BRP Inc. (NASDAQ:DOOO) Q3 2023 Earnings Call Transcript

BRP Inc. (NASDAQ:DOOO) Q3 2023 Earnings Call Transcript November 30, 2022

BRP Inc. beats earnings expectations. Reported EPS is $3.64, expectations were $2.35.

Operator: Good morning ladies and gentlemen and welcome to the BRP Inc.’s FY ’23 Third Quarter Results Conference Call. For participants who use the phone lines, it is recommended to turn off the sound on your device. And I would like to turn the meeting over to Mr. Philippe Deschênes. Please go ahead, Mr. Deschênes.

Philippe Deschênes: Thank you, Julie. Good morning and welcome to BRP’s conference call for the third quarter of fiscal year 2023. Joining me this morning are José Boisjoli, President and Chief Executive Officer, and Sébastien Martel, Chief Financial Officer. Before we move to the prepared remarks, I would like to remind everyone that certain forward-looking statements will be made during the call and that actual results could differ from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you consult BRP’s MD&A for a complete list of these. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com under the Investor Relations section. So with that, I’ll turn the call over to José.

José Boisjoli: Thank you, Philippe. Good morning everyone and thank you for joining us. Our teams once again demonstrated incredible agility and resilience as we navigated through the unprecedented challenge of a cyber-attack which forced us to temporarily suspend operations early in the quarter and yet managed to deliver our strongest quarterly result ever. Driven by a strong product portfolio and our team ability to navigate the tight supply chain environment we continued to outperform the industry and delivered solid retail growth and market share gains. With this excellent performance, our financial results came in well ahead of expectations. Taking into consideration these exceptional results and in light of the cleaner visibility we have on customers demand and on the supply chain environment for the rest of the year, we are increasing our normalized EPS guidance for the year to a range of $11.65 to $12 per share representing a year-over-year increase of 17% to 21%.

Let’s turn to Slide 4 for key financial highlights. Revenue reached $2.7 billion, up 71% compared to last year, driven by solid growth for side-by-side, three-wheeled vehicles, personal watercraft and snowmobiles, as well as the introduction of the Sea-Doo Pontoons. Normalized EBITDA was up 94% to $488 million and normalized earnings per share increased 146%, reaching $3.64. Turning to Slide 5 for a look at our Q3 retain performance. The strong demand for our products and our ability to navigate the tight supply chain environment, allow us to deliver a strong retail performance across our product portfolio, our portfolio of products and in our geographies. In North America, our retail sales were up 42% or 39% when excluding the Sea-Doo Pontoons, compared to the industry which was up mid-single-digits.

Our performance was also very strong in other regions with retail up 34% in EMEA and 41% in Latin America. As for Asia-Pacific, while our retail was down 3% in the quarter, it significantly outpaced the industry which was down in the low 30%. You can see the key driver of this strong performance on Slide 6. Our success over the years has been driven by our ability to constantly innovate as we bring new products to market that drive consumer interest and by our value proposition which motivates dealers to sell our products by maximizing their profitability. Through such initiatives we have been able to attract the best dealers and gain floor space within their showrooms. Given we were able, we were capable of leveraging additional products capacity, we have delivered impressive results.

Our Q3 retail performance was our strongest ever for third quarter. We have gained over 2 percentage points of market in North American Powersports industry so far this year increasing our global market share to more than 30% and we have become the industry number one OEM in terms of the average number of units retailed per dealers, this makes BRP a must for any Powersports dealers. We are very pleased with our momentum and strongly believe that we have set solid foundation to continue to grow in the coming years. Turning to Slide 7 for a quick update of the state of consumer demand. As you can see with the strength of our retail sales, consumer demand remained healthy despite the ongoing macroeconomic concerns. More importantly, when we look at the different indicator, the trend remained positive.

We continue to see a strong level of preorders. Over 40% of our expected North American retail for Q4 is already pre-sold to consumers. Cancellation rate remained low. We completed the international dealer booking following our August Club and dealer order came in above expectations. Retail financing metrics remained quite favorable, demonstrating that our customers are in a strong financial position with continued increase in FICO scores. Website visits and Google search for our brands remained higher than pre-COVID level. As you can see, customer interest for our products remained healthy. Turning to Slide 8 for a quick update on our manufacturing operations. In terms of the supply chain the situation during the third quarter essentially evolved as anticipated.

This allows us to increase production throughput and progressively ship more units and components to our dealers. As the environment improved our strategy of shipping units that are missing a few components and quickly retro fixing them at the dealers delivered great results. Based on the current state of the supply chain and the healthier inventory levels, we are well positioned to have a strong Q4 and deliver on our guidance for the year. Now let’s turn to Slide 9 for Year-Round Product. Revenues were up 74% reaching $1.3 billion in Q3. This was primarily driven by strong side-by-side shipment as we were able to further utilize our increased capacity and by delayed shipment of three-wheeled vehicles model year 2022 due to the supply chain issue earlier this year.

In terms of retail, Can-Am side-by-side had its strongest quarter so far this year benefiting from the additional production capacity at Juarez-3 and from an improving supply chain. Can-Am gained market share in all industry segments, but more importantly made significant gains in utility, which is the largest segment. Our retail was up high 40% in the quarter and so far in season 2023 we are close to our M25 objective of 30% market share in the category. As for ATV, retail was down low single digit in the quarter due to the limited product availability as we made the decision to prioritize component for side-by-side. Still, Can-Am ATV continued to gain traction with customers and has gained over 1 point of market share so far in fiscal year 2023.

With our solid lineup in additional production capacity, we are well positioned to sustain our growth momentum with Can-Am off-road. As for three-wheeled vehicles, we ended season 2022 on a strong note with Can-Am three-wheeled vehicle retail being up over 50% in the quarter driven by shipments later than usual due to supply chain challenges. For season 2022, Can-Am three-wheeled vehicle retail was down mid 20%. Though disappointed with our performance for the season as our retail was impacted by the untimely product deliveries, we strongly believe that the future is bright for three-wheeled vehicle business, since we continue to attract a high level of new end trend to the industry. We also continue to see strong traction with our rider education program for which course completion are up over 20% year-to-date.

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Historically, these completions have resulted in a strong conversion rate towards the purchase of new units. Turning to Seasonal Products on Slide 10. Seasonal Products revenue were up 133% from last year passing the $1 billion mark for the quarter. The strong growth was driven by late shipment of personal watercraft model year 2022 and the introduction of the Sea-Doo Pontoon. We also shipped more snowmobile than last year. Looking at the retail, our retail for personal watercraft in the quarter was up over 100% driven by later deliveries of model year 2022 product pre-sold to consumers. These pre-sold units have also contributed to maintaining a selling momentum in November, which retail have significantly. Looking at counter seasonal markets, we are only at the beginning of their season and retail was up mid-single-digit in the quarter.

As for Snowmobile, we are still early in the season and retail is trending well being up mid-single-digit for the quarter. With the strong level of customer pre-order, we are well positioned to have a successful snowmobile season. Continuing on Slide 11, with the look at Powersports parts, accessories and apparel and OEM engines. Revenue were up 5% to $297 million. Our revenue continued to benefit from a growing product portfolio, which led to higher volume of replacement parts and increased sales of accessories driven by the linked ecosystem. We are currently witnessing solid momentum for our new model year lineup of Snowmobile accessories and apparel both from dealers and consumers, which bode well for the upcoming season. Moving to Marine on Slide 12.

Marine was the last business unit to restart operations after the cyber-attack. This, combined with some supply chain issue, impacted the ramp up of production for the new Manitou product, which affected Q3 and is also expected to affect Q4. As a result revenue were down 15% in comparison to last year, ending the quarter at $111 million. Looking at retail sales, in North America, our retail for the quarter was down low 30% for Alumacraft, which we believe is in line with the industry, but I would point out that we are no longer selling welded boat. Manitou was down in the low 60% due to the production ramp up issue as already mentioned. As for Quintrex, we are in the early part of the season in Australia and retail was down low teen percent in the quarter.

We are in the off season for boating in North America, but we believe that with the new Manitou and Alumacraft product we are well positioned for the future. Our new boat and pontoon design are very well received. Notably Manitou’s new MAX Deck platform won the top prize in the innovative Onboard Design Solution category at the recent 2022 Boat Builder Awards in Amsterdam where we were competing against high-end luxury boats from well renowned brands. Manitou is also featured on the cover of Pontoon and Deck Boat magazine, the segment’s most influential publication with an impressive readership. The cover tagline says it all, “time to shake up the industry”. With that, I’ll turn the call over to Sébastien.

Sébastien Martel: Thank you, José and good morning everyone. Thanks to the sustained robust demand for our products and the improving supply chain environment, we delivered results that came in well above our expectations leading to the strongest quarter ever in our history. The outperformance was primarily driven by higher deliveries of side-by-sides, stronger shipments of components to dealers in the quarter, resulting in a higher completion of unfinished units and the continued tight management of our expenses. Looking at the numbers, our revenues for the quarter were up 71% versus last year reaching $2.7 billion. We generated $655 million of gross profit representing a margin of 24.2%, down in comparison to last year’s level as the benefit from higher volume, especially side-by-side mix and pricing was more than offset by the impact of inflation, supply chain inefficiencies, and cyber-attacks.

Note that the cyber-attack represented a headwind to gross profit of about 90 basis points in the quarter. While continuing down the P&L, we generated record normalized EBITDA for the quarter of $488 million, representing a strong margin of 18%, and our normalized net income came in at $293 million resulting in a normalized earnings per share of $3.64, up 146% from last year’s Q3. Moving to our network inventory situation on Slide 15, as we already mentioned, we have been able to increase our throughput during the quarter driven by better utilization of our production capacity and the improved supply chain environment. As a result, we have seen a healthy increase of 105% in our network inventory driven by side-by-side, ATV and snowmobile, which puts us in a better position to support the strong demand for products in the fourth quarter.

We have also ended the quarter with a higher level of inventory for three-wheeled and personal watercraft resulting from the late deliveries after the summer season due to the supply chain challenges we had to deal with earlier in the year. The retail of these model year 2022 units is going well, especially with many of the PWCs already pre-sold to customers and we expect to be in a good inventory position with these units in the spring. While we have made good progress on improving the availability of our products in the network, there are still areas where we have a lot of inventory to rebuild to bring it to a more optimal level. In fact, despite significantly increasing ORV deliveries to dealers in the last nine months, we also delivered important retail growth and market share gains, which limited the inventory growth for that product category as it is still down 42% versus pre-COVID and it is still far from an optimal level at roughly 50 days of inventory.

Bringing ORV up to our target of about a hundred days and optimizing our inventory for seasonal product still represents about $750 million of inventory to rebuild. But all-in-all things are trending in the right direction as we were able to make headway in improving unit availability to support our retail momentum. Now looking at the Slide 16 for an update of guidance for the year, while the year has seen its share of challenges, our teams have done an exceptional job to manage through these tough situations, allowing us to outperform our competitors and deliver results ahead of expectations. As we look to the rest of the year, we are well positioned to sustain our solid momentum as we continue to experience robust demand for our products and as the improvement in our supply chain is allowing us to better utilize our increased capacity and deliver more units to our network.

As such, with two months to go in the year, we are comfortable increasing both our top line and bottom line guidance. We now expect our total revenues for the year to be up 27% to 32% as we are planning for increased production of side-by-sides and we are well positioned to hit the higher end of our seasonal products guidance, as snowmobile is off to a good start. You will notice that we reduced our guidance for Marine revenues as a result of the delayed ramp up in production for the new Manitou as José mentioned earlier. Going down the P&L benefiting from increased volume, we now expect our normalized EBITDA to grow between 15% and 18% and our normalized EPS to end between $11.65 and $12 representing a growth of 17 to 21 over last year.

Our guidance calls for the delivery of another strong quarter in Q4, carrying our momentum into fiscal year 2024, which we expect to be another solid year for BRP given the strength of our product portfolio where structurally it is driving higher margins, the strong progress we made in terms of market share gains, especially with side-by-side, the continued momentum with new products such as the Sea-Doo switch and the new Manitou Pontoon, all of this supported by better utilization of our increased production capacity. And lastly, an improved cost environment with expected lower commodity rates and a reduction in supply chain related headwinds such as retrofit expenses, spot buys and special freight. On that, I’ll turn the call over to José.

José Boisjoli: Thank you, Sébastien. I am pleased with our multiple accomplishments. We are also making good progress on the CSR front. Earlier this year we committed to take corporate social responsibility even further with the launch of our new CSR25 program. It includes ambitious targets and concrete initiatives like the BRP Community Engagement program, ride out intimidation. We are very proud of this initiative and of all the BRP employees worldwide who are embracing the fight against intimidation and raising awareness for this important cause. In conclusion, I am impressed with our performance so far this year as we’ve delivered better than expected results in a challenging environment while continuing to progress on our strategic initiatives.

This positioned us well to deliver on our guidance as we anticipate another record year. Looking ahead, the new product introduction, additional production capacity, as well as our momentum with dealers, and recent acquisition, put us in a strong position to sustain our growth trajectory. I sincerely thank all employees, dealers, and suppliers for their relentless efforts, especially given the numerous challenges and headwinds we have had to face. Without their hard work, resilience and dedication, it would not have been possible to achieve these exceptional results and we look forward to keeping our momentum. On that note, I’ll turn the call over to the operator for questions.

Q&A Session

Operator: Thank you, sir. And your first question will be from Joe Altobello at Raymond James. Please go ahead.

Joe Altobello: Thanks. Hey guys, good morning. First question I guess is on your retail and the share gains that we’ve been seeing in previous quarters, obviously this quarter very strong again particularly in side-by-side. I guess what are you guys doing that the competition isn’t that’s enabling you to get more units to dealers and how much of that improvement is product availability versus some other driver?

José Boisjoli: Yes, good morning, Joe. Listen, I believe that the fundamental of our business, our strategy is very strong. First, we have very innovative and competitive products. We have took the call a few years ago to increase capacity in Juarez and now with the supply chain that is getting better, the supply chain is definitely helping and we can use the capacity which we could not use in H1. The third element is the BO strategy. We decided to ship incomplete product to dealers with little thing to repair or to add on to the unit, a few parts to add on to the unit and we using their service to PDI the product, then in Q3 we had excellent — we had good supply chain. We were able to accelerate our throughput in production, ship more units to the dealer, but also ship components to the dealer.

Then I think it’s a combination of all this and we have great momentum with the dealers. We’ve been working hard to improve the value proposition and it’s paying off. Then I think it’s a combination of all this. I don’t think there is a silver bullet, but this is what is making a difference and the beauty is Q3 was strong and we see November continuing with that trend.

Joe Altobello: That’s very helpful. May be just a follow up for Seb. I believe you mentioned earlier the pipeline refill opportunity was $750 million and I think that was $1.4 billion last quarter, so maybe help us bridge that difference?

Sébastien Martel: Well, one of it is timing related. As you saw, we have more inventory for personal watercraft and three-wheeled, this is really timing related because we had supply issues and so we delivered these units later. So that means there’s more inventory of that unit, which should correct itself in the next few quarters. But obviously what we want is to make sure that the product availability is there for the consumers, for the dealers, and so it’s our goal to replenish inventory. We always said that it would happen at the tail end of fiscal year 2023 and at the beginning of next year. There’s still $750 million to replenish. Some of it is going to happen in Q4. It depends on obviously production and how strong retail is. But my expectation is that by early next year we should be in a good inventory position level at the dealer network where there’s enough product there for the dealers to meet consumer demand.

Joe Altobello: Got it. Okay, thank you guys.

José Boisjoli: Thank you.

Operator: Next question will be from Robin Farley at UBS. Please go ahead.

Robin Farley: Great, thanks. I wonder if you could comment on some others in the market have talked about seeing some softness in recreation units and you did mention your release, the return of some sales program, so I don’t know if it was related to that? And then also just a quick clarification on when you used to talk about dealer inventory down 20%, and I know it’s on the slide as well, is that including the substantially completed units that technically are not in your shipments yet, or is that excluding the substantially completed? Thanks.

Sébastien Martel: Good morning, Robin. I’ll take the inventory one first. It does include the units that the dealers have on hand, which are incomplete, but also have the parts. So if you were to look at the increase in inventory, we said it’s about 200%. If you exclude the units for which the dealers have and the dealers have the parts but are not yet installed, that would be up only about 100%. So there’s still quite a bit of units that still need to be retrofitted by the dealers in their networks. As of where we stand at the end of October, obviously the dealers will repair them as the season progresses. But that’s in a nutshell what the inventory is. In terms of programs there we’ve seen a bit more programs happening from various OEMs, but far from the extent where they were pre-COVID.

So there’s a bit of money being put towards their products. I think it’s more a getting customers through the doors, attracting them at the dealership. It’s not caused by excess inventory, definitely not.