch as well. expected to be down because of the marine business. And snowmobiles, obviously with the softer snow we had this year, it impacted obviously our retail expectations. And so we're expecting our seasonal business to be down probably in the high single digits.

And sorry, just the EBITDA margin that you factor into your base level of earnings?

Well, we've communicated the expectation that EBITDA should come back to 17% for us with the size of the business we have, with the investments we've made in modularity and technology. We certainly believe that a 17% EBITDA margin is something that should be achieved. Even when you look at the implied guidance for the second half of the year, we'll actually be fringing close to that 17% EBITDA margin. in a year where we're cutting deliveries. So it's certainly something that we believe is achievable.

Very good. Thank you very much, and good luck. Yep.

Next question will be from Jian Xu at BNP Paribas. Please go ahead.

Hi, guys. Thanks for the question. I think in the previous guidance, net price is supposed to be a 50 cents benefit, and now it's I guess 75 cent headwind, so maybe putting that together, 25 cent year-on-year headwind. What gives you confidence that this is enough, just like a 25 cent headwind? And is this kind of the new normal on promos, or do you think promos get better next year?

Well, certainly when I look at the promos, definitely. One of the big costs of the promos is the high interest rates, and so it's costing us more money. And so if rates were to come down, and hopefully they do in the near future, obviously that's going to reduce the cost to us for these promotions and less of a headwind from a margin point of view. And again, based on what we have in our forecast, what we see today, we believe the pricing assumptions and the program assumptions we have are sufficient We've taken important provisions for the marine business at the end of Q1 and also planning for some programs in the second quarter. So, again, with the guidance we have, I'm comfortable that we have enough money to go through what we see today in terms of overall demand.

Okay. That's very helpful. And then maybe just can you elaborate a bit more on the gross margin assumptions between marine and power sports? I mean, it sounds like marine is still negative, but – I mean, to your point, the 26% power sports gross margin, how do we think about the rest of the year relative to that?

Well, the margin was obviously impacted in the quarter from higher promotions. But again, margin in the back half of the year are planned to be a bit higher than what we delivered in the first quarter. Usually the second half of the year, we see better margins as well historically from the mix of the products that we ship. We usually ship, obviously, new model year snowmobile premium models for side-by-side at the start of the season, and that tends to drive higher margins in the back half of the year.

Okay, very helpful. Thank you.

Thank you. Next question will be from Luke Hannon at Canaccord Genuity. Please go ahead.

Thanks, and good morning. Jose, on the last call, I know you gave good colour on how the snowmobile industry has sort of bounced back from periods where industry units were sort of lower than expectations. I'm curious, when we think about the marine business, I think I heard you correctly in that it probably is going to take about 12 to 18 months for inventory to normalise there. How does that compare to maybe past periods

where retail was a little bit softer and dealers had access inventory to work off i think i think the two industry are quite different in in slow mobile you have only a few oems and we are the market leader and And the snowmobiler is very, I would say, enthusiastic about the sport. And what is happening on snowmobiles is like this year, there will be quite a lot in the next season, but there will be quite a lot of model year 24 with discounts and the model year 25 reduced numbers. And this is why the snowmobile industry typically is quite resilient after a bad snow season. On marine, the big difference is a lot of smaller OEM supplying the industry, and there is a lot of different behavior between the OEM. This is why it's a bit more difficult to predict, but it will take probably more time, like I was saying. We were planning that it would be corrected in 2025. Now we say maybe it will take two seasons to correct the industry bubble, the inventory bubble that is out there. But the dynamic is a bit different because of the number of OEMs that have different behavior.

And when we say two seasons, we maybe do 75% in this season and then 25% in the next.

Okay, I appreciate that. Thanks. And then a very quick follow-up. Seb, I think I heard you correctly. It's still expecting $750 million of free cash flow. What do you have baked into your assumptions as far as working capital goes?

Well, we do expect a slight tailwind from working capital. As we've shared in the past, we were still running with high raw material inventory post-COVID and supply chain challenges, so we kept higher safety stocks, but now we're progressively reducing these. And so I'm expecting probably a tailwind of about $100 million from working capital this year.

Thanks.

Thank you. Next question will be from Jamie Katz at Morningstar. Please go ahead.

Thanks for squeezing me in. I just have one question on CapEx. It looks like you guys have taken CapEx down just a touch this year, but are we thinking about maybe moderating any of the bigger projects over the next year or two, given that the environment looks like it might remain soft a little bit longer than previously expected? Thanks.

Yeah, we're actually selective in how we deploy the CapEx. And as we've shared in the past, we're comfortable with the capacity we have today. So we don't see us needing to add more capacity in the mid to short term. And so we're good there. But obviously, we'll continue investing in technology. And so that's CapEx investments for new products. You'll see that. But again, this year, I think we're at the right level with where the business is, and we'll make sure that we continue driving returns and drive good free cash flow as well for the business by being selective in our investment decision.

Does that imply that maybe next year it will be around the same spend level or perhaps just slightly higher as things resume rather than picking up again?

Yeah, it could be slightly higher. That's certainly something that's possible. Not to the levels we were in the last few years, but a bit higher than this year is a possibility. Could you add 50, 75 million? Yes, we could.

Excellent.

Thank you. Thank you. Next question will be from Brandon Rowley at DA Davidson. Please go ahead.

Good morning. Thank you for squeezing me in here. Just a couple quick questions. First, just on off-road vehicle, given what's going on with some of the other OEMs being aggressive with their shipping approach, do you feel as though there could be a market share headwind in the near term over the next couple quarters because they're continuing to ship aggressively while you're kind of pulling back on inventory and introducing a new model year kind of out of season?

Like I said in my question before, my answer before, you know, each dealer, each multi-line dealer has a credit line by OEM. Then we don't, an OEM, the dealer cannot fulfill with other product lines our credit line. Then this is, well, we believe we will have, despite the reduction in inventory, enough inventory not to miss retail. But also, it could happen that a month we lose some, but we gain some. But overall for the year, we still believe we will gain a few market share in the off-road business.

Okay, great. And just finally, I think you had mentioned you're going to be introducing an electric motorcycle at your dealer event in August. Could you just kind of talk about what you're seeing in the electric motorcycle market and reasoning for why you think now is a good time to kind of introduce a new model there? Thank you.

First, this project started about three years ago. Everything is done. The investment is made. But I have to admit that I had the chance to try the product myself, and it's funny. In the last two days and today, there are dealers from Europe and North America that are writing products. the product and we get their feedback. And we feel quite optimistic about our product and how it will be competitive in that new segment for us. But again, I think you cannot ignore the trend that you see in the electric products. It's slowed down over the last few years, but it's still there to stay. And we believe we have good product and we need to start somewhere. The beauty of what we've done is the power pack that we're using on the motorcycle is exactly the same power pack that we have on snowmobile. And this part of our power pack will end up in other product line. Then you can leverage multi-product line with one investment in the electric power pack. And we believe it's a long-term play, but we believe it's the right thing to do for the continuation of our business. Great. Thank you.

Thank you. At this time, I will turn the call to Monsieur Deschaines to close the meeting.

Thank you, Sophie. And thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our second quarter conference call on September 6th. 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. And at this time, we do ask that you please disconnect your lines. Have a good weekend.