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Edited Transcript of DOO.TO earnings conference call or presentation 20-Mar-20 1:00pm GMT

Q4 2020 BRP Inc Earnings Call

Valcourt Apr 2, 2020 (Thomson StreetEvents) -- Edited Transcript of BRP Inc earnings conference call or presentation Friday, March 20, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* José Boisjoli

BRP Inc. - President, CEO & Chairman

* Philippe Deschênes

BRP Inc. - Manager of Treasury & IR

* Sebastien Martel

BRP Inc. - CFO

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Conference Call Participants

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* Benoit Poirier

Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst

* Brandon Rolle

Northcoast Research Partners, LLC - MD & Senior Research Analyst

* Brian Morrison

TD Securities Equity Research - Research Analyst

* Craig R. Kennison

Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

* Marc J. Torrente

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Steven Arthur

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the BRP Inc.'s FY '20 Fourth Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.

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Philippe Deschênes, BRP Inc. - Manager of Treasury & IR [2]

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Thank you, Maud. Good morning, and welcome to BRP conference call for our fourth quarter of fiscal year 2020. Joining me this morning are José Boisjoli, President and Chief Executive Officer; and Sebastien Martel, Chief Financial Officer.

Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call that are subject to a number of risks and uncertainties. I invite you to read BRP's FY '20 earnings press release for a listing 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 José.

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José Boisjoli, BRP Inc. - President, CEO & Chairman [3]

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Thank you, Philippe. Good morning, everyone, and thank you for joining us. This morning, we'll give you the Q4 and fiscal year '20 results. However, given how rapidly the situation with COVID-19 is evolving globally, it is difficult to predict its impact on our business. You will understand that we will continue to adjust our plan as things unfold.

Let us start by reviewing the current situation. First, the employee of BRP are doing well. We have established clear policy on travel, events and health, and we'll continue to update them as government response evolve. We have also adopted work from home practice where applicable. Second, I would like to thank all our employees, in particular, our manufacturing workforce, who are taking extra care to apply special health protection measure. Third, we have had some challenges, but have not experienced any break in our supply chain to date. Fourth, as of today, all our manufacturing sites are operational, but we anticipate there will be line speed reduction or temporary closure to adapt to the demand. Fifth, most of our dealers around the world, with a few exceptions, are continuing their operation. And dealer are

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Spain and France for the moment. Interesting to note, in China, 26 out of our 33 dealers have reopened for business, and traffic is beginning to resume. As you can imagine, we are monitoring the situation closely and will continue to adapt.

Before I move on to discuss fiscal year '20 results, I would like to remind everyone that our diversified manufacturing footprint, product portfolio and market presence provide us a solid base to work upon.

Let's start by looking at our financial results for the year on Slide 4. Our revenue were up 15% to reach $6.1 billion, primarily driven by strong growth in Year-Round Product. Our normalized EBITDA was up 23% to $804 million resulting in a normalized earnings per share that came in above our guidance range at $3.83, representing solid growth of 24% over last year. For the fourth straight year, we have been able to outpace the industry. Our North American Powersports retail sales for the year were up 15% compared to an industry that was up mid-single digit. When excluding snowmobile or North American Powersports retail, sales were up 17% in an industry that was up mid-single digit. This is a testament to our reputation for pushing technology and innovation to create market-shaping product as well as our flawless execution and our strong dealer network. It's difficult to celebrate in time like this, but we achieved our 2020 objective 1 year in advance by delivering over $6 billion in revenue and over $3.50 in normalized EPS. I'm extremely proud of what BRP is becoming. I would like to thank all our employees.

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We have set a solid foundation together.

Now let's move to our performance for the fourth quarter, starting with the look at global retail on Slide 7. Our strong momentum continued into the fourth quarter, as once again our Powersports product lineup continued to drive strong consumer demand around the world. In North America, our retail was up 12% or 21% when excluding snowmobile. Latin America was up 19%, driven by strong side-by-side and personal watercraft sales. We continued performing well in EMEA, with retail up 7%, even though the industry was down low single digit, and in Asia Pacific where our retail was up 9%, while the industry was up mid-single digit.

Looking at North American retail by product line on Slide 8. Again, this quarter, we've delivered solid growth across our Powersports product portfolio. We continued to outperform the off-road industry with side-by-side retail growing above 30% for a second consecutive quarter and ATV retail being up about 10%. Early in the season, 3-wheeled vehicle retail was up low single digit, continuing to grow despite lapping a very difficult comparable as our retail had tripled during last year's fourth quarter. Personal watercraft performed well early in the season with retail up low teen, and we had a strong quarter for snowmobiles with retail up mid-single digit in an industry that was down high single digit.

Now let's turn to Slide 9 for the Year-Round Products highlights. Revenue were up 18%, driven by a higher volume of side-by-side sold. On the retail side, 7 months into season '20, the side-by-side industry was up high single-digit. The demand for our Can-Am side-by-side was very strong, and our retail was up low 30% season to date. Can-Am side-by-side was also performing well in international market with retail for the quarter up over 30% in Latin America and up over 40% in EMEA and Asia Pacific.

Turning to ATV. The North American ATV industry was also 7 months into the season, and retail overall was up low single-digit. For the same period, Can-Am ATV was up low-teen percent, notably gaining share in the mid cc segment. Can-Am ATV was also performing very well in Europe and in Asia Pacific, with retail up high single-digit and low teen, respectively.

Now looking at the 3-wheeled vehicle. Early in season '20, the North American 3-wheeled motorcycle industry was up low single digit, and Can-Am 3-wheeled vehicle retail was up low single digit. We started shipping the new RT model in the last 2 weeks of the fourth quarter, and it is very well received by dealer and consumer.

Turning to Seasonal Products on Slide 10. Seasonal Products revenue were down 6% primarily driven by a lower volume of personal watercraft sold due to production timing. Looking at retail, starting with personal watercraft, we are currently at the end of the season and counter-season market, and Sea-Doo continued to experience solid growth, notably in Brazil, where retail was up in the mid-20% for the quarter. In Australia and New Zealand, our retail was up low single-digit, despite the negative impact from the wildfire problems. In North America, traction at the boat show was good, and season-to-date retail was up low-teen percent, both for the industry and for Sea-Doo.

Turning to snowmobile. 10 months into the season, the North American snowmobile industry was about flat compared to last year. Our Ski-Doo lineup continued to drive strong consumer demand, resulting in retail that was up about 10%, and we remain #1 in North America in all the segments in which we are competing and have globally the highest market share in our history. Also we recently held our dealer event where we introduced our model year '21 Ski-Doo and Lynx lineup. The most important use for our model year '21 Ski-Doo lineup was the introduction of the world's first factory-built 2-stroke turbocharged engine that is available on the new Ski-Doo Summit 850. This is another great example of our ability to push technology and disrupt the industry.

Considering with a look at Powersports part, accessories and apparel at OEM -- and OEM engines, revenue were up 6% in the quarter, driven by a higher volume of Year-Round Products parts and accessories. Fiscal year '20 was an excellent year for our accessories business as we've delivered double-digit accessories revenue growth with all our Powersports product line.

Now looking at the Marine category. Revenues were up 19% in the quarter, driven by the acquisition of Telwater and a higher volume of outboard engines sold. Looking at retail sales, 7 months into season '20, the North American outboard engine industry was about flat, with Evinrude retail down high-teen percent. Boat retail for Alumacraft, Manitou and Quintrex was generally in line with the industry. For the Marine business, we are following our buy, build, transform strategy, and I would like to remind you again that this is a mid to long-term play.

Overall, we had a very good result for fiscal year '20, and our momentum continued early into fiscal year '21. Exceptionally, this morning, we'll share some color on our fiscal year '21 retail. Our retail from Feb 1 to last Friday, on March 13, was up 11% and 24%, excluding snowmobiles for a good start of the year. However, in this current global uncertainty, we are proactively implementing measure to protect our financial flexibility and are monitoring closely the situation. In this context, we'll not issue a full year guidance for fiscal year '21 at this time. We believe that BRP will be well positioned when the economy bounces back.

And with that, I will turn the call over to Sebastien, and will return for closing remarks.

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Sebastien Martel, BRP Inc. - CFO [4]

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Thank you, José, and good morning, everyone. Before we jump into Q&A and discuss the current business environment, let me give you an overview of the Q4 results. We completed fiscal year '20 with results that came in slightly ahead of our expectations, driven by the continued strength of our ORV business. Our revenues for the last 3 months of the fiscal year grew 7% to reach $1.6 billion primarily driven by higher wholesales of SSV due to the continued popularity of our lineup with consumers. Our gross profit margin ended at 23.7%, an increase of 150 basis points from last year's fourth quarter as the net favorable impacts coming from volume, pricing and sales programs, and production and distribution costs were partly offset by unfavorable foreign exchange rate variation. Our normalized EBITDA was up 22% to $222 million. And our normalized EPS was up 27% to reach $1.12.

Looking at the full year, as José mentioned, we also delivered record results with revenues up 15% to reach $6.1 billion and normalized EPS of 24% to reach $3.83. Both metrics ending slightly above the higher end of our guidance ranges, primarily driven by stronger-than-anticipated results for our ORV business and favorable tax rates. Free cash flow ended at $225 million, including CapEx that ended below our guidance with investments of $331 million as certain projects were pushed to fiscal year '21.

Also just after the end of the year, we extended the maturity on our long-term debt by 2 years to May 2027 and reduced pricing on a portion of it. As you know, proactively managing the maturity of our long-term debt and maintaining our covenant-light structure is one of the ways we contribute to strengthening our balance sheet.

Turning to Slide 15. Our quarterly normalized net income was up $14 million compared to last year as it ended the quarter at $100 million. The growth was driven by a net favorable impact of $56 million coming from volume, mix, pricing and sales programs, and a net favorable impact from production and distribution costs of $19 million, which were partly offset by higher operating expenses for $15 million to support continued product investments, higher net financing costs and normalized income tax expense were $17 million, and an unfavorable foreign exchange rate impact for $29 million.

Looking at network inventory on Slide 16. Our network inventory was up 7% over the same period last year as we continue gaining market share. Remember that our retail for the quarter was up 12% or 21% when excluding snowmobile. So again, this quarter, the increase in network inventory continued to trend positively as it was lower than retail sales growth. Our network inventory is up for SSV as we continued to experience solid momentum with a second consecutive quarter of retail growth above 30%. And 3-wheel, primarily driven by Ryker, for which demand continued to be strong, and we started shipping units for the upcoming season earlier than we did last year.

We are comfortable with our network inventory level and quality as the number of days continued to trend in line with our targets and the quantity of aged inventory is low, with less than 3% being more than 18 months old. Managing a healthy network is a key priority of ours, and we will continue to diligently manage it to ensure that evolves in line with retail demand.

And finally, turning to Slide 17 to talk about fiscal year '21. Now with the recent developments related to COVID-19, our ability to forecast the year at this time is challenged. The potential impacts resulting from the pandemic remain unknown and difficult to predict. And so far, the direct impact on our business, as José indicated, have been limited. However, when we look at the containment measures that the various governments have implemented around the world, it is only a matter of time before we start feeling the impact on our business, whether through supply chain or retail demand. Therefore, given the fluidity of the situation and the inherent challenges it creates in predicting how the next months will unfold, we will not be issuing guidance for fiscal year '21 today.

Despite the limited visibility, like many companies, we have started scenario planning exercise that focus in part on volume reductions, cost control and cash flow. We are still in the beginning of this process, and therefore, it is too early to share the details of this with you today. However, proactively, in order to ensure that we have access to liquidity as needed, this past Wednesday, we have drew the full amount on our $700 million revolver facility. And with the Board, we have decided to suspend the quarterly dividend. We expect to provide you with more information and details at the latest on our outlook for fiscal year '21 during our Q1 earnings call.

As we look ahead, our focus remains on delivering on what we control, all the while taking a prudent approach to the year, notably by implementing recommended actions by government officials to ensure the safety of our employees, by working closely with our suppliers, by adjusting our production levels in line with retail trends to ensure that our dealer network inventory remains healthy; and lastly, in a balanced, proactive and prudent manner by implementing contingency measures as required to control costs, optimize cash flow and position us to continue our growth once this crisis is behind us.

And with this, I will turn the call back to José

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José Boisjoli, BRP Inc. - President, CEO & Chairman [5]

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Thank you, Sebastien. Fiscal year '20 was an incredible year for us as we've delivered our 5-year plan, Challenge 2020, one year in advance, by exceeding our $6 billion in revenue and $3.5 EPS target. As I said, I'm extremely proud of what BRP has achieved as well as the strength and resilience of our people. During the period -- this period of uncertainty, our first thoughts are with everyone affected by the situation, including our employees, dealers and business partners. As the situation evolves, we are ready to respond and to adjust our business plan as needed in order to protect our long-term growth. On that note, I will turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Steve Arthur from RBC Capital Markets.

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Steven Arthur, RBC Capital Markets, Research Division - Analyst [2]

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Just wondering if you can elaborate on a couple of things. First, on dealer inventory. You talked about it at the end of the quarter and covered there. Any comments at all in what you're seeing, how it's trending over the last few weeks since the quarter end?

And with respect to dealer orders that are expected for delivery in the next coming months, how firm are those or how much flexibility does the dealer have for deferring deliveries or canceling them outright and the revenue recognition impacts there?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [3]

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Dealer orders -- I will talk to you about the dealer order, and Sebastien will cover the inventory. The dealer order right now, obviously, in a country like Spain, Italy, and France, the dealer order, I mean everything is closed and we don't have any shipment. In North America, we don't see yet any dealer cancellation. The retail was excellent, and that's why I gave you the color of our retail till last Friday. Our retail was excellent till last Friday, and we didn't see any cancellation of the order at this point. That being said, we believe it will come. And I don't think the dealer will cancel order. But at one point, dealer will close, and it will be difficult to ship. Obviously, we have firm orders for off-road for the next 3 months. We have firm order for watercraft. We have -- at the end of Ski-Doo -- Ski Snowmobile. And 3-wheeled vehicle, we have firm order also till the end of the season. But it will depend how this situation will evolve over the next few days.

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Sebastien Martel, BRP Inc. - CFO [4]

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On the inventory, as you saw at the end of January, the retail -- for the quarter, the retail was super strong and the inventory position was good as well. And as José indicated in his opening remarks, retail up to last week was up 24% when you exclude snowmobile. So the retail continued to be very good. And so the inventory position is still very healthy. Obviously, we will monitor, and we are monitoring retail on a daily and weekly basis. And we are working with our teams to adjust deliveries and production if needed based on dealers' ability to take these orders and service consumers.

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Steven Arthur, RBC Capital Markets, Research Division - Analyst [5]

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And just one final one. Clearly, it's a very rapidly evolving situation. Any color on the actions that you've taken already or the things that have already been implemented to scale back production at the various facilities? And when you look at your stress testing, any color at all on what low case downside scenarios look like over the coming?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [6]

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As of today, all our manufacturing sites are running normally. But you can expect in the coming weeks, some factory will go from 2 shifts to 1 shift to slow down production and some could be closed temporarily for a period of time. Obviously, Steve, we will adapt depending of how fast the situation will have the domino impact. What is a bit funny is some industry are doing still very well. Our retail on side-by-side is strong, ATV. Even watercraft in U.S. is doing well. Then it's very, very difficult right now to follow the situation, and we'll adjust as fast as we can when we have a better indication.

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Operator [7]

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Our following question is from Mark Petrie from CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [8]

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Just a follow-up on that topic. With regards to sort of the production of specific types of product at each of your facilities, could you just remind us about your ability to potentially sort of consolidate across the facilities as opposed to just sort of shutting down the line?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [9]

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No. At this point, we don't think about consolidation. It's a lot more efficient to go from 2 shifts to 1 shift. And if the demand stopped totally, to stop totally the operation. Consolidation takes time, and we're not there. I think we'll go through a period of time. And this is the big question, how deep and how long this will last. Then we are not at that stage of looking at consolidation. This could last a few months. This could last, I don't know. Then, we'll adjust our plan. But right now, it's a lot easier to reduce line speed and temporary closing than consolidation.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [10]

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Yes, okay, fair enough. And then could you just give us a sense sort of by your buckets of costs, be it cost of goods and then your various OpEx lines, how much of that would sort of be kind of fixed or just pure overhead? And how much would be variable or semi-variable?

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Sebastien Martel, BRP Inc. - CFO [11]

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Yes. Obviously, when we look at our business and we look at adjusting the level of operations, OpEx and overhead will be the big element. And then just to give you a bit of color, in most (inaudible), in terms of fixed versus variable, we have about, let's say, probably 90% of the cost in overhead is fixed. And in the cost of goods sold bucket, 85% of the costs are variable, 15% of that is fixed. And of that 15%, 90% is pretty much difficult to reduce because it's either depreciation or leases that you have on the building. So 85% is variable, 15% of it is fixed, and of that, 90% is pretty much frozen. And so overall, in COGS, about 13% is fixed. And then on OpEx, well, that is pretty much variable, you probably have 80%, 85% of that that's variable. Sorry, is that clear?

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [12]

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Yes, yes. No, we got there. And then could you just sort of talk at a high level. Like when you -- I mean obviously, we're not there yet. But there's going to be a point where, presumably, there's a scenario where a lot of your dealers are under some pretty significant financial pressure. And could you just talk about the structures or past experiences in terms of providing financial relief to dealers and what that has looked like?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [13]

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First, we've been growing and the economy has been strong for more than 10 years, then the dealer overall were in good financial situation compared to '08, '09, where the situation deteriorated for a few years before to hit the crisis in '08, '09. Then first, I think the dealer today worldwide are in better shape than they were in '08 and '09. That's the first thing. I think everyone is managing their inventory better compared to what we were doing before. And dealer right now are trying to operate. Just to give you a sense, in U.S., Wednesday, we've done a survey -- in North America, we've done a survey, Wednesday, and only 4% of the dealers were closed. About 20 were thinking about closing and the other were still operating, but changing a bit their habit, some are trying to sell product on digital, some are doing VIP delivery. Then everyone is trying to find new ways to keep going. Very difficult to know, but no doubt that we are in better shape than we were before.

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Operator [14]

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Our following question is from Benoit Poirier from Desjardins Capital Markets.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [15]

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Could you talk, José, a little bit about the situation back in 2008, 2009? And also what kind of flexibility do you have from a CapEx standpoint, kind of your ability to reduce your CapEx going forward? To which levels?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [16]

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Yes, in '08, '09, and we've looked, obviously, of how the situation deteriorate. But the big difference is in '08, '09, you had like about 10 months of declining in sales. After that, we hit the bottom, and it took a long time to recover. This time it's different. As you saw, and that's why I gave you the color on our retail up to last Friday, everything was rolling full glass. And now we know that there will be a slowdown, but the big question is how deep and how long? Then right now, we are monitoring, obviously, the health of our employee. We're monitoring closely all our expenses, all the CapEx that we can, depending how things evolve that we can delay. And obviously, doing that, trying to protect our short-term growth -- our term -- our growth when the economy bounce back. We want to be -- our goal is to be extremely well positioned when the economy bounces back.

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Sebastien Martel, BRP Inc. - CFO [17]

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And on your CapEx question, Benoit, we had shared some preliminary numbers last fall that were looking at fiscal year '21, and we had said that our plan for fiscal year '21 was CapEx north of $400 million. We are still in the planning phase. Obviously, we're taking this very seriously, and we're looking at all the cash elements of the business. We don't have a number yet for '21. But if we need to bring that number in the low $200 million, it's certainly something that is feasible when I look at the high level plan. But obviously, we'll be doing a bottom-up in the next few weeks.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [18]

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Okay, perfect. And how much of your sales do you expect? If we look at fiscal '21, no guidance, although you expect growth in every product line. So how much of the revenues is already baked in terms of the people that already preorder snowmobiles that will be received in November and December? And how should we expect dealer inventory to evolve, let's say, the coming quarters?

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Sebastien Martel, BRP Inc. - CFO [19]

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Obviously, the situation is still very, very fluid. It's unprecedented. We do have firm orders for personal watercraft, if we wanted to. We have the orders for Q1, for Q2. There's super good visibility there. For ORV, we also have good visibility. For snowmobile, dealers have placed their orders for next season. But obviously, it's one thing to produce them, but then you need to have dealers that are able to take them and consumers that are able to buy them as well. And so today, I think it would be optimistic to think we are were able to sell all of the preorder units to our consumers. And as we said, we'll be adjusting our plans accordingly, and we'll be working with our dealers, plant partners to make sure that we do the right thing for the business in the long term.

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Operator [20]

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Our following question is from Tim Conder from Wells Fargo Securities.

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Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [21]

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This is actually Marc Torrente on for Tim. First, just given where oil prices are now, could you remind us of your direct and indirect exposure to the oil patch regions, maybe a percentage of your total off-road vehicle sales over sales overall?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [22]

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Yes. I mean our exposure to the oil states are fairly limited. And we still have a lot of market share to gain in those states. And we do -- we don't do much B2B, we do most of our sales B2C. But just to give you a sense, it's about 20% of our U.S. sales. The 7 states Texas, Oklahoma, New Mexico, Colorado, Wyoming, North Dakota and California. And so far -- I mean we're growing -- this season, we're growing over 20% in those states. Then so far, we don't see any direct impact. But because we're fairly small in those areas, we still believe that we have some runway.

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Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [23]

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Okay, great. And then (technical difficulty) certain environment, is there any, I guess consideration at this point to change product launch cadence throughout the year?

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Sebastien Martel, BRP Inc. - CFO [24]

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That was still too early to call. Obviously, we -- our product launches are scheduled several years in advance. I mean we have teams working on product launches 1 year, 2 years. And so too early to say what we're going to be announcing in June and what we're going to be announcing in September. We might adjust our plans based on how the economy is evolving. But most of the engineering work is done for these products. So we still have a healthy pipeline of product introductions to do. Obviously, the situation will dictate what we announce and when.

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Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [25]

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Okay. And then in the deck, you provided some commentary on your 2021 plan prior to the virus impact. Could you provide any more detail on what your segment outlooks could have looked like without the impact for the year?

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Sebastien Martel, BRP Inc. - CFO [26]

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What could have looked like? Sorry, Marc, I missed the...

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Marc J. Torrente, Wells Fargo Securities, LLC, Research Division - Associate Analyst [27]

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Your segment outlooks for the year?

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Sebastien Martel, BRP Inc. - CFO [28]

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Yes. We were -- obviously, you saw the results that we delivered last year, and you saw the retail, how it kicked off early this year. And so our outlook for fiscal year '21, before this whole situation, was very favorable. Obviously, ORV and off-road was a segment where we were looking for growth and solid growth, snowmobile with the product introductions that we did last winter and a few months ago at our club. We were also optimistic for that product line. And we have a very solid lineup with personal watercraft and with our 3-wheeled business. So honestly, before this, we were actually very bullish for fiscal year '21.

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Operator [29]

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Our following question is from Robin Farley from UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [30]

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I want to clarify the retail that you gave. Was that season to date? Or was that just since February 1? You gave that retail number till last Friday, I just want that -- the start of that period. And then also if you can clarify, I thought if you suspend production, would you be maintaining labor expense? I just -- I know you gave some of the fixed versus variable, but thinking about some of the variable being labor expense and whether that would be maintained?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [31]

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First, the retail I gave you in fiscal year '21 was from Feb 1 this year to last Friday, March 13. And just to repeat, we're up 11% overall, and excluding snowmobile we're up 24%. Then this is -- we had a very good momentum. In terms of labor, if we close temporarily, we will adapt to the country rules. In some -- in North America and in Europe, there is program for employee who are temporarily off. Then it will depend on the country where we have the operation or we have our sales team. We will adapt to each region.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [32]

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So there's potentially a couple of weeks of continuing labor cost. Is that kind of the idea? I'm sorry, is that's what you were suggesting?

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Sebastien Martel, BRP Inc. - CFO [33]

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The line is very bad, Robin, we -- you're breaking up, sorry.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [34]

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Oh, just clarify to that. There would be a couple of weeks of maybe maintaining labor for a brief period, maintaining this labor cost?

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Sebastien Martel, BRP Inc. - CFO [35]

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If we do temporary shutdowns, most of the government programs kick in immediately the first day of temporary layoff. And so we wouldn't necessarily need to -- in most of the countries need to maintain the labor cost for a few weeks if we shut down for a few weeks.

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Operator [36]

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Our following question is from Craig Kennison from Baird.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [37]

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Seb, I understand you are undergoing a liquidity review right now. But just wondering if there are any particular covenants in play that are top of mind for you?

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Sebastien Martel, BRP Inc. - CFO [38]

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Craig, good question. We've -- José and I were both there in '08 and '09. And back then, we had long-term debt with covenants. And so we had to navigate through that period of uncertainty and manage the business through covenants. And one of the takeaways we had back then is that if ever there was another slowdown, we don't want to be hindered by jeopardizing or making sacrifices to the business because we need to comply with covenants. So we've been very stubborn and diligent in maintaining a covenant-light debt. And so today, our debt is covenant-light. There are no financial covenants associated with our Term B.

We've also been very diligent at always extending the maturity. So we don't want to be stuck with any short-term debt reimbursement. And last January, the markets were good, the pricing was good as well and we decided proactively to extend the maturity on our debt by an additional 2 years. And so now our term B has a covenant-light structure and repayment date of 2027. And so that's one of the lessons that we learned back in '08 and '09. And today, while, knock on wood, this is one good decision that we've taken, and it provides us with added flexibility in these types of situations.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [39]

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That's very helpful. And then I'm wondering if you've had conversations with your credit partners, either on the floor plan side or those who provide loans to consumers? And just curious what they might be saying to you at this time.

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Sebastien Martel, BRP Inc. - CFO [40]

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Absolutely. We've been -- we're working with TCF in North America for floor plan. We work with Wells Fargo as well at international. And we're in constant communication with both partners. They are extremely supportive. They understand the situation. They've been through this before. We are working hand-in-hand to support our dealers. We are adjusting our payment terms. We are extending floor plan as well to our dealers. We need our dealers in the long-term, and we need healthy dealers. And so we understand that. TCF and Wells Fargo understand that as well. And so we're proactively working to try to lessen the burden on them as much as possible.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [41]

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And lastly, I don't know if you commented on retail in the last week. Obviously, it's early, but things have changed a lot. Have you seen any statistics on retail since the end of last week?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [42]

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Yes, we'll give you some colors. Craig, and we're monitoring this worldwide. And just to give you a sense, our retail was about 10% since the beginning of the year, last 2 weeks, last week. And the rolling last 2 week and last week was about 10% up. It was down 9% in the last 3 days. Then you can see that it's starting to affect. And obviously, in Europe, France, Spain and Italy are down. Then this is totally normal. And in U.S., like I said in my comments, 4% of the dealer are closed right now. Then, this is what we don't know, is how big will be and how fast, how deep and how long it will be.

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Operator [43]

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Our following question is from Cameron Doerksen from National Bank Financial.

He just removed himself from the queue. So we're going to go with Gerrick Johnson from BMO Capital Markets.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [44]

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Sebastien, can you tell us what the capacity utilization was prior to the virus outbreak?

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Sebastien Martel, BRP Inc. - CFO [45]

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On the revolver?

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [46]

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No, no, no. Factory capacity utilization, where were you prior to the outbreak?

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Sebastien Martel, BRP Inc. - CFO [47]

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We were -- listen, we were running full capacity at -- in side-by-side, personal watercraft as well. So we were running at a pretty high pace. Obviously, snowmobile is an off season, so that was not running. But -- and the 3-wheeled vehicle business as well, we were -- we started production of the new RT model late January, and so that's in production in Valcourt, and the Ryker as well, shipping for the summer season.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [48]

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Okay, great. Can you repeat what you said about the $700 million revolver?

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Sebastien Martel, BRP Inc. - CFO [49]

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Yes. Well, in my prepared remarks, what I indicated is that we -- last Wednesday, we decided to draw the full amount on the revolver in order to provide us with necessary liquidity when needed.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [50]

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Was there a chance that it would go away? Why did you need to -- why did you need to pull on it right now?

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Sebastien Martel, BRP Inc. - CFO [51]

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Well, when we look at the overall market situation, when we look at the uncertainty, obviously, you're reading the news like everyone else is, a lot of the business -- a lot of businesses are going through tough times. And back in '08 and '09, there was concerns about access to liquidity and how banks would fare in all of this. We're not worried because we have Canadian chartered banks behind the revolver. But at a certain point, we wanted to be proactive and prudent in our managing of the business, and that's why we decided to pull on the revolver.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [52]

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Okay, got you. And lastly, similar to Robin's line of questioning. On OpEx, I think you said 85% is variable. I mean I get it on R&D and perhaps sales and marketing, but G&A, I would think, would be pretty darn fixed, especially if it's people and labor behind that. So can you just talk about your operating expense a little bit more in detail on how it is 85% variable?

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Sebastien Martel, BRP Inc. - CFO [53]

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Yes. Well, maybe I'll just -- I probably didn't do a good job when Robin asked her question earlier in terms of fixed versus variable. So let me redo that over again.

We'll start with the cost of goods sold line. When you look at the cost of goods sold, out of the cost of goods sold, 15% is overhead and depreciation, and about 90% of that is fixed. The rest of the COGS is material labor, freight, warranty, et cetera, and that's 85% of the cost of goods sold, and that's variable.

In terms of OpEx, yes, there's a lot of salaries. Yes, there's advertising, there's consultants. I would say 80% to 85% of that is variable and addressable. Yes, there are some salaries. But if the situation warrants that we need to adjust our workforce, we will adjust our workforce accordingly. Obviously, these actions will be measured. We want their certain skills and competencies that we want to protect and make sure that they're there when the economy turns around. But the way we look at it is everything should be addressable in terms of spend, and then we'll take the measured decisions as needed.

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Operator [54]

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Our following question is from Brandon Rolle from Northcoast Research.

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Brandon Rolle, Northcoast Research Partners, LLC - MD & Senior Research Analyst [55]

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I just wanted to ask about your largest North American RV competitor. They've gotten much more aggressive this year. Have you seen any impact on your retail demand since maybe mid-February? And in the future, do you plan to compete with lower pricing on? Or do you plan to just continue beating on innovation?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [56]

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No. I think -- I mean we didn't see any slowdown in our retail. As you saw in Q4, we were over 30% in retail versus last year. And we had a very, very strong start of fiscal year '21. Then obviously, there is great competition between our biggest competitor and us. But we didn't see any slowdown in our retail.

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Operator [57]

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Our following question is from Brian Morrison from TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [58]

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Seb, in your commentary, you talked about your CapEx and the flexibility to take it from potentially $400 million down to $200 million. Can you maybe just talk about some of the major projects that comprise that $400 million, and might be amenable that you could take it down to $200 million?

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Sebastien Martel, BRP Inc. - CFO [59]

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Yes. Well, obviously, you've seen our business evolve over the last 2 years, and you've seen us grow. And our plans for fiscal year '21 were to continue to grow. And so we were making investments in capacity in most of our sites. And so obviously, we will re-question capacity investments in the short term. Some -- we also have some projects that had more longer-term returns, certain investments in our systems and all that. And so these are items that we can re-question as well. And obviously, in situations like this, while some improvements that you might want to make to some of the buildings that are not necessarily critical can be postponed to a future time. And obviously, these are things that we will also be addressing in our plans.

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Brian Morrison, TD Securities Equity Research - Research Analyst [60]

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Okay. And then one follow-up, if I can. Back in your prospectus, you provided some color on the impact of volumes and revenues and EBITDA, and the impact back in '08 and '09. Can you maybe talk about what happened to your free cash flow at that time as well? Just to get a color of -- some color on the impact.

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Sebastien Martel, BRP Inc. - CFO [61]

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Yes. Well, obviously, cash generation was impacted back in '08 and '09. We were -- in '08 and '09, we did consume some cash in the first year, and it took about 2 years before we came back to positive cash generation. And so that's why we are taking a prudent approach in managing the business. That's why we took the decision to postpone the dividend payment -- the quarterly dividend payment. We have ample flexibility with our revolver. But as José indicated, the duration and the extent of this crisis is unknown today, and we prefer to be prudent and adjust accordingly if things are better than what people anticipate.

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Operator [62]

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Our following question is from Derek Dley from Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [63]

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Just one last one on the CapEx. So that low $200 million number you quoted, is that what you would define as maintenance CapEx right now within the system?

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Sebastien Martel, BRP Inc. - CFO [64]

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Too early to call. I just wanted to give you an appreciation of -- as to the flexibility that we have on our CapEx. As I talked earlier, obviously, we'll be selective in what we decide to do and not to do. But like any companies, we were growing, and so we were making investments, some of them that are paying more in the short term, some of them that are paying more in the long term. The good news is that we have flexibility to adjust our plans, and we do not believe that it will -- could jeopardize the business in the long term. So we'll be very, very selective in what we decide to do.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [65]

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Okay. And just in terms of your exposure to more oil and gas-focused region. I'm assuming the majority of that exposure would be in Year-Round Products and likely within the utility segment of Year-Round. Can you just comment on like where your market share is on that? I mean that was obviously a big growth vertical for you. And I suspect that you still have room to gain market share even in what could be a very challenged market.

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José Boisjoli, BRP Inc. - President, CEO & Chairman [66]

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Yes, the popular product in those regions is the Defender, the utility side-by-side. This is a product, was the big seller in those regions. And again, we introduced a new Defender -- the Defender in 2015. Then that's why we started from almost 0 market share, and we've been growing since that time at a very good pace. Then this is why we believe we still have runway despite the oil price that have declined lately.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [67]

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Can you give us any color on the market share?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [68]

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The market share, I mean is low to mid-teen percent.

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Operator [69]

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Our following question is from Benoit Poirier from Desjardins Capital Markets.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [70]

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Yes. With respect to capital deployment opportunities, could you maybe provide your view about how do you look at share buyback given the pullback in your stock price, whether it represent an opportunity in your view? And maybe if you believe there might be some M&A opportunities down the road and if it's something that you're or will be looking at in the market environment?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [71]

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Benoit, as long as we don't have better visibility on the situation, we will be very prudent. Again, I think it's the first time, we're writing history right now. And the big question is how deep and how long this crisis will last. And as long as we don't have better visibility, we'll be very careful to protect our cash position.

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Operator [72]

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We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschênes.

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Philippe Deschênes, BRP Inc. - Manager of Treasury & IR [73]

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Thank you, Maud, and thanks, everyone, for joining us this morning. Our next conference call will be on May 28 for our first quarter conference call for fiscal '21. Thanks again, everyone, and have a good day.

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Operator [74]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.