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Edited Transcript of DOO.TO earnings conference call or presentation 29-Aug-19 1:00pm GMT

Q2 2020 BRP Inc Earnings Call

Valcourt Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of BRP Inc earnings conference call or presentation Thursday, August 29, 2019 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

* Brian Morrison

TD Securities Equity Research - Research Analyst

* Cameron Doerksen

National Bank Financial, Inc., Research Division - 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

* Frederick Charles Wightman

Citigroup Inc, Research Division - Assistant VP & Analyst

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure 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

* Timothy Andrew Conder

Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure 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 Second Quarter Results 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, Luise. Good morning, and welcome to BRP's conference call for the second 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 MD&A 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 will 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. I am pleased to report that we concluded the first half of the fiscal year on a strong note as our momentum continued in the second quarter, and we have delivered solid result across the board. The demand of our product remains strong as we achieved another quarter of double-digit retail growth for our powersports. Although we had poor early spring weather, especially in certain regions like the Northern and Midwest portion of North America, we were able to catch up in June and July for all product lines.

From a financial standpoint, we experienced our best second quarter on record after delivering our highest revenue and normalized EPS dilutive for that period. On the back of this solid performance, the successful completion of our substantial issuer bid and the closing of the Telwater acquisition, we are narrowing the range and increasing our year-end EPS guidance to $3.65 to $3.80, an increase of 18% to 23% year-over-year.

Now let's get into the highlight of the quarter starting with the financial result on Slide 4. Our revenue reached a record level for our second quarter at $1.460 billion, representing a year-over-year growth of 21% notably driven by Year-Round Product. All regions contributed to the growth with revenue up 21% in the United States; 32% in Canada and 14% for International. Our normalized EBITDA was up 16% to $168 million, resulting in a normalized earning per share of $0.71, up 8% over last year.

Our retail momentum continued to be strong. In North America, our powersports industry remained healthy and continued to perform well despite negative weather conditions earlier in the spring, posting a mid single-digit retail growth for the quarter.

Our product continued to outperform in the region as we've delivered a second consecutive quarter of mid-teen retail growth.

Internationally, we continue to be affected by political and economic tension in certain parts of the world. Mexico has slowed down, but still remained up mid-single digit with retail remaining generally strong in Latin America overall and up 18%.

In EMEA, we are performing well with retail up 18% while the industry is down high single digit. For APAC, our performance in China has been flattish and China is impacting the rest of APAC, where our retail is slightly down 2% and the industry down about 10%.

Looking at the North American retail by product line on Slide 6. Again this quarter, in general, we outpaced the competition and delivered growth in our powersports product line. Side-by-side and ATV had very strong quarter with retail up in the high 20 and low-teen percent respectively.

Three-wheel vehicle continued their robust growth with retail up in the 90%, driven by the introduction of Ryker. And finally, personal watercraft was up low single-digit affected by weather condition this spring, which is better than the Marine business and in line with the rest of the industry.

Turning to Slide 7. On June 4, we introduced our model year '20 Can-Am off-road lineup, the most complete and competitive yet. The key highlights are: the introduction of the Can-Am Defender 6x6 HD10, representing a significant addition to Can-Am utility lineup with its 6-wheel traction, longer cargo bus and industry-leading torque. This model was in response to a need in the industry for increased cargo capacity. The combination of the longer bus and 6 wheels give this product incredible capability and the opportunity to create a new segment in the industry. The Can-Am Defender 6x6 is also the eighth new side-by-side platform introduced over the last 4 years, delivering on the commitment we made in 2015 of introducing a new side-by-side platform every 6 months for the next 4 years.

Now the Maverick X3 Turbo RR offers the best performance in the Sports segment with its industry-leading 195-horsepower and improved off-road maneuverability. Since its introduction in 2016, we continue to build awareness for the Maverick X3, our flagship side-by-side vehicle as the face of racing, present and future.

For example, we occupied the top 6 place earlier this month in the highly regarded Best In The Desert race from Las Vegas to Reno. With our model year '20 introduction, we now offer a more competitive lineup across the prized spectrum with the introduction of the new mid-hp and entry-level high-hp Maverick X3 package, very happy with those introductions.

And for ATV, the upgraded Can-Am outlander feature improved airflow with new inner fender and side panel making the temperature cooler and more comfortable for the rider. With the introduction of the Can-Am Defender 6x6 complete, we plan to continue the same pace of innovation, which allow us to more than double our side-by-side retail over the past 4 years.

Our capability increase at Juarez 2 is completed, and we're now running at full line speed.

As you see on this slide, we still have a lot of room to grow in the utility, sport and recreational segments. Over the years, we have set a solid foundation that position us well to capture market opportunity and continue our growth trajectory.

Now let's turn to Slide 9 for the Year-Round Product highlights. Revenue were up 33% for the quarter, driven by higher volume of side-by-side and ATV sold and the introduction of the Can-Am Ryker. On the retail side, the North American side-by-side industry ended its season '19 on June 30 with retail sales up mid-single digits. Can-Am side-by-side had a very strong end of season with retail up in the high 20% for the quarter, driven by our continued pace of innovation, strong momentum with our dealer network and greater availability of product.

For the full season, our retail was up 20%. And for the first time, we're ranked second in the industry.

Our side-by-side business also continued to grow rapidly in international market, notably in the EMEA and Latin America where retail sales grew about 25% in the quarter.

Turning to ATV. The North American ATV industry also ended its season '19 on June 30 with retail down low single digit. For the same period, Can-Am ATV retail was up high single-digit and ended the season with the #3 market share position in North America.

We have a very strong momentum with ATV as we continue to gain market share in both the mid-cc and the high-cc categories. Our ATV growth is also a result of our growing Can-Am off-road offering, our dealer value proposition and overall improved brand awareness.

We have similar success in Latin America and in Europe, where our retail grew 15% and 37% respectively in the quarter.

I am very pleased with our off-road vehicle performance and confident we can continue our momentum.

Now looking at the 3-wheel vehicle business. Nine months into season '19, the North American 3-wheel motorcycle industry is up in the mid-30% range. Our Can-Am 3-wheel vehicle retail sales are up over 100% for the same period, and our lineup is driving the industry growth so far this season. We're pleased with the momentum we have with Ryker. We're seeing strong consumer demand, especially in North America and in Europe and the awareness for the product continued to grow as it is attracting a lot of attention from the media and the online community.

We have made good progress with our Rider Education Program, which is now offered in 189 schools in 50 states and provinces and close to 17,000 courses completed with a conversion rate that is trending above our 15% target.

All in all, we are pleased with the launch of Ryker and the progress we have made in the first year of our 2-year plan as well as with the different initiatives taken to unlock the full potential of our 3-wheel vehicle business. As you know, our goal is to replicate the Sea-Doo Spark success story, and we seem to be on the right path.

Now turning to seasonal product on Slide 10. Seasonal product revenue were up 11%, primarily driven by favorable product volume and mix for personal watercraft. Looking at retail sales. Historically, retail sales have always been strongest for Sea-Doo in the North America East and mid-West versus the competition, which tend to perform well in the South. With the poor spring weather condition and sustained flooding, we were disadvantaged in these markets. Despite this, because of our strong lineup, we were able to catch up in June and July, and finished the quarter in line with the industry.

The industry 10-month into the season '19 is up low single-digit percentage and Sea-Doo North America retail is also up low-single digit over the same period. It is a similar situation in EMEA, where the market was slightly down driven mainly by Scandinavian weather condition although Sea-Doo continues to gain market share. The Sea-Doo Fish Pro is also performing well in its first season with very good sell-through in all our key markets around the world.

In fact, the Fish Pro won an Australian Good Design Award for the quality of our design and its innovative feature. For snowmobile, the Scandinavian industry ended its season '19 on June 30 with retail up low single-digit. Ski-Doo and Lynx combined retail was also up low single-digit for the season, and they maintain the #1 position in the industry.

Continuing with a look at powersports PAC and OEM engine on Slide 11. Revenues were up 18% in the quarter driven by continued solid momentum for our parts and accessory business across all of our powersports product line. Our accessory business continued to experience strong growth with a 33% increase in revenue for the quarter, notably held by the success of the Ryker accessories lineup for which sales continue to trend above target. The core of our success is our strategy to develop accessories in parallel with the vehicle, resulting in an extensive lineup of accessories that are ready at the launch, well integrated into the vehicle, and compatible with multiple model across all brands. The Defender 6x6 is a great example of this as we already introduced over 150 accessories available for this vehicle.

On the Rotax front, during the quarter, we opened the first Rotax Max Dome in Linz, Austria close to our manufacturing facility in Gunskirchen. It is an innovative concept that combines indoor electric Go-Karting racing with gaming technology, augmented reality and virtual entertainment. Karting is the perfect product for electrification because the distance range per charge in a controlled environment is not an issue compared to other product line. By adding the aspect of gamification, it creates a whole new customer experience. During the year, we will continue to improve the Max Dome model, but our mid- to long-term plan is to expand this concept to other cities and countries.

This is our first venture in the direct-to-consumer experience, and it provides us a useful learning opportunity both to define this model and to potentially offer other experiential concept in the future.

Now looking at the Marine category on Slide 12. Revenue were up 1% in the quarter due to the acquisition of Alumacraft and Manitou last year offset by a lower volume of outboard engines sold. The Marine industry was the most impacted by the unfavorable weather condition we experienced during the spring and the early summer.

On top of that, 1/3 of our Evinrude and Alumacraft business and 50% of our Manitou business is in the Great Lakes region, the area hardest hit. Because of our current geographical concentration, we were especially impacted.

Looking at retail. The North American outboard engine industry ended its season '19 on June 30 with retail above flat compared to the previous season. Evinrude retail was down high-teen percentage for the season. In the Marine business, boat industry data is delayed, and it's not reported the same ways as for the engine and powersports. Regarding the boat retail for the period of April to June, for Alumacraft, the aluminum fishing boat industry was down low-teens and we were down high teens. For Manitou, the Pontoon boat industry was down high single-digit and we were down mid-teen for the same period.

Finally, following the end of the second quarter, we completed the acquisition of Telwater, the leading manufacturer of aluminum boat in Australia. Our marine strategy is ongoing, and the Evinrude, Alumacraft and Manitou teams are all working together to integrate the next generation of engine with the next-generation of boats. We are looking forward to sharing more detail on our strategy with you soon.

Considering this is our first year into the boat business, this is not exactly the season we would have asked for. However, we're satisfied with the progress the team have made on the integration of our acquisition. And as a reminder, this is a mid- to long-term strategy, and we are confident in our ability to deliver its high potential.

On that note, I will turn the call over to Sébastien.

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Sebastien Martel, BRP Inc. - CFO [4]

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Thank you, José, and good morning, everyone. Our momentum continued in the second quarter as we delivered solid financial results that came in, in line with our expectations. Our revenues grew 21% to reach $1.5 billion for the quarter, representing a record for a second quarter at BRP. Our gross profit margin ended at 22.5%, a decline of 70 basis points from last year's second quarter as a favorable impact coming from volume and pricing was more than offset by higher sales programs, production costs and unfavorable product and region mix.

The normalized EBITDA was up 16% to $168 million, and the normalized EPS reached $0.71. We generated $75 million of free cash flow and invested $67 million on CapEx. We were also quite active in terms of capital deployment over the last few months as we successfully completed the $300 million SIB effectively repurchasing 6.3 million shares, and we completed the Telwater acquisition.

To support both initiatives and to preserve our financial flexibility going forward, we raised the new term loan tranche of USD 335 million during the quarter. Our balance sheet remained solid and our strong financial flexibility allows us to continue to invest in the business all the while maintaining the ability to opportunistically deploy different capital allocation initiatives.

Turning to Slide 15. Our quarterly normalized net income was up about $3 million compared to last year as it ended the quarter at $69 million. In terms of year-over-year variations, we saw an increase of $72 million, driven by a favorable impact coming from volume, mix, pricing and sales programs. These elements were mostly offset by higher production and distribution costs and higher depreciation expense for a total negative impact of $23 million. Higher operating expenses were $41 million to support our different projects, notably the launch of new products such as the Ryker, increased R&D cost for future product launches, and higher SG&A notably associated with IT investments. Higher financing costs and tax expense and FX were $6 million.

Turning to Slide 16 for a look at our network inventory position. Our network inventory position is up 16% versus last year's first quarter, primarily driven by the continued strong demand for our off-road lineup for which retail percentages were up low-teens for ATV and high-20s for SSV in the quarter.

Remember that we had capacity constraints last year, which limited our ability to ship to meet demand and now with the completion of Juárez 2 capacity expansion, we have greater ability to ship products and sustain the retail growth.

Our contributors to the growth of network inventory are Ryker, for which retail is very strong in its first season and we are seeing some dealers already out of inventory; and snowmobile, as we ended the season with slightly more inventory than previous year, and we also started shipments earlier this year compared to last year. We have always been diligent in managing inventory levels with our dealers. At the end of the second quarter, our inventory at our dealerships is in line with expectations, and it is down 9% versus Q1 following a strong powersports retail performance in the second quarter.

So overall, we are very comfortable with the level and the quality of our network inventory.

Now looking at Slide 17 for an update on guidance. As I mentioned, we ended the first half of the year with solid financial results in line with our expectations and our outlook for the year remains generally unchanged. Our industries are behaving as we had anticipated with the exception of the Marine business, for which, as José mentioned, suffered the most from the unfavorable weather conditions. Given the strong momentum we have with SSV and the competitiveness of our new lineup, we are reviewing upward the lower end of our Year-Round Products revenue guidance and the range is now up 16% to 19%.

As for marine, the addition of Telwater for the second half of the year is expected to offset the softer results we experienced with our current North American Marine business due to the weaker industry trend and so our revenue guidance for marine remains unchanged. This results in a total company revenue guidance of up 10% to 13%. As a result, the lower end of the normalized EBITDA guidance range has been increased, and we are now expecting growth of 21% to 23%.

We have adjusted upward our net financing cost to reflect the additional debt, the share count downward following the completion of the SIB and reviewed upward the depreciation expense. These 3 elements result in a net positive impact of $0.05. Following these adjustments and the strong results with SSV, we're tightening and increasing the normalized EPS guidance range to $3.65 to $3.80, representing an increase of 18% to 23% over last year. The normalized EBITDA cadence between the third and fourth quarter is forecasted to be similar in size for both quarters.

Our guidance calls for a strong second half of the year as the demand for product remains solid, and we have good visibility on our shipment volumes and operating expenses for the remaining of the year. We expect fiscal year '20 to be a record year for BRP, and our business fundamentals are solid, giving us the confidence in delivering these strong results.

With this, I'll turn the call back to José.

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

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Thank you, Sébastien. We have had a record performance for second quarter, and I'm very pleased with the result and progress on our key strategic initiatives. We are experiencing continued momentum by product line in the region, and I still see lots of growth potential for our business, especially in Year-Round segments. I am also pleased with the conclusion of the Telwater acquisition and the fact that it marked an important milestone in the advancement of the marine strategy.

Despite talk of an economic slowdown, our industry remains healthy, our dealer traffic is good, and we continue to observe strong retail trends in August. Our team continued to execute well on all fronts, and I want to thank them once again for their hard work around the world. We are looking forward to our next Sea-Doo and Can-Am dealer meeting in little over a week in Las Vegas, and the introduction of more innovative products and hope to see you there.

And finally, as I mentioned earlier, we are confident that given our positive performance, we will be able to deliver on our improved guidance.

I will now 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 Robin Farley from UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [2]

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Two questions. One is just looking at the commentary about off-road being kind of up mid-single digit, I guess, others in the industry have talked about the June quarter being up high single-digit, I wonder if you could just sort of say what -- if you saw deceleration in the growth rate in July or perhaps did not? Just any color on that? And then obviously, of course, how August is also relative to that just in terms of acceleration or deceleration from those trends?

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

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Obviously, we cannot comment on the others, but what we saw in Q2 is ATV was basically flattish when side-by-side was up high single digit. Obviously, side-by-side has a big plate in terms of volume in the second quarter and then I cannot comment on the off-road numbers that you heard in another call.

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Sebastien Martel, BRP Inc. - CFO [4]

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But the July was not the soft for us. It was a good retail quarter, and we're seeing, as José alluded into his opening remarks we're seeing, again we don't see the industry for August, but we see our numbers and the trends are positive as well in August.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [5]

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Okay. Great. Just obviously concerns out there about broader macro factors in the last 2 months. And then just a longer-term question. With shipments maybe more falling into Q2, I guess Juarez 2 ramped up maybe faster than what you had initially guided or what expectations were for kind of what shipments would be in Q2. So given that higher shipment rate, is there -- could second half shipments also move up from these levels, if it was a kind of a supply constraint issue in your original shipment guidance that maybe is now behind you?

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Sebastien Martel, BRP Inc. - CFO [6]

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Well, we've adjusted the guidance for Year-Round Products, driven by side-by-side of the strong demand that we saw in the second quarter. And so the guidance now reflects what we anticipate is going to happen in the second quarter, obviously if demand was continuing to be robust, could we adjust our shipments, obviously, yes, we have that possibility of adjusting shipments if need be and increasing capacity before the end of the year.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [7]

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Is there kind of a percent capacity that's being utilized now versus what potential is still there? I don't know if that's something you can quantify and then that...

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José Boisjoli, BRP Inc. - President, CEO & Chairman [8]

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If I give you some color and again just to remind you what we said before, in H1, basically our capacity was similar to last year because we've shut down the factory for 2 weeks to remodel it. And we had a slow ramp-up to ensure that quality was right, then overall our H1 capacity was similar to last year. And in the second half Q3, Q4, we had like 50% capacity possibility. And right now, we're running because Q3 is always we introduce the new model year. Q3 will be a strong quarter, more to come on Q4, but this is the type of capacity that we have. Then, on the full year basis, overall, if we will be using the full capacity, it would be about 25% up versus last year.

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Operator [9]

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Our next question is from Benoit Poirier, Desjardins Capital Markets.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [10]

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Congratulations for the good results. When we look at the retail inventory was up 16% year-over-year, would you be able to quantify how much was weather driven? And what should we expect in Q3 in terms of inventory level?

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Sebastien Martel, BRP Inc. - CFO [11]

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Yes. When I look at the inventory, as I said, again, we're very comfortable. Retail was only softer for personal watercraft and that was impacted by weather. But it was again very strong for ATV and superstrong for side-by-side. So are we talking a few thousand units in inventory because of weather? That's probably the size of it, so not very material.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [12]

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Okay. Perfect. And for the Ryker, you've been able to ramp up successfully the product and also with the millennials. So could you maybe provide more color about what you've learned from them related to the brand, the desire to have the 2-wheeler vehicle and also how they use Ryker as opposed to the Spyder in terms of commuting versus a pure hobby?

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

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That's a loaded question, Benoit. Let's see. It's a bit early to conclude on the Ryker. We're super happy about the reception of the unit. And as you know, today our RT and F3 owners are in average 59 years old and we're targeting consumer between 35 and 55. And right now, very preliminary but the average Ryker user or buyer is about 10 years younger than the RT and F3, then we're attracting definitely younger people. That being said, it's a bit early into the season. You have early adopter, you have people who always wanted to have a 3-wheeler and could not afford an RT or an F3 that decided to buy a Ryker then very difficult to conclude at this point. Then the intent is to finish the season because there is still retail going on, and we started shipping the model year '20 in August. And there is still some Ryker, I mean, where still some retail going on and we'll have a complete analysis of the season later in December, and when we meet you at the Analyst Day in October, and will be able to conclude more at the end of the next year.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [14]

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Okay. That's great color. And when we look at marine, you are over and next to the U.S. Northern and Midwest region, could you talk a bit about your dealership expansion strategy? How did it go so far?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [15]

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Yes. Basically, there are 3 types of expansion. There is Alumacraft or Manitou dealers or Evinrude, to take another brand. There is conversion to Evinrude, Alumacraft or Manitou dealer will take Evinrude and there is white space. And again we will share with you more about the detail of our strategy in October, but basically we had a goal this year in fiscal year '20 to add about 120 -- 150 roof, and it could be an Alumacraft dealer taking Evinrude or an Alumacraft taking Manitou or white space, and we're about halfway there then we're going -- we're tracking quite well. Obviously, like I said in my remarks, I mean, being -- Manitou is very, very Midwest. And Alumacraft is East, and we had more difficult season than what we had hoped for. But again, the marine strategy is a long-term strategy. I'm very happy with the work that the teams are -- that the work that the team have done so far on developing the next generation of boat with the new generation of Evinrude and we feel confident in the future.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [16]

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Okay. Last one for me from a capital deployment standpoint. The stock is down significantly since the completion of the substantial issuer bid. So I was wondering if you could tell more about the room to perform further in CIB and given the devaluation right now and the strong outlook?

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Sebastien Martel, BRP Inc. - CFO [17]

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Obviously, we are very disappointed with where the stock price is trading. Obviously, it's not reflective of the performance that we've had over the last several years and last quarters. As you said, the momentum is there. And so the valuation is attractive for buybacks and obviously it's something that we will consider and entertain in the next few quarters.

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Operator [18]

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Our next question is from Tim Conder from Wells Fargo.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [19]

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Gentlemen, any commentary that you can give us relating to the promotional activities that you may have done during the fiscal Q2 or that you're seeing in the market right now and again maybe across the product lines on the marine side and then on the ATV and the side-by-side product lines?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [20]

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If we start by off-road, I would rate it yellow. ATV was very similar to the last few years. And on the side-by-side, you need to understand that it is the first year where we can -- we have some product availability. And it is the first season where we had like some noncurrent at the end of June than we had for the first time some normal promotion on Defender and the Maverick family. And some of our competitor complained about it, but the rebate we were giving is in line with what every OEM is doing at the end of the season. Then I would consider off-road yellow. Watercraft, we have reacted on the back end of the summer because we were behind, then last year was green. This year, we invested a bit more than last year, not ridiculous, but a bit more than last year; and 3-wheel, I will consider it green. If you remember, we readjusted our pricing in RT and F3 last year, and our promotion for model year '19 started only in August, like it should be. Then, this is overall the retail environment. On the boat side, we were a bit more generous than in the past 2 years, but again in line with the other OEM.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [21]

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Okay. And, José, any color geographically whether you want to look at North America collectivity or Canada versus U.S. and then basically the rest of the world, or you want to say Europe or just broad geographic regions as far as promotions and collectively? Or if you do want to break them down by the product categories?

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

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Yes. What I'll give you, Tim, is applying to Canada and United States. The situation was about the same in both countries. The weather was the weather, and we catch up in June, July on the retail front. At International, it's a lot of moving piece. Scandinavia was similar to what we saw in North America in terms of weather then we had slowdown in the watercraft in Scandinavia. Off-road was not affected. That being said, in the Western Europe, watercraft has done extremely well because they had one summer, and we're very happy with the overall. Other than that, some adjustment in APAC, but overall, I would say, very similar to last year except North America and Scandinavia.

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Operator [23]

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Your next question is from Gerrick Johnson from BMO Capital Markets.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [24]

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Looking at your own inventory up 22%, can you discuss the puts and takes there?

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Sebastien Martel, BRP Inc. - CFO [25]

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Well, as you probably saw, the second half of the year implies a very strong H2 from volume growth as well and strong profitability growth. And so we are or we have produced some of the units for shipments in Q3, and so that is the main driver of the increased inventory. The SSV business was going strong. We have also a strong international business with longer trends at times and that business is growing as well. And so that needs to be accounted for in our planning as well, and therefore that results in higher inventory levels.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [26]

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Okay. And one more thing that you don't seem to talk about, I would like to hear about is, your initiative in Texas, and how that new office is going? And some update on what's going on with your stuff in Texas?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [27]

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Overall, I mean, we are on plan. We ramp up the number of people in Dallas, and we changed a bit the structure of the management team. We divided the United States in 3 regions, and we have a leader on each region. That give us -- in the past, we're managing United States a lot -- I mean, East to West, South to North, and now we have like more regional focus, which gave us an opportunity to have some tactical focus on different region or different opportunities. Then overall very happy with the Dallas office, and we believe that we have a lot of people there that are better connected to the U.S. market versus when we're managing United States from Canada.

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Operator [28]

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Our next 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 [29]

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I just wanted to ask about the dealer base in the U.S. and I guess specifically mostly on the side-by-side, but I think you're sort of at relative maturity in terms of dealer count but gaining floor space and mind share, wonder if there are any metrics you can share that would help us gauge that? And how you sort of continue that momentum? And obviously there is a combination of factors, but is the focus sort of in continuing that momentum more on just generating demand? Or there is still more to do around engagement, improving systems and that sort of thing?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [30]

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On the number count, we believe we are about the right number of dealers. If you remember, we signed a lot of dealer in the last few years and now we have about 1,250 in North America. There is always some turn 25 to 30 years that is happening, but the focus is more on what you said, continuing to gain space into the dealership, and gain in efficiency, better engage with our dealers, help the dealers to become better retailer. And it's a -- we work with them hand on hand. Then this is the focus, and we're doing, I believe, a pretty good job to have business discussion with dealers and helping them to raise the bar.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [31]

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And do you think, broadly speaking, obviously there is lots of different factors, but in terms of driving that engagement, is it more a matter of continuing to create consumer demand and obviously the dealers are going to respond to that? Or is it in terms of how you engage with the dealers, manage their profitability, improving systems, ordering systems, inventory, supply, and those types of levers?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [32]

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We see -- we're trying to help the dealer to order the right product mix, and we're monitoring more and more their inventory, helping them to understand their retail and make sure that they have the right model at the right time in the dealership. Also the service part is getting more and more important. There is a lot of money tied into the service part and the dealers -- some dealers do it extremely well, others not as well. Then it's working hand on hand with the dealers to help to be more efficient in what they do. And so far, we don't see the need to increase the number of dealer. It might happen if we continue to grow in the side-by-side business where we have some -- maybe today we have a dealer supporting a big region, and maybe in time we need to. But for this year, the focus is more working on the efficiency of the dealer.

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Operator [33]

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Our next 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 [34]

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I wanted to ask about your view of the U.S. consumer, a lot of talk about maybe a slowdown, maybe that's especially true with wealthier consumers, but you have an interesting perch on the world. What are you seeing?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [35]

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I mean, again there is a lot of talk about a slowdown, but you know the thing that we're watching that we believe could affect our business, but I will give you some statistic. U.S. unemployment rate in July was 3.7%, very low. The housing slowed down a bit, but it was up 0.6% in July versus a year ago. The U.S. consumer consumption remained strong. It was up 3.3% in June and 3.4% in July. And to be honest, I mean, we don't see a slowdown in our powersports business. I mean, Q1 the industry was up high single digit and in Q2 over mid-single-digit up. Then this is -- and you know we're not economists, but this is the thing that we believe that is affecting our business. And so far, we're very happy with the state of the economy and the consumer.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [36]

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And with respect to Telwater, I apologize, if I missed it. But could you frame the revenue and margin profile of that business and detail what's included in guidance?

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Sebastien Martel, BRP Inc. - CFO [37]

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Yes. So in guidance, we have 6 months of revenue built in there. On an annual basis, Telwater is a let's say CAD 80 million to CAD 90 million business. Our margin profile is very similar to what you've seen in other boat companies in the U.S. So lower gross margin, lower level of operating expenses, but similar EBITDA margins.

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Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [38]

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And then finally again with respect to Telwater, to what extent do you intend to run Telwater, Alumacraft and Manitou separately versus trying to leverage any commonalities between -- among those businesses in terms of R&D and other factors to get efficiency?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [39]

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Yes. Absolutely, I mean, we are working right now on the metrics organization, where obviously there will be a leader for each boat brand, but you have cross-functional function like design, R&D, operation where company will share the best practice. What we like about the 3 acquisitions is they are -- the 3 of them are involved in aluminum boat construction, and there is definitely synergy between each of them to be gained, and comparing the way they do things. On top of it, in terms of product development, we have team right now working on the next generation of boat and engine to make sure that we have a perfect integrated product. Then basically it's a metric structure where there is a responsible for each boat brand, but you have some cross-functional function to help the synergy.

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Operator [40]

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Your next question is from Brian Morrison from TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [41]

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I think I understand the increase in inventory in the powersports industry, I am content with that. Maybe with the inclusion of Telwater and the flat revenue guidance in marine now, maybe you can just walk through or help us understand the marine inventory both in the dealer network and internally? And potentially with the industry softness that you're going through right now and albeit potentially temporary whether your appetite for M&A might be heightened or whether you're content with your current portfolio?

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

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Yes, again, the Evinrude inventory have decreased by 10% into the quarter then -- we're comfortable with our level of inventory. On the boat side, the 2 brands that we manage in North America are very different. Manitou, it's a high-ticket item. And they used to have 5 to 6 months of inventory at the dealership. They turn their inventory typically a bit more than 2x a year, and right now we have about 6 months of inventory out there, about 10% higher than typical and we're comfortable with that. Alumacraft, it's a lower ticket item. Their normal inventory is more in the 12 months, about the same the industry average. And we are a bit maybe 5% to 10% more than typical, but we are comfortable on both brands -- on the boat inventory at the dealer. At our factory, very minimum -- minimal. I mean, this is -- a boat is a big piece of equipment, and we have minimum inventory in our yard at both Manitou and Alumacraft. For Telwater, it's about the same. Again, we've done officially the acquisition on August 1. It's the same pattern, not much inventory at the manufacturing facility, and I believe they turned their inventory quite high, but I don't have enough data to be -- to answer your question. In terms of acquisition, in the boat space, for the time being, we are happy with those 3-boat company, and the focus in the next, I would say, 12 months will be to make sure that we maximize the synergy, and we maximize the integration, and how we can maximize the work between the 3-boat company and BRP to again deliver on the boat strategy, then don't expect boat acquisition in the next 12 months.

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Brian Morrison, TD Securities Equity Research - Research Analyst [43]

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Okay, thanks. Just to clarify. In terms of the inventory then, should we expect promotional activity in the back half of the year? I can only presume that's factored into your current guidance?

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Sebastien Martel, BRP Inc. - CFO [44]

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Yes. Promotional activity should be similar year-over-year. Obviously, sometimes our promotional activity may be influenced by weather especially when we look at the snowmobile season that is upcoming, but the guidance reflects what we believe is appropriate promotions in order to drive the retail that ultimately drives our whole set of numbers.

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Brian Morrison, TD Securities Equity Research - Research Analyst [45]

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Okay. One last housekeeping item maybe, Sebastien, in terms of your net income adjustment, can you maybe just clarify, it's modestly changed, but excludes this -- pardon me, includes an FX change. Maybe just on a normalized basis, can you just tell me what's changed here?

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Sebastien Martel, BRP Inc. - CFO [46]

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Yes. The only FX change that you see in our normalization of net income and normalization of it that relates to the long-term debt. So as our debt, which is denominated in U.S. dollar gets revalued every quarter, that creates a FX -- noncash FX variation in the P&L. And given the materiality of the debt and the swings that we often see in currency, it does create noise in the P&L and that's why we normalize that item.

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Brian Morrison, TD Securities Equity Research - Research Analyst [47]

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Yes. So just on a normalized basis, is net income changed? Or is up or down?

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Sebastien Martel, BRP Inc. - CFO [48]

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Well, the net income as per the bridge is up $3 million at $69 million, if you look at the bridge that we have in the webcast.

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Brian Morrison, TD Securities Equity Research - Research Analyst [49]

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Sorry, I'm talking about the guidance.

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Sebastien Martel, BRP Inc. - CFO [50]

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The guidance, sorry. The normalized net income is up to reflect the EBITDA adjustment that we did on the bottom end of the range.

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Operator [51]

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Next question is from Greg Badishkanian from Citigroup.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [52]

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It's actually Fred Wightman on for Greg. Just wondering if you could talk about what, if any, impact you're seeing in terms of the supply chain, either product disruptions or pricing changes just given the tariff and trade back and forth we're seeing in North America? And then what that means for the implied back half increase and output that you guys are expecting in guidance?

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Sebastien Martel, BRP Inc. - CFO [53]

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Yes. As we've shared with all of you in the last few quarters, the whole tariff dispute between U.S. and China is having minimal impact on our results. Now let's say the wave 4s that were just announced, we're probably looking at worst, a $5 million impact for us. So all the tariffs when you combine them all for the full year, so from wave 1 to wave 4, you're probably looking at $15 million for full year -- for this year. And let's say if that was to be applied on a full year basis, you are looking at probably maximum $20 million. Again, we source very few of our components from China. When we look at our whole supply chain and product quality, it doesn't necessarily always fit to source in China because we're not necessarily all meeting the specs that we want to meet or the lead times are not there. And so that's why we source very few of our components from China, and we're not as impacted as other companies.

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Frederick Charles Wightman, Citigroup Inc, Research Division - Assistant VP & Analyst [54]

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That's really helpful. And then there is a call out in the slides specifically for the Maverick Sport dealer inventor impact, how much is that specifically on a percentage basis?

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Sebastien Martel, BRP Inc. - CFO [55]

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Off the top of my head I wouldn't be able to give it to you, I'll probably give it to you offline, but last year, we had very little Maverick Sport in the network. It was a new product. And as we were obviously capacity constrained, we privileged the shipments, doubled the Maverick X3 and the Defender, which are higher margin products, and that's why this year now with the capacity we have, we ship more into the network.

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Operator [56]

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Next question is from Derek Dley from Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [57]

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Just following up on -- just that question in terms of dealer inventory. There is also a comment in there just in terms of snowmobile sales having earlier shipment. So should we expect some sort of a timing adjustment between Q2 and Q3?

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Sebastien Martel, BRP Inc. - CFO [58]

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No. Again it's a small volume. We always -- this year, as snowmobile volume shipments are expected to be higher than last year and so given the season and the production schedule is very condensed, you have abilities to either produce earlier in the second quarter or later in the fourth quarter depending on when engineering release are ready that's going to impact when we ship and therefore this year, because of those factors, we shipped more units in the second quarter.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [59]

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Okay. That's helpful. And Sébastien, I think in the past, you provided a bit more color just in terms of some of the puts and takes and the magnitude of each of the impacts on gross margin that you called in the press release commodity production distribution. Wondering if you could give us that bridge again?

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Sebastien Martel, BRP Inc. - CFO [60]

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Yes, sure. So as you all saw, our margins are down 70 basis points this quarter. Volume was a positive impact as you saw the revenue growth year-over-year, so that's almost a 200 basis point plus to the margin. Mix was unfavorable and sales programs as well were unfavorable. The mix driven obviously by Ryker and also we did ship less X3s in the quarter as we knew that we were coming out with a new X3 at 195 horsepower, so we kind of held back on some of the shipments of X3s. That was a negative, combined there the mix and the sales program, 140 basis points. Production costs, negative 80 basis points. Half of it coming from added depreciation, the other half coming from -- obviously, now we're running a bigger plant. We've kind of done 2 ways of increases on a year-over-year basis so that's being reflected in our operating cost, so that's 80 basis points. And the last item, FX were 50 basis points.

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Operator [61]

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The last question is from Cameron Doerksen from National Bank Financial.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [62]

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Just wonder, I guess, clarify the question earlier on the, I guess, some of the inflationary cost headwinds and then the tariff impact. I think in the past, the number that you talked about is kind of $35 million in inflationary costs, some of that was tariffs and some other things. What's, I guess, the equivalent number now on a kind of a full year basis?

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Sebastien Martel, BRP Inc. - CFO [63]

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Well, we talked about $35 million impact in the past for -- we call it inflation in freight commodity and tariffs. So you could add an extra $5 million to that, Cameron.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [64]

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Okay. Perfect. That's great. And just on the side-by-side business, just thinking about the product portfolio now, you've introduced the eighth platform, which you've been targeting over that period. I just wonder if you can talk a bit about just on a product basis where you think you're still underrepresented? Or is it just really more of a kind of growing market share in the subsegments that you're in now? Is there anything else that you feel as though that you need to, I guess, increase the product portfolio to continue to grow?

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José Boisjoli, BRP Inc. - President, CEO & Chairman [65]

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Yes, in the last 4 years, basically we introduced new platform in almost every segment into the industry. And there is still white space for us in the side-by-side business and you can expect in time other new platform not at the pace of 1 every 6 months, but you can expect also variation of model trying to create new segments, like an example, the Fish Pro; and in the watercraft, we're good to create new segment in a product category. That will be our main focus, and still if you look at our product portfolio, today we have the base, but we can continue to expand our offering to the consumer and delivering a new trend or a new request for consumer. Some investor is always asking the question, will you stop there? For sure, not. I mean, we intend to keep the same pace of investment that we've done in the last 4 years forward. Obviously, like I said, it's not necessarily a new platform every 6 months, but you can expect that we'll continue to push in the side-by-side industry.

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Operator [66]

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So Mr. Deschênes, this was our last question. I will now return everything back over to you for closing remarks.

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Philippe Deschênes, BRP Inc. - Manager of Treasury & IR [67]

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Thank you, Luise, and thanks, everyone, for joining us this morning. We want to invite you to join us at our Dealer Event in Las Vegas, in September 10 and 11, and our third Investor Day, in October 28 and 29. Thanks again, everyone, and have a good day.

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Operator [68]

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Thank you. Your conference has now ended. Please disconnect your lines at this time. We thank you for your participation.