BRP Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2024

There are 16 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to BRP Inc. Fiscal Year 20 5 Third Quarter Results Conference Call. For participants who use the phone, I would like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr.

Operator

Deschenes.

Speaker 1

Thank you, Sylvie. Good morning, and welcome to BRP's conference call for the Q3 of fiscal year 2025. Joining me this morning are Jose Boisjali, 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 and that the actual results could differ from those implied in these statements. The forward looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult BRP's MD and A for a complete release of these.

Speaker 1

Additionally, note that following the announcement of the initiation of the process for the sale of our Marine businesses, these businesses are now presented as discontinued operations. Therefore, all periods presented in these release reflect continuing operational needs unless otherwise noted. Also note that you

Speaker 2

can find today's presentation on our website at brp.com under the Investor Relations section. So with that, I'll turn the call over to Jose. Thank you, Philippe. Good morning, everyone, and thank you for joining us. The 3rd quarter was marked by disciplined execution of our plan, which allow us to deliver results above our expectation, driven by the timing of snowmobile shipment and tight management of operating expenses.

Speaker 2

Our retail performance was as anticipated, reflecting a challenging market dynamic due to soft industry trends and high level of promotional activity on non current unit from other OEMs. We have remained focused on reducing network inventory, and we are pleased with the solid progress made so far. Based on retail trend, we are on track to deliver on our objective for the year. Before going further, I want to say a few words on our decision to sell our marine businesses. After careful consideration and given the current dynamic of both the marine and powersports industry, we have decided to double down on our core powersports activities.

Speaker 2

We aim to focus our effort and investment toward this business to capitalize on growth opportunity and continue to position BRP for long term success. Consequently, we initiated the process for the sales of our marine businesses, namely, Alumacraft, Manitou and Telwater. We continue operating in the normal course of business, But as Philippe mentioned, we are now reporting our result on a continuing operation basis and our guidance reflect this new reporting structure. You will understand that since the sales process is ongoing, we cannot comment further on today's call. Now let's turn to Slide 5 for key financial highlights.

Speaker 2

Revenue reached $2,000,000,000 normalized EBITDA was 264,000,000 dollars and normalized EPS was $1.16 all above expectation. 1 of the key highlights of the quarter was the progress made on our network inventory reduction plan, as you can see on Slide 6. This plan was one of our priorities this year to protect our dealer value proposition. We have made significant strides toward our 15% to 20% reduction objective by the end of this fiscal year. Inventory is down 10% so far, given the timing of snowmobile shipment this year.

Speaker 2

More importantly, in ORV, it is down 22%, achieving our objective 1 quarter ahead of plan. We have also seen noticeable improvement on 3 wheeled vehicle, personal autograph and switch pontoons. This put us in a favorable position to capture market opportunity when the industry rebound and to foster long term profitable growth. Turning to Slide 7 for an update on the global powersports market. The Q3 was consistent with trend observed since the beginning of the year.

Speaker 2

In North America, our powersport retail was down 11%, in line with expectation, with Canada continuing to outperform the U. S. Market. From an international perspective, EME remained generally under pressure with our retail down 19%. Latin America continued to grow at a rapid pace with our retail up 21%, driven by a strong performance in both ORV and Personal Watercraft.

Speaker 2

And Asia Pacific saw mixed performance depending on the country with the retail flat on average. Overall, these counter seasonal markets have a better start to the summer season than expected. Turning to Slide 8 for a look at North American retail performance by product line. As expected, we experienced a decline in ORV as limited availability of non current unit reduced in market share resulted in market share losses and a soft start to the snowmobile season, which is typical after a year with unfavorable snow condition. Meanwhile, Personal Watercraft had a better end of season than anticipated.

Speaker 2

Let's turn to Slide 9 to circle back to the ORV market dynamic. As you can see, about 2 thirds of side by side vehicle and close to 90% of the ETV Industry Unit Retail this quarter was non current. This dynamic is the result of intense promotional activity by other OEMs who had higher level of non current units. In our case, we had limited non current availability, which resulted in short term market share loss. However, we gained share in the more profitable current unit, driven by our newly introduced product and the overall strength of our lineup.

Speaker 2

We expect this dynamic to persist at least through the Q4, but our strong performance with current unit gave us confidence that we will regain market share when the inventory position of other OEMs normalize. Now let's turn to Slide 10 for a look at the launch of our Can Am electric motorcycle lineup. The team has been busy raising awareness with consumers and the media, preparing the dealer network for the official start of the 2025 retail season and showcasing the product in key events such as ICMA, the largest motorcycle trade show in the world. I attended the show and I was pleased to notice the excitement for our technology and innovative design as well as the fit and finish of our Can Am Pals and Origin Motorcycle. The launch is well underway.

Speaker 2

We are approaching our targeted number of dealer globally. Production is ramping up in December and shipment will start at the beginning of fiscal 'twenty six. We look forward to our 1st season in the electric motorcycle industry. Now let's turn to Slide 11 for a more detailed look at year round products. Revenues were down 12% to $1,000,000,000 primarily reflecting redo shipment.

Speaker 2

At retail, Can Am side by side was down mid single digit, slightly lower than the industry due to the non current dynamic. However, we continue gaining share in the utility segment, led by the ongoing success of our high end Defender cabs models. As for ATV, retail was also down mid single digits. We have gained about 4 percentage point of market share so far this year in the mid cc segment, driven by the introduction of our new Outlander platform. As a reminder, we have also introduced this platform in the high cc segment in August.

Speaker 2

Looking at 3 wheeled vehicle, Can Am completed its 2024 season in October, with retail down high teen percent, outpacing the industry, which was down about 20%. While the season was more challenging than initially expected, we are pleased with continued market share gain that solidified our position as the industry leader. Turning to seasonal product on Slide 12. Revenue were down 29% to $616,000,000 primarily reflecting lower shipment. In snowmobile, we proactively reduced production level, given higher inventory following last winter unfavorable snow condition.

Speaker 2

Our retail is performing in line with the industry early in the season, despite lower level of non current inventory compared to our peers. We are confident in our ability to outperform the market, given our innovative lineup, as well as our loyal and passionate customer base. As for PwC, we ended the season with retail down in the high 20% range, lagging the industry as our competitor returned to normal production levels. Despite this situation, our retail was better than anticipated at the end of the season, which we concluded with the number one position in the industry and the market share above pre COVID levels. However, since our retail performance for the whole season was below initial expectation, we ended with more inventory than planned, and we will reduce shipment for the upcoming season.

Speaker 2

As for the Sea Doo switch, we ended the season with retail down mid-forty percent, as we were lapping the strong success of our 1st full season last year and facing a soft pontoon industry this year. We're looking forward for a more normal season 25 for Switch. Moving on to Slide 13 with powersports, parts accessories and apparel and OEM engine. Revenue were down 6% to $303,000,000 primarily due to lower shipment of snowmobile P and A given higher level of inventory in the network after last season. Our ORV parts business continued to increase, driven by growing vehicle fleet, while accessory sales have been softer, in line with unit retail.

Speaker 2

With that, I turn the call over to Sebastien. Thank you, Jose, and

Speaker 3

good morning, everyone. Our 3rd quarter results once again demonstrated our commitment to support our dealers as we were disciplined in limiting our shipments to reduce our network inventory levels. From a financial perspective, our results came in ahead of plan as we continued to diligently manage our expenses and we shifted some deliveries of snowmobiles, which were initially planned for Q4. Before jumping into the numbers, I want to remind you that the following represents the results from continued operations as our Marine business has been reclassified as discontinued operation. Now looking at the numbers, revenues were down 18% to $2,000,000,000 primarily due to lower shipments and higher sales program.

Speaker 3

We generated $430,000,000 in gross profit, representing a margin of 22%, down from last year, primarily due to the less efficient use of our assets given the lower production volumes and higher sales programs. These were partly offset by a richer product mix, especially in SSV and through favorable pricing. Our normalized EBITDA ended at $264,000,000 and our normalized earnings per share at $1.16 To help you compare these results to our initial expectations for the quarter, assuming we would have reported with Marine included in our numbers, our normalized EPS would have been $0.91 Turning to Slide 16 for an update on the guidance. As we already mentioned, our Q3 played out generally in line with our expectations. Our retail performance was consistent with our outlook and we made good progress on a network inventory reduction plan, putting us in a good position to achieve our objective for the year.

Speaker 3

Looking ahead, while our Q3 results came in above our expectations, they benefited from the timing of shipments of snowmobiles between the 3rd Q4. And as such, the net impact on the full year is negligible. Additionally, while there are only 2 months left to go in our fiscal year, we are keeping some flexibility in our guidance to account for the fact that the main snowmobile retail season has yet to start and the potential adjustments we may make Note, however, that our guidance is now Note, however, that our guidance is now presented on a continuing operations basis. So the changes that you are seeing in today's guidance when compared to the one we issued in September are simply driven by this reclassification. As such, we now expect our revenues to end between $7,600,000,000 $7,800,000,000 normalized EBITDA to end between $1,200,000,000 $1,070,100,000 and normalized EPS to end between 4.25 dollars and $4.75 Now to give you an appreciation of the impact of the sale of our Marine business on our financial profile, let's look at Slide 17.

Speaker 3

As Jose mentioned, we took the decision to sell our Marine segment to refocus on our core powersports business. We strongly believe that doubling down on powersports, an industry in which we have a solid track record of success is the right move forward for BRP as our most attractive opportunities are in powersports, especially in ORV and our core powersports business has a much more attractive financial profile and investments in this sector have greater expected returns. To highlight the benefit of this decision on our financial profile, we have illustrated on the slide the evolution of the guidance compared to the one we issued last quarter. As you can see by comparing the 2 that our continuing operations are expected to generate about $130,000,000 more of normalized EBITDA, improve our normalized EBITDA margin by 200 basis points and increase our normalized EPS by $1.50 Additionally, excluding our discontinued operations, our expectations in terms of free cash flow generation for the year would have been about $100,000,000 higher. While this was a difficult decision to make, we expect that our exit of Marine will improve our ability to capitalize on high return opportunities in the powersports space through greater focus on financial capabilities.

Speaker 3

We are confident that this will enable us to strengthen our position as the leader in the industry and make BRP an even stronger company for the long term. On this, I will turn the call back to Jose.

Speaker 2

Thank you, Sebastien. BRP has once again proven to be an agile organization in this transition year. We were the 1st OEM to prioritize network inventory depletion, and we are on track to reach our objective by the end of the fiscal year. I am proud of our team execution to protect the strength of our dealer network and the value of our brands. I thank all of our employees for their commitment.

Speaker 2

Even though it is too early to give detail for next year, we will enter fiscal 'twenty six with a strong product portfolio and an improved inventory position. Driven by our solid business fundamental, we are uniquely placed to capture opportunities when the market rebound. As a global organization, we constantly monitor the macroeconomic and trade environment to anticipate and address any new policy developments. We are used to dealing with evolving trade agreement and have always succeeded in finding solution to new tariff. Looking to the long term, we remain focused on solidifying our position as a global leader in the powersports industry.

Speaker 2

You can expect us to continue pushing technology and innovation. Have repeatedly proven our ability to design award winning product and we recently took home 6 new design award in Australia, Japan and the U. S. These distinctions stem from our sustained investment in R and D count on us to continue to wow consumers with our strong product pipeline in the coming years. On that note, I turn the call over to the operator for questions.

Operator

Thank you, sir. Your first question will be from Sabahat Khan at RBC Capital Markets. Please go ahead.

Speaker 4

Great. Thanks and good morning. Julie, I understand you're going to give official guidance at the next quarter. If I can just maybe tease out any directional perspectives on sort of your 3 powersports segments and anything on seasonality as we look ahead fiscal 'twenty six? Obviously, some clearing out to do in Q4 here, but any directional commentary you can provide on what you're seeing out there would be great.

Speaker 4

Thank you.

Speaker 2

I mean, obviously, we don't expect we'll give you guidance for next year this morning, but we are planning for flattish industry overall with this market dynamic. And I believe we're well positioned with our product line. We have the off road business. Right now, we're losing some market share because we have less non current than some of our competitor. But we have very strong product lineup with the off road business.

Speaker 2

And you can expect from us next year to introduce again new exciting model. On the seasonal product, Ski Doo snowmobile season is ongoing. The snow was a bit late, but now it's catching up. And we expect a good retail this season. And watercraft, you know that we handled the inventory with higher inventory than planned, but we counting on next summer season to rebalance the inventory.

Speaker 2

Then in the parts and accessory business is quite resilient. The part business is doing quite well. Accessories typically is in line with the sales of the unit. But overall, we are well positioned to be very competitive within the industry.

Speaker 3

Yes, maybe if I could add a few elements. Obviously, as Jose mentioned, we need to go through the snowmobile season. And from a big picture point of view, obviously, inflation interest rates are moving in the right direction. So that obviously is good, but it may take an impact before we see an impact on overall consumer demand. And so our base case is that the powersports industry could be flat.

Speaker 3

Obviously, some of you might say, well, you've done a good job this year of reducing inventory levels. And so will wholesale match retail next year? Certainly more, yes. But there's still some OEMs that need to flush out some inventory. And so we expect the market dynamic to be challenging, especially in the first half of next year.

Speaker 3

So a bit of top line growth, a bit of benefits of wholesale matching retail. But as Jose again indicated, PWC snow inventory we need to work through. And in terms of overall profitability, obviously, we took some measures to right size our costs this year. So that's certainly going to help OpEx as a percentage of revenue. But there's some variable compensation elements, depreciation and financing costs that will offset some of that.

Speaker 3

So again, still a lot to go through. There's a trade situation as well that we're monitoring, but we will certainly be in a better position to provide you detailed guidance in a few months.

Speaker 4

Great. And then just on a follow-up, you announced the renewal of your NCIB this morning. Given where the balance sheet is heading, your outlook for next year, just any comments on how active you might be on the return of capital front? Thank you.

Speaker 3

Well, if you look at our historical track record, we've been quite active in terms of buyback. The priority always remains investing in the business. Certainly, we'll want to see how things trend in the start of next year, especially with the tariff situation before we decide to be extremely active on buybacks. We've always been cautious in managing the balance sheet diligently and we'll continue to do so, but prioritize returns is certainly a focus of ours as well.

Speaker 4

Thank you.

Operator

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

Speaker 5

Hey, good morning. Thanks for taking my call. Obviously a better than expected Q3, sounds like to the tune of $0.30 to $0.35 I guess, A, how big of a benefit was the snowmobile timing? Obviously, that's going to be a watch between Q3 and Q4. But I guess what I'm wondering is, inventory rightsizing seems to happen seems to have happened a little bit earlier, which would seem to mean you won't need to undershoot retail by as much in Q4.

Speaker 5

And then it looks like the tax rate came down as well. So kind of feels like the landing point for earnings should be at least modestly better. Maybe help us tease out those factors.

Speaker 2

Maybe I will start with the Mike, some comments on the inventory. We're very happy with the progress we made on off road. Now we are at the level we believe we should be are at. The big question between now and when we've talked in March will be snowmobile. We're planning obviously a retail season that is with better snow condition than last year, But this will be key between now and the end of Q4 to see how the retail of snowmobile will go and the depletion of inventory.

Speaker 2

Good progress, like I said in my intro, on Switch three wheel product, very, very happy of the depletion there. And Watercraft, we'll discuss about next season. Then what we are happy of our progress on inventory because at the end of the day, the dealer and us make more money selling current than selling non current at discount.

Speaker 5

Got it. And then maybe just a point of clarification on the inventory piece. I think coming out of the first half, you were saying total inventories were down 13% and your target was 15% to 20%. Now you're saying they're down 10%. Now we've pulled out marine, so I'm assuming that's part of the disconnect.

Speaker 5

But maybe, I don't know, what was the first half year to date inventory decline to compare to the current down 10% and what is in the new world the target for the year?

Speaker 3

Yes. Well, you're absolutely right. We were down 13% year to date in Q2. Now we're down 10. And basically, that's all explained by snowmobile.

Speaker 3

When I look at all of the other product lines versus Q2, all the product lines are down. And the one that's up obviously is snowmobile because we've obviously shipped a lot of units in Q3 ahead of the peak retail season. So no change if there's anything, it's an improvement versus the position we were in Q2. And the overall objective of 15% to 20% still stands for the end of the year. And as again, we highlighted a few times already in the call, it's going to be largely driven by the snow season.

Speaker 5

Got it.

Speaker 6

Thank you.

Operator

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

Speaker 7

Thanks. Hey, guys. Good morning. Just wanted to follow-up on James' line of question here a little bit. If you think about 26 at a high level, and again, I understand no guidance today.

Speaker 7

But if you end this year with network inventory down 15%, let's say, and we assume the industry is flattish next year. And I think you said earlier that wholesale and retail should largely be in alignment. Why wouldn't we see a pretty sizable lift in shipments next year?

Speaker 3

Well, two reasons, as I indicated. I think the while the industry, there's still a lot of inventory from other OEMs and they need to work through their inventory. So we believe that dealers will be cautious in taking on more inventory and even work down further inventory. So that's the number one assumption, especially in the first half of next year. And the other big one is personal watercraft and snowmobile.

Speaker 3

There is going to be some inventory depletion happening next year. So yes, we'll see a lift on the top line, a modest lift on the top line. But we believe that dealers will remain cautious in the first half of next year. And so we'll if we do see a bigger uplift in wholesale, it will be in the second half of next year.

Speaker 7

Okay. And just a follow-up on that. The noncurrents that are in the channel today, we're obviously going into the off season for a lot of that. How long do you think it will take to flush out some of that inventory?

Speaker 2

We believe that most of it should go out in Q4. Maybe certain areas, some third dealers, maybe some in Q1 next year. But we believe in the next two quarters, most of the non current should be flush out.

Speaker 3

Yes. And we ended the Q3 in a good position. Our non current inventory in ORV is actually down above 30% year over year. So we're actually very happy with the position we have. And obviously, as Rosie indicated, we've got product news coming up and having floor space to introduce that product news is also positive.

Speaker 7

Okay. Thank you. I'll see you guys next week.

Speaker 2

Thank you.

Operator

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

Speaker 8

Yes. Thank you very much. Good morning, everyone. Just with respect to the launch of the electric motorcycle, I was just curious to obviously shipments will start fiscal year 'twenty six early, but what kind of contribution on revenue we could expect next year? My understanding, maybe not material, but I'm also curious to kind of gauge what could be the dilution on the margins and the impact next year?

Speaker 2

Good morning, Benoit. First, we're very happy with the way the motorcycle is received right now. And I know it's not the best timing worldwide to introduce an electric product, but I would say what I'm pleased with every dealer who are easy it to be a dealer 1st year or every customer that we or media, they were somewhat questioning. And now when they try the product, they are very pleased with the ride, the silent, the performance and the overall experience of the product. And so far, we are on plan.

Speaker 2

We are also on plan to sign the dealer count. We said we're targeting 300 dealers 1st year. We will be there when we start shipment. And overall, this will be the 1st rollout. But again, 1st year, we are somewhat limiting the production to a level that we believe is healthy.

Speaker 2

And it will be a small number to start with, and we will grow from there.

Speaker 3

Yes, year over year impact, don't forget, we are investing in EV and 2 wheel this year. So the increment and then next year is still an investment year because we'll invest be investing marketing dollars in the launch. So it could be an incremental headwind of probably, let's say, dollars $20,000,000 to $30,000,000 next year.

Speaker 8

That's great color. And just for the follow-up, when we look at the powersport market right now, obviously, it's crowded, especially when we count the number of side by side manufacturers. So there's probably be some natural selection. Yamaha exciting this exiting the snowmobile market. So a question mark around Arctic Cat.

Speaker 8

So any early indication that some ORV manufacturers are looking to exit? And given that some players are impacted, is there any willingness on your part to be involved in potential M

Speaker 2

and A that would complement your current product offering? Thanks. Obviously, Benoit, we're following, like all of you, the dynamic in the industry and the position of each OEM into the industry. I agree with you, there is some dynamic and I think that the industry will change over time. But obviously, you cannot expect me to comment on M and A or different possibility.

Speaker 2

There is 100 of possibility out there, but the industry is going to transition. There is some OEM that have more difficulty than others. The only thing I can say, I'm very, very happy where we are because we have strong product lineup in each product line we operate. And by refocusing on Power Sport, I think we will accelerate our plan.

Speaker 8

Thank you very much, Jose. Thanks.

Speaker 6

Thank you.

Operator

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

Speaker 9

Great. Thank you. Can you please remind us what the change in dealer count in the U. S. Is for your ORV dealer channel?

Speaker 3

There hasn't been much change in the overall dealer count, Robin. There I mean, we add a few dealers here and there every quarter, but no big evolution. Today, total dealers in the U. S. As of yesterday was 9 82 dealers covering all the product lines.

Speaker 9

Okay, great. Thank you. And I don't know if you'll really have any color to add given the unknowns out there, but do you have any thoughts on the potential tariff situation and what kinds of mitigating actions you may be able to take or potential to shift production to some facilities that may be for sale now in the U. S. For other product lines, but where you could potentially move some production?

Speaker 9

Just kind of I don't know if you're I know it's still early in the process of what may take place. And so just any thoughts there? Thank you.

Speaker 2

Yes. As you know, Robin, we're closing obviously monitoring the situation. And at this time, there is hundreds of different possibility. But as a global company, we optimize over the years our manufacturing footprint and our supply chain to meet customer demand and be efficient. Then we have a long history of managing through trade and tariff requirement between Canada, U.

Speaker 2

S. And Mexico, but also between other country around the world. We always been able to navigate the change in the geopolitical landscape and we are a leader in the industry. Then the only thing I can say at this time, I don't know it's top of mind for many investor, but we have the team, we have the know how and we'll adapt to the change. And I don't think we need we should overreact right now because we can speculate at this and we should not speculate too much because there is like I said, 100 of different possibilities.

Speaker 2

Then I just want to say to you and to the investor, we're monitoring the situation and rest assured if needed, we will adapt and we will take action in the best interest of the customers, the employee and the shareholders.

Speaker 9

Okay. Thank you. Understood. Thanks very much.

Operator

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

Speaker 10

Yes, thanks. Good morning. I'm wondering if you can maybe comment a little bit about what you're seeing as far as dealer behavior as it relates to interest rate reductions. And maybe the way to do that is to compare and contrast what you're seeing out of your Canadian dealers versus U. S.

Speaker 10

Dealers because we have had, I guess, a more aggressive interest rate reductions in Canada versus U. S. So I'm just and it does seem as though your retail performance in Canada is maybe doing a little better. So I just wanted to maybe talk about what you're hearing from your dealers as far as the impact of interest rate cuts and maybe the way to do that is compare Canada versus U. S?

Speaker 2

And I think the dealer recognize first that we're the first one in the industry to lead the charge to reduce inventory and they appreciate what we're doing. And obviously, right now, they see the progress we're doing on off road. They see the progress that we've done on 3 wheel and smaller product line, but they see the progress that we're doing there. The question is snowmobile. We had the inventory of 2024, we're shipping 2025.

Speaker 2

Production is almost done. Then inventory of snowmobile is high right now, but it's normal at this time of the year. And at least now the snow came in the snow belt and it feels good overall beginning of the snowmobile season. Then the dealers see the difference and they recognize what we're doing. We just need to go over the hump of the snowmobile season.

Speaker 2

And if the retail is decent with the normal snow season, I think the pressure will go down and we are planning a reasonable watercraft season next year. We end up with more inventory, but we're planning to reduce shipment of 2025 to make sure we end the season clean. Then I think the dealers see where we're going, they appreciate where we're going, but we need to deliver with them the retail on snow and watercraft. And but I don't see any big difference between Canada and U. S.

Speaker 2

The only thing I would say in Canada, every single dealer, although sell snowmobile, when in U. S, the dealer in the South feel already better with the reduction we have done on ORV.

Speaker 10

Okay. So that's helpful. And maybe just a quick maybe modeling question for Seb. Just wondering about the G and A line item here on the cost side. Just wondering if the Q3 is a decent run rate as we look forward just now we have the marine out of the business.

Speaker 3

Well, obviously, yes, it has a big impact on the total operating expenses. I mean, if we would have had Marine in our numbers, we probably be, let's say, 50 basis points higher in terms of OpEx percentage. And as we look to next year, obviously, we're still investing in some product categories we've right sized. And so we should see an improvement year over year in OpEx probably in the range of another 50 basis points year over year from 25 basis points to 26 basis points.

Speaker 10

Okay. That's helpful. Thanks very much.

Operator

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

Speaker 6

Hey, good morning. Thanks for taking my question. You've addressed many of them, but maybe I'll just ask a follow-up on the tariff issue. Understood none of us can really predict the future on that front, but what percentage of your cost of goods sold are sourced out of China? And then what percentage of your production today is in Mexico?

Speaker 6

Just to help those of us trying to guess at that impact.

Speaker 3

Yes, we've never been a big sourcer out of China. In fact, today less than 10% of our sourcing comes from China and the parts that we source are less technically complex. So in a situation where incremental tariffs could be imposed, obviously, there are parts that we could easily transfer to another supplier. Obviously, it would require work. I don't want to undermine it, but it's certainly something we could do.

Speaker 3

And from a Mexico point of view, over 70% of our production stems out of Mexico. But obviously, we're in Mexico, yes, for the cost advantage as we took the benefits of the various free trade agreements, But also for labor availability, the workforce in Mexico is highly skilled, both from a blue collar and a professional point of view as well. And so we believe we will not be the same company had we not have that footprint in Mexico.

Speaker 6

Thank you, Seb. And then on 2026, again, know you're not providing guidance, but you're saving essentially $1.50 in loss avoidance related to marine in 2025. But it should be very clear that the benefit next year is much smaller than that because you weren't expecting to lose maybe the same amount.

Speaker 3

We're not have accepted to lose the same amount. That's fair. Yes.

Speaker 6

Okay. Well, hey, thank you.

Speaker 2

Thank you, Craig.

Operator

Next question will be from Martin Landry at Stifel. Please go ahead, Martin.

Speaker 11

Hi, good morning, guys. I want to go back to a previous answer you on the non current models. You seemed optimistic to that the non current inventory, I believe that was the industry you were talking about, with Clear in the coming next quarter or 2. I just want to understand a little bit where we are today in terms of industry units of non current versus historical level? If you can provide that, it would be helpful.

Speaker 11

And then what why are you optimistic that all those non current models will clear out in a short order?

Speaker 3

Well, what we said, Martin, was that some non current will clear now, but also in the first half of next year and dealers will remain cautious. And that's been the standard industry practice of clearing out inventory. No OEM likes to stick with inventory and no dealer likes to stick with non current inventory as well. So usually when you look at historical patterns, Q4 and Q1 are big quarters where non current units get cleared up. And in terms of visibility, we don't have industry information on the current non current inventory.

Speaker 11

Okay. Okay. And maybe just another quick one for me. Just trying to see a little bit how your dealers are approaching 2025. How is their financial position given the industry has been challenging?

Speaker 11

Are some of the dealers hurt from a financial standpoint? And have you started to see some delays in payments from dealers?

Speaker 3

We do every quarter, we do a deep dive with our floor plan financing partners and do an assessment of the health of the dealers. And generally, the dealers are in very good health. They've made a lot of money during COVID, and so they're fairly well capitalized. We're supporting them tremendously with the inventory. We're paying almost 70% of the floor plan cost financing.

Speaker 3

And we've been diligent as well in managing deliveries this year and reducing inventory, which is certainly a plus for them. Dealers are making obviously less money than they were making during the COVID. But when you look at overall dealer profitability and some of the metrics we can put our hands on, their profitability is somewhat in line with what they were making pre COVID. But nothing out of the ordinary, no special provision, no risk of repo is on the radar.

Speaker 2

Cool.

Speaker 11

Thank you. Best of luck.

Speaker 2

Thank you.

Operator

Next question will be from John Hsu at BNP Paribas. Please go ahead.

Speaker 12

Hi, guys. Thanks for the question. You gave a little bit of guardrails in terms of next year for revenues and maybe OpEx. Can you talk a little bit about how you think how we should think about gross margin ex marine next year? What are some of the puts and takes there?

Speaker 3

Yes. Well, puts and takes, obviously, we're still operating with less than optimal levels of capacity utilization. One big variable for next year is the programs. This year, we did have to put more dollars on programs hurting gross margin percentage. The one positive element will obviously be programs.

Speaker 3

Other positive elements will be cost efficiencies that we're driving in the business. So that would be the main one. So yes, expecting a slight improvement in gross margin next year.

Speaker 2

Okay, thanks.

Speaker 12

And then on the current units, you kind of showed that slide showing how your sales for the current inventory is really strong. I guess, what do you think that's what's driving that? And how does that give you confidence into next year in terms of maybe gaining share as well if inventory gets clean?

Speaker 3

Well, two things. 1, we've recently launched 2 new ATV platforms covering all of the segments or 90% of the segments. And that's certainly been well received and these are being sold as current units. It's been over 10 years since we had introduced a brand new platform like that. So and the industry has been relatively, if I could use the word, non innovative, if that's the word.

Speaker 3

And so that's a big plus. And on the ORV side, the side by side, the Maverick R4 seaters certainly well received. And the Defender cab, current models are in high demand and that's been fueling our retail growth.

Speaker 2

Okay. Thank you. Thank you.

Operator

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

Speaker 6

Hi, good morning and thanks for taking my questions. Most of them have been asked, but I guess just one for you, Jose. Can you discuss if you've seen any change in consumer sentiment post elections? Have you seen any signs of increased optimism around the consumer?

Speaker 2

Yes, that's a funny one. First, overall in Q3, the trend with consumer didn't change. The new entrant were at 23% pre COVID level. There is definitely entry level buyers are under pressure. And we see it in entry level model like the Spark on Watercraft, the Ryker on 3 wheel, the Switch on pontoon, our retail were down 30% in those industry.

Speaker 2

And when we look to the side by side, the premium high end product was up almost 15% and the value was down 25%. And when you look at all this, the dynamic didn't change in Q3. We heard this heard that twice in the last few weeks that now the people are waiting that the new President is in force to make their decision. Then I think I believe there is something there, but we cannot quantify what it will be. But I heard that come in a few

Speaker 6

times. Interesting. Thanks for the color. I'll get back in queue.

Operator

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

Speaker 13

Hi, good morning. I guess what we haven't talked about yet is what the used market looks like right now and maybe how the behavior in the used market could impact the consumer takeaway of new units in the year ahead. So have you guys seen any noteworthy trends on maybe whether prices have been decelerated or volume has been increasing in that used channel, just to help us triangulate the entire inventory picture across the industry? Thanks.

Speaker 2

Yes. As you know and we said a few times, we don't have any data on the used market. Then when the only thing we can say is what we hear from the dealers. The used obviously like the non current right now is getting some retail. But we don't see I didn't heard any big change into the used market in the last quarter.

Speaker 13

Okay. And then I think earlier in the call, you said the current expectation for next year is for a flat industry. Are there any number of interest rate cuts baked into that? I'm just trying to think about the sort of bull case and bear case scenarios from where your current point is?

Speaker 3

Today, the assumption we have is current and frustrate environment. Obviously, we believe that will take several cuts in order to move consumer demand. Interest rates are still relatively high. So from a retail financing point of view, we need to see several cuts next year to start seeing an impact on demand. But obviously any rate cuts while on the short term is going to help floorplan financing costs and our financing costs as well on our balance sheet.

Speaker 13

Excellent. Thank you.

Operator

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

Speaker 14

Yes, thanks. Good morning. I was hoping just to follow-up on an earlier line of questioning on the dealer health and dealer profitability, maybe coming at it from different angle. If we were to frame up where dealer sentiment stands as of today because there are a lot of moving parts. On the one hand, it sounds like the inventory picture is getting a bit better, but the end customer demand has yet to really come back or materialize.

Speaker 14

But I mean, as you pointed out, they are making as much money as they were pre COVID. It sounds like maybe the sentiment is a little bit detached from that. But overall, where would you say dealer sentiment stands today as of perhaps this time last year or let's say pre COVID levels?

Speaker 2

I think the dealer, many dealer has to somewhat right size their business the way we're doing it. And the dealer in U. S. Very often carry 5, 6, 7 OEM and they need to right side their business. What I mean by that, decide with who they prefer to work.

Speaker 2

It's quite rare that the dealer will drop a product line or a brand, but they could decide to buy less of that brand and buy more of that other brand. And this is why we're betting on our approach to improve inventory of BRP product, have a better inventory turn over and prove to the dealer then when they sell a BOP product, they make more money than selling other brands where they carry more inventory. Then I would say many dealer right now are in that process of rightsizing or maybe realigning their priorities inside their dealership. And we believe we can play a positive role there. Okay, thanks.

Speaker 14

And then as my follow-up, you mentioned the incremental 50 basis points that you expect to get as far as the OpEx rate goes. What do you have in the pipeline, I guess, as far as cost savings programs or how much of that is going to be allocated towards specific cost savings programs or process efficiencies versus sales leverage?

Speaker 3

Well, obviously, every year we challenge the team on being more efficient and re questioning the way they do their business. Again, we expect a modest pipeline growth next year. And so most of the impact, I'd say probably fifty-fifty comes from operating leverage and the other one from cost efficient.

Speaker 14

Thank you very much.

Operator

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

Speaker 5

Hey, good morning. Just a point of clarification, the floor plan financing, the 70% that you're covering, how does that work? Is that something that gets dealers through into next selling season? Or is it a certain amount of time post from whenever they receive a unit? Thanks.

Speaker 3

Yes, it varies. There's 2 types of support we provide them. We provide them with standard support when we ship a unit, which could be 60, 90 days. And then in a context where the industry is more challenging seasonal business, we finish with more inventory, we'll provide them with what we call internally risk assurance. So we'll cover the floor plan costs for a longer period usually until the next retail season begins.

Speaker 3

And so that's the main form it takes.

Speaker 5

Okay. So safe to assume maybe we get a little bit of carryover into 1Q of next year?

Speaker 3

Yes. Well, that's all accrue for the financials. So when we end the snowmobile season, we'll take the accrual AE personal watercraft season as well. So it's a hit that you take in the current fiscal year. Got it.

Speaker 3

Thank you.

Operator

Thank you. And our last question is from Brian Morrison at TD Cowen. Please go ahead, Brian.

Speaker 15

Thanks very much. And Seb, I appreciate all the details on the puts and takes of next year. Couple of quick questions. One, when I think about the season end inventory in PWC and the switch, you did provide the surplus inventory for snowmobiles back in Q1. I think you said destocking was 30% or $350,000,000 Can you provide the metrics for the PW and switch for as the season ended?

Speaker 3

Yes, I wish I could, but I don't have the backup with me, Brian. So we'll have to take it offline.

Speaker 15

Okay. And then I guess my second question is, you're clearly in great shape in side by side inventory and that's a real benefit. I just wonder if you play devil's advocate here. Do you expect to lose ORV market share next year? And the reason why I ask is, I'm curious, how do you address retaining loyalty if consumers are baited by the promo on the heavy non current of competitors?

Speaker 15

Because the entire industry is challenged until this clears, correct?

Speaker 2

Yes. But the theory that and the philosophy that we have, dealers know that selling current product is more profitable than non current product. And we're trying obviously for their benefit and our benefit and protecting the value of our brand, because the brand, Can Am brand has a value, it's recognized for performance, quality, design, and we want to protect that. Then basically, that's why we believe that the strategy that we have is the right one. When a season start, it's normal to have a certain level of non current, which is happening right now.

Speaker 2

But typically, after a quarter or 2 of the new season, the customer purchase is mainly current and this is where we believe we will win big time. Then right now we are into the transition of that inventory depletion period, But we believe that mid to long term, this will be very beneficial for us.

Speaker 15

I think I agree with that, Jose. I'm just curious as to if you lose a customer because they go non current, how do you get them back?

Speaker 2

Yes, but at the end of the day, there is so many customers and some who shop for a price could buy a Can Am. But if we don't have any concurrent, non current, you will buy another brand. But again, we've been able to grow market share by the quality of our product, by the innovation with our product, the technology and this is the bet that we take. We push technology and innovation to attract more customers and gain share. Then we grew from 0% in 2010 to 20% last year to 30% last year.

Speaker 2

And we still believe that we can continue to grow. But we cannot gain any or every customer who shop for a price. This is not I agree with you.

Speaker 15

I just wanted to understand the dynamic. I appreciate the comments.

Speaker 2

Thank you. Thank you.

Operator

Thank you. There are no more questions at this time. I will turn the call back to Mr. Deschenes to close the meeting.

Speaker 1

Great. Thank you, Sylvie, and thanks, everyone, for joining us this morning and for your interest in BRP. We look forward to speaking with you again for our Q4 results on March 26. Thanks again, everyone, and have a good day.

Operator

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

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Key Takeaways

  • BRP delivered above-expectation Q3 results with $2 billion in revenue, $264 million in normalized EBITDA and $1.16 in normalized EPS, driven by the timing of snowmobile shipments and tight expense management.
  • The company made significant progress on inventory reduction, with total network inventory down 10% and ORV inventory down 22% (one quarter ahead of plan), targeting a 15–20% reduction by fiscal year-end.
  • BRP has initiated the sale of its Marine businesses (Alumacraft, Manitou and Telwater) to focus capital and resources on its core powersports operations, and all results are now presented on a continuing-operations basis.
  • Global retail trends saw North America down 11%, EME down 19% and Latin America up 21%, and BRP gained share in current-unit ORVs despite competitors’ heavy promotional activity on non-current units.
  • For fiscal 2025 (continuing operations), BRP reaffirmed guidance of $7.6–7.8 billion in revenue, approximately $1.02–1.07 billion in normalized EBITDA and $4.25–4.75 in normalized EPS.
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Earnings Conference Call
BRP Q3 2025
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