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BRP Inc
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Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY '22 Third Quarter Results Conference Call. [Operator Instructions] I would now like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.
Thank you, [indiscernible] Good morning, and welcome to BRP's conference call for the third quarter of fiscal year '22. Joining me this morning are Jose 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 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 to cancel BRP's MD&A for a complete list of lease. 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 Jose.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. Please turn to Slide 4. In the third quarter, our team once again demonstrated its ability to successfully operate in a tough environment. The on execution on multiple fronts over the past 9 months position us well to deliver on our guidance for the year. During the quarter, consumer demand remained at an all-time high across all product lines. Our recent product introduction, notably the SD switch were very well received by consumers and the media as a result. We registered record high fresh season consumer certificate. For CDPersonal graft and pontoon and presold unit for Can-Am off-road vehicles. Furthermore, we continue to gain market share -- During the quarter -- sorry, furthermore, we continue to gain market share in the power sports industry. Although our low network inventory and global supply chain disruption limited our ability to grow retail. We continue to outpace the industry in North America, EMEA and Asia Pacific. This is a testament to our strong brand and the replication of our team. While we were impacted by supply chain pressure, the third quarter was marked by continued solid execution across the organization. As we expected, the availability of certain component was tighter in the quarter, which limited our wholesale and resulted in a higher level of unit wing missing component. However, the situation has been improving over [indiscernible] weeks. We also continue to execute on our key projects. Our new product development initiatives are on plan and the ramp-up of our production capacity at Juarez and Queretaro is on schedule. That said, we've delivered better-than-expected profitability in Q3, driven by a higher product mix and tighter management of expenses. Given this performance and our ongoing initiative to mitigate supply chain issue, we are raising the lower end of our normalized diluted EPS guidance by $0.75, narrowing the range between $9 and $9.75 per share. This represents a growth rate of 67% to 81% over last year. Let's turn to Slide 5 for the key financial highlights of the third quarter. As expected, revenue were down 5% to $1.6 billion, primarily due to the supply chain constraint. However, our profitability was stronger than expected. Normalized EBITDA and normalized diluted earnings per share stood at $252 million and $1.48 per share respectively, down about [ 30% ] year-over-year. Turning to Slide 6. As you can observe, key financial metrics for Q3 year-to-date are all up significantly. Revenue are up 28%, Normalized EBITDA is up 52% and normalized diluted earnings per share almost doubled to $6.93 per share. These are all record results. In fact, our normalized EBITDA and normalized EPS on a year-to-date basis are higher than any single full year in BRP history. As a result, we are confident to achieve our annual guidance and deliver another record year in fiscal year '22. Turning to Slide 7 for a look at our retail performance for the quarter. Our network inventory remains at very low levels. Therefore, our retail sales were roughly equal to our shipment of products. Overall, while our North American powersports retail sales were down 12% in the quarter, when excluding snowmobile, we still outpaced the industry, which was down low 20%. When compared to pre-COVID levels, retail sales were actually up 1%. We're able to achieve this despite operating with very low level of inventory in the network. We expect retail to start to grow and improve in Q4, driven by the timing of snowmobile shipments and the additional production capacity from URS3 and Capital. Looking at the global retail picture on Slide 8. Overall, we outpaced the powersports industry in all key regions, including North America, EME and Asia Pacific. In North America, specifically, when compared to the industry, we did well with the side-by-side vehicle, ATVs and personal watercraft product lines. However, we're slightly below the industry in 3-wheel vehicle and snowmobile because of the timing of shipment due to the shortage of components. Turning to consumer demand on Slide 9. While our retail growth in the quarter was limited by product availability, we continue to see very strong consumer demand for our products. We continue to attract a high level of new entrants with an estimated 36% year-to-date, well above the historical average of about 20%. Website visits remain high and well above pre-COVID levels. For example, our Can-Am off-road website saw close to 60% more visit in October '21 than the same period 2 years ago. The momentum with preseason consumer certificate for personal watercraft is excellent. As of last Friday, we already had 4x the number of certificates versus what we had last year, and recall that we had the record level of precision certificate last season. And the launch of ORV preorders has been very well received. We've launched it in November 8, and customers' orders are already trending above target. So all in all, consumer demand remains very strong and does not show signs of slowing down in near term. Turning to Slide 10 for an update on Sea-Doo Switch. Another key highlight of the quarter was the very successful launch of the Sea-Doo Switch. Media review and consumer response to our new products were well above our expectations. The launch represents the strongest REIT ever for BRP product. It generated over $2.3 billion impression and over 3 million website visits in the first 30 days. Also, Switch as an exceptional preseason consumer certificate, 3x higher than we were expecting. Production is planned to start in the later part of the fourth quarter with deliveries expected to be for the next boating season. We are very pleased with the great start we are experiencing with Switch. We truly believe it will be a game changer for the boating world. Now let's turn to Slide 11 for our year-round products. Revenue were down 8% to $736 million, mainly due to lower product shipments caused by supply chain constraints and were partially offset by a favorable product mix and increased pricing for side-by-side and ATV. Two-wheeled vehicles were most impacted by lower volume as we prioritize the allocation of component to product lines that were in the retail season. Now looking at side-by-side North American retail. In the third quarter, retail was down mid-20%, in line with the industry despite having less units in the fire at our Juarez 2 facility at the end of July. Excluding the impact of the fire, we estimate that our retail would have improved by high-teen percent for the quarter and would have outpaced the industry. Still Can-Am side by side is very well positioned to grow in the coming years. Consumer demand for our lineup remains strong. Our new products are very well received and we continue ramping up production at our Juarez 3 facility. Given the strong demand for side-by-side vehicles and our ongoing market share gains, we have decided to start the Phase 2 expansion at our Juarez 3 facility which will effectively double production capacity at that facility. Construction is expected to start at the beginning of the calendar year and the production ramp-up is forecast to start in the first quarter of fiscal year '24. Turning to ATV. For the quarter, Can-Am North American retail was down high single-digit percent while the industry was down mid-20%. Our Can-Am ATV lineup continued to gain momentum with market share gain in the high CC category. Turning to 3-wheel vehicles. The North American 3-vehicle industry completed its season '21 in October with retail up close 20%. Our Can-Am 3-wheel vehicle retail was up mid-20% over the same period, gaining share in both the 3-wheel vehicle and 2-wheel motorcycle industry and ending the season with the #1 market position in 3-wheel and fifth in the motorcycle industry. We had impressive results even if we miss inventory in the back end of the quarter, which impacted our retail. Turning to Slide 12 for an update on 3-wheel vehicle Season '21. It was another very good season for 3-wheel. Not only did we gain market share, we made progress on our key priorities. We continue to generate strong momentum with the Rider Education Program. The total number of riding course completed since the launch of the program is now up to 44,000. The Ryker continue to attract a younger and more diverse consumer base. In fact, 55% of consumers are new entrant. Over 38% are women, a key buyer group. 70% are under the age of 55, and about half are from diverse communities. Moreover, the Woman of On-Road community that we initiated last year has been very successful now contain close to 12,000 members. All of these initiatives have helped us grow the 2-wheel vehicle market. In fact, we tripled our annual retail sales in North America since the Ryker introduction in season 2018. We are confident in our ability to continue to grow in the coming season. Turning to seasonal product on Slide 13. The seasonal product revenue were down 14% to $437 million, mainly due to lower product shipments caused by supply chain constraints, and were partially offset by a richer mix of personal watercraft and favorable pricing. Now looking at personal watercraft retail. For the quarter, North American retail was up high 80%, while the industry was up mid-70% as Sea-Doo continued to gain market share. The North American industry ended its season '21 on September 30, with retail up mid-single digit. Sea-Doo Retail was up high teen percent over the same period ending the season with the #1 market position in all segments in the industry and achieving its highest market share ever. Once again, we ended the season with a very low level of network inventory, down 70% in comparison to the same period last year. In Australia and New Zealand, early in the season, Sea-Doo is off to a good start with retail up over 90%. With low level of inventory and strong preseason consumer certificate, we are experiencing another very strong year for our personal watercraft business. Looking at snowmobile. While it is currently still early in the season, during the quarter, the North American industry was down mid-40%. And our snowmobile sales were also down high 40%. This is mainly due to low product availability, given we prioritize the allocation of component to product line that were in season during the quarter. Looking ahead, our retail is rapidly improving as we are now focused on the completion of snowmobile that we're awaiting missing component. Given this prioritization, combined with a record level of units presold to consumer, we are confident in our ability to deliver a strong fourth quarter. Continuing on Slide 14 with a look at Powersports part, accessories and apparel and OEM engine. Revenue were up 9% to $284 million for the quarter. This growth is driven by a higher volume of replacement parts due to the increased product usage, combined with strong unit retail, which generated increased accessory sales. Our strategy to develop accessories and parallel to vehicle continue to pay off and the Sea-Doo Switch is another great example. With this strong success, we are well on our way to achieve our fiscal year '22 revenue guidance, which forecasts to surpass the $1 billion mark for the first time. Now looking to Marine on Slide 15. The Revenue were up 26% to $131 million, driven by a higher volume of both sold and lower sales program. Looking at retail sales. For the quarter, both Alumacraft and Manitou saw a retail decline as sales were made earlier in the season compared to last year. However, year-to-date, both brands performed well. Alumacraft was down high single digits due to low level of inventory and Manitou was up about 10%. This said, both brands finished the boating season in North America with low inventory. As for Telwater, we are approaching the upcoming boating season in Australia and retail is up high single digit for the year-to-date. We are pleased with the progress we have made in our Marine business, and are looking forward to launching new boat with the Ghost engine in each of the 3 brands in the second half of 2022. With that, I turn the call over to Sebastien.
Thank you, Jose, and good morning, everyone. As previously anticipated, we managed through supply chain issues throughout the third quarter, which impacted our wholesale and retail. However, the strong demand for our premium models and the continued tight management of our expenses allowed us to deliver better-than-expected profitability. Looking at the numbers, we generated $411 million of gross profit, representing a margin of 25.9% and delivered $252 million of normalized EBITDA. Our normalized income came in at $128 million, down $71 million from Q3 last year, due to lower volume of unit deliveries, higher production and distribution costs and a slight increase in operating expenses, which were partly offset by better mix, lower financing costs and tax expense as well as favorable FX impact. This resulted in a normalized earnings per share of $1.48, coming ahead of expectations. From a cash flow perspective, we had negative free cash flow in the quarter as we continued investing in the business. Notably, with $136 million in CapEx to support our growth projects and $485 million in working capital given that we continued operating with a higher level of work in process inventory as we are managing through the supply chain constraints.Moving to our network inventory situation on Slide 18. Year-over-year, our network inventory is down 44%, with all product lines seeing declines despite lapping a very low level of inventory at this time last year. While looking versus Q2, our inventory is slightly up, driven mobile shipments ahead of the winter season. As you know, in order to deliver on our commitment of fulfilling all dealer orders in the context of supply chain constraints, we are shipping incomplete units to dealers for which the retrofit is simple and rapid. This approach brings the product closer to the final consumer and should lead to timelier retail once the final components are received by the dealers. These incomplete units are excluded from our reported network inventory until we ship the required components. If we were to include these units on our network inventory, our inventory level would be down only 14% year-over-year instead of the 44% decline we reported and therefore, positioning us well to deliver on our wholesale and retail plan in Q4 as we accelerate the shipment of components to our dealers. And looking ahead, we still have a significant inventory replenishment opportunity, representing roughly the equivalent of a full quarter of wholesale to get back to more normalized levels, a sizable growth driver for the quarters to come. Now moving on to the updated guidance, starting with a bit of context on Slide 19. With just a couple of months to go in fiscal '22, we now have better visibility on our production for the rest of the year. While we expect to continue operating through a tight supply chain environment, the actions we took throughout the year to adopt our processes to this new reality are paying off, making the situation more manageable and allowing us to deliver increased volume in the fourth quarter. Looking at revenues, we have adjusted our ground products guidance to reflect the impact of supply chain constraints on wholesale and the timing in 3-wheel production, which is now concentrated more in fiscal '23, Q1, as we prioritize production capacity in components availability for snowmobiles in Q4. We have also adjusted upward the lower end of the guidance ranges for other product categories to reflect the increased visibility we have on our expected production output for the year. With these volume adjustments, we are increasing the lower end of our profitability metrics to reflect the expectations for a continued favorable product mix and lower than previously anticipated operating expenses. Our guidance also accounts for increased commodity and logistics costs, which are expected to be offset by improved pricing and lower sales program. Finally, we are also increasing our CapEx guidance to a range of $705 million to $730 million to reflect the opportunistic acquisition of the Juarez 2 and Queretaro facilities, which we are -- which we were leasing until now. This transaction is expected to close in the coming months. Looking at the numbers on Slide 20. With these adjustments, we now expect our total company revenue to grow between 25% and 30%. Our normalized EBITDA to grow between 38% and 47%, and our normalized EPS is now expected to end between $9 and $9.75, representing a growth of 67% to 81%. While we are comfortable with our plan for the year, we expect to continue operating in a tight supply chain environment, which may lead to variability and the timing of reception of components from suppliers, and, in turn, may impact our production and shipment schedules. Given this situation, we are operating with lower visibility than we usually do, and this is why we have kept a wider than usual guidance range for this time of the year. Still, we are confident in our ability to achieve our guidance and given our expectation for a strong fourth quarter and continued solid growth in fiscal '23, the Board of Directors has approved the launch of the normal course offer bid under which we will be allowed to repurchase up to 3.8 million shares over the next 12 months. On that, I turn the call over to Jose.
Thank you, Sebastien. To conclude, we delivered record results in the first 9 months of the year, thanks to the selling and execution of our team and strong consumer demand. Given this performance and our ongoing initiative to mitigate supply chain disruption, we expect to report solid Q4 results, achieve our guidance and deliver another record year in fiscal year '22. Building on this momentum, we are well positioned to deliver strong growth in fiscal year '23, as we expect to benefit from numerous key initiatives and trends, including a sustained strong consumer interest in Powersports & Marine, the upcoming significant inventory replenishment cycle, which is expected to take place over the next 12 to 18 months, the continued robust demand for our product lineups, the first year of the Sea-Doo Switch, which is proving to be very promising and additional production capacity from Juarez 3 and Queretaro. In addition, we have a solid pipeline of projects to sustain our long-term growth, including continued investment in innovation, the ramp-up of additional production capacity at Juarez 3 Phase 2, our new entrance strategy, which is progressing well, new product introduction in the Marine business such as Project Ghost, as well as offering electric options in each of our product lines by 2026. As you can see, we are well positioned to drive short-term and long-term growth. Finally, I would like to thank all our employees for their hard work and dedication in this very busy time, our supplier for doing everything they possibly can to meet our orders, and our dealers for their support and patience. Also a special thanks to our customers for their confidence and loyalty. On that note, I turn the call over to the operator for questions.
[Operator Instructions] Your first question comes from Craig Kennison from Baird.
Obviously, there are many consumers who show up at dealers that is choosing to do switching to another BRP product...[Technical Difficulty]
Craig? We move to another question and we come back operator.
And your next question comes from the line of Martin Landry.
This is [indiscernible] coming online for Martin. You seem to be handling the supply chain situation quite well and the others in the industry getting units in the stores. Just wondering if you can shed any light on some of the initiatives, ability in working the facilities in Mexico with the fact that you have a labor modular part? Anything that could would be helpful.
Then first, I don't know, guys, if we hear you well. But as you know, our goal is to meet all dealer and customer orders. Then basically, we have improved on our process. Do you hear us?
Yes, I hear you, it's a little bit of background noise, but I can talk to.
Then as you know, the goal is to meet all dealer and customer orders. And we have -- basically, we have improved our process over the years. And the first one, we allocate products to minimize factory chain. And basically, we allocate product to dealers to make sure that we minimize the chain that would come from them. Second, we have the chance to be -- to have many product lines and we have the possibility to prioritize certain products, depending seasonality. Then I'll give you an example. In Q3, we prioritized component on ORV product and personal watercraft counter season because they were in the peak retail versus 3-wheel vehicle and snow because this is not the usage of the product for 3-wheel and snow in August to October is limited. Q4, we will prioritize ORV and slow versus 3-wheel and watercraft. And in Q1, all product lines will be prioritized. And this gave us, I believe, more flexibility than some of our competitors. The other thing is we decided to run our assembly line, doing some BOs, either we retrofit them in-house or we have the dealer to retrofit them. And when the dealer do it, it's more people who can do the retrofit. And on top of it, it's saving a shipping time. And the last thing, you know that we have a high percentage of our production was made in Mexico, where we have no labor shortage versus what's going on in Canada and United. Then overall, Supply chain is still challenging, but with those initiatives is more manageable.Do you hear us?
Yes. Okay. So just a quick follow-up. You mentioned that we'll see more product introductions over the next 3 years and then the last 3 years. So how should we think about how that could impact some of your expenses with research and development? Is there going to be any sort of step change or material change in how that is relative to your revenue in the coming 3 years?
Well, historically, we've always invested around 4% to 4.5% of R&D as a percentage of revenue, and the expectation is that we continue on that trend. Innovation is part of winning in this industry, and we need to continue fueling innovation.
Your next question comes from Gerrick Johnson from BMO Capital Markets.
On last quarter, you talked about growing revenue and earnings by double-digit percent in fiscal '23. I did not hear that this time you're backing off of that guidance.
Gerrick, no, we're not backing off of that guidance. Obviously, assuming the supply chain continues to improve and it remains manageable as we expect for Q4. You know that we have a lot of growth opportunities for next year, as Jose alluded to them, but obviously, we have added capacity for side-by-side, personal watercraft, the Switch, the Ghost, the restocking of inventory in the network. And also, we will have a few surprises next year in terms of product introduction. So if you take the midpoint of the guidance range on EPS for fiscal year '22, we are confident in our ability to deliver, again, double-digit EPS growth for next year.
Okay. Great. And in the quarter, with revenues lower, what was the profitability surprise? Was it -- I think you said it was operating expense? What they surprised you to the -- to be a benefit?
Yes. Well, we came in lower than what we were anticipating, obviously, with the low level of network inventory that we have in the field continued strong consumer interest, we scale back on some of the marketing spend that we were planning to do. And other favorable. Okay.
And I have 1 more, and I'll jump back in queue. If you ship an incomplete unit, when do you recognize that revenue?
Very important question. We recognize revenue only when the final components are shipped to the dealer. So as I've said in my call, any retrofit units or incomplete units that we ship to the network are actually excluded from network inventory because we haven't recognized revenue. and we'll be recording revenue when we ship the component. So that's why now that we're sitting with -- if you compare year-over-year, minus 14% of total inventory, including incomplete units, obviously, it bodes well for wholesale plan for the fourth quarter.
Your next question comes from Cameron Doerksen from National Bank Financial.
And just a follow-up on that last question. I guess that's largely -- especially on the snowmobile side, but largely explains the fairly significant implied sequential revenue growth in seasonal products in Q4 is the fact that you've got these units at the dealers that are basically kind of ready to ship?
Yes. This is -- yes, exactly.
And as Jose mentioned as well, purposefully, we prioritize other product lines versus snowmobile in Q4. So that's why you'll see a heavier lift than wholesale in Q4 for snowmobile.
Okay. Perfect. And I guess sort of a related question for me, just on the working capital in Q4. I guess, presumably, you'll have a significant -- obviously, we've seen inventory, I guess, increase sequentially the last number of quarters. I would -- is your expectation that we'll see that decline in Q4. And I guess, maybe my other question is we saw a fairly big jump in accounts receivable in Q3. I'm just wondering what kind of explained that.
Well, if you look at the overall investment in working capital year-to-date at the end of Q3, it's about $855 million, and my expectation is that will go down in the fourth quarter, probably to the tune of $200 million to $250 million, so positive cash generation. And yes, AR has increased, obviously, with the shipment of goods to the dealers in the last period of the month. So that obviously increases overall AR.
Your next question comes from Joe Altobello from Raymond James.
I guess first question on supply chain constraints. You did mention earlier it's improving in recent weeks. I was hoping you could elaborate on that a little bit. Is it on the logistics side or components procurement? Or was it pretty much across the board?
And I would say on the semiconductor, we see some improvement. We have a better visibility of what's coming. This is definitely a plus. The logistics is still difficult with the Christmas high season, there is a shortage of, as you know, of container, boats, plane and all of it then this is creating some disruption. That being said, and that's what I've tried to explain the way the process that we put together to better manage the volatility I believe, is good for us. Then again -- and again, I'm not sure if you heard well, but we allocate product to dealers, and we ask them to presell those products, not what they don't know if they will get it. We -- because we have multiproduct line, we have the possibility to prioritize certain product lines versus other depending of the riding season. We decided to run our assembly line. Some would be that will retrofit here or at the dealer level, then this is another lever that expedite unit at retail. And the last thing is because we have quite a high level of production in Mexico, where there's no labor shortage. We feel it's helping. Then all of this is helping us to better manage the high volatility of the supply chain.
Okay. That's very helpful. And then maybe thinking about fiscal '23, you did mention earlier, you're still expecting double-digit EPS growth. Your EBITDA margins this year are looking around 18% to 19%. I think you said they should be flattish next year. So could you help us understand sort of the puts and takes in fiscal '23 in terms of margins, I assume you're expecting some normalization in sales programs. And I would think that, that would be offset largely by cost savings and other drivers.
Yes. When we -- when you give you some color on EBITDA margin for next year, what we said was the expectation is that would be in line with what we had in fiscal year '21, which was a phenomenal year in terms of profitability and EBITDA margin. Obviously, the pluses are, the volume is going to be a big plus for next year. Pricing is also going to be a plus. But the headwinds that we're seeing, obviously, we're benefiting this year from a very favorable commercial environment on the sales program. We're expecting a headwind on sales program. We're expecting a headwind on mix as well. This year, we tend to favor higher-margin products because production was limited, and so that's what we've put on the top of the list. And also commodities are going to be a headwind. We're seeing it this year. We're expecting it to continue being high next year. Probably less disruption in the, we'll call it, the weekly management of operations, so less costs there, but certainly an inflationary pressure from a commodities point of view and a salary point of view as well.
Your next question comes from Brian Morrison from TD Securities.
Seb, I want to go back to the prebuilds with your WIP up about $500 million. What percentage of that is snow? And do you expect that elevated WIP to normalize all in Q4? Or could this be ongoing with the supply chain visibility?
Well, if I look at my overall retrofit situation, the Q3 was the quarter which for us, we believe, is the peak in terms of units retrofit. We are about 2.5x higher than where we were at the end of Q2. And our expectation is that number is going to go down in Q4 by about 25%. So we'll still be at high level, higher than we would like, but still very manageable. And the expectation is in Q1 and in Q2, we will be depleting that retrofit inventory. Obviously, the beauty with our business is that we have multiple product lines, so we can prioritize units, and that provides us with a lot of flexibility, and that's what we're doing.
Okay. And then maybe for Jose, you've made comments here about Phase 2 already with what market share in unit volume does that imply? By my math, that looks like you're going up to about 200,000 units of capacity and 40% market share. Is that correct?
Yes. I mean, obviously, we felt that at the rate that the market is growing and the way we're gaining market share today, 30% is a lot more than what we thought 3 years ago. And our Juarez 3 factory was designed to be built into phase. And when I look at the overall picture, if you take the peak of the off-road vehicle market in 2006, this industry, if you combine ATV and side-by-side was 1,350,000 unit. Now it's still 85% of that volume, obviously, side-by-side is growing faster than an ATV a decline, but we still are 15% below the peak of 2006. And when we see all the new product that OEM bring in, we believe that there is still runway for the industry to grow. And again, our target is to go at 30%, and we won't stop at 30%. When the 30% is reached, there will be another goal.
Okay. And last one, very quickly, just the days outstanding that your dealers you usually provide that number. I assume it's still sort of in the mid-20s?
Yes, that's correct.
Your next question comes from Robin Farley from UBS.
Great. I just wanted to clarify 1 of your comments on the call about shipping and complete product. Did I understand you to say that the amount at dealers is equivalent to a full quarter of shipments? And with that, is that true for off-road? Or was that mostly a comment about snow?
Just 1 clarification. When we talked about the fourth quarter of production, I was referring to the whole inventory replenishment opportunity. As you see inventory down sequentially significant versus last year and versus 2 years ago, even more so. So that's the color I provided, Robin.
Okay. No, great. That's helpful. And then in terms of the capacity increase that there was expansion from -- not the new 1 you've announced, but the 1 that came online in August. Can you just quantify for us the capacity increase that, that would represent, but then kind of where you are -- the fact that, I guess, the supply chain, like what percent of that increase, I guess, is what I'm trying to get to is are you not able to hit because of the supply chain. So just trying to get a sense of what it's actually adding today versus what it can add when the supply chain issues are normalized?
Yes. Well, obviously, you're right, with the supply chain issues. We're not able to benefit from this full added capacity in the third quarter. But we do have an aggressive capacity ramp-up plan, and the expectation is that comes up first. We would be able to use that additional capacity. Now Juarez 3, Phase 1 offered an additional 50% of capacity increase versus what we had prior to opening of that facility. And so as the supply chain normalizes, the teams are working to make sure that we're able to benefit from the added capacity as soon as possible.
So Feb 1 will be what percent increase off of kind of last year's -- or the pre-August '21?
The target is to be at 50%. Obviously, the supply chain needs to normalize. Will we be there? Time will tell. We still have a few months to go, but that's the target.
That's what I was going to try to understand whether you were saying that February 1 that you thought your siting issues would be normalized, but you're kind of -- you're not saying that.
I'm not saying that it's going to be. Obviously, it's a weekly management. Visibility improves, we're better at managing it. But we saw a few hiccups over the last 12 months that many companies have. So time will tell.
Okay. Great. And then maybe just a final thing. You mentioned the new dealer order program that was started in November. Do you have any way of sort of quantifying without having had that formal order system, what dealer deposits -- so not your P&L, but the dealers taking deposits from consumers waiting for product. Any way to quantify how that looked at the end of Q3 versus the end of Q2 kind of just sequentially?
Robin, we've been having those preorder system for snowmobile, watercraft and 3-wheel for many years. And I would say the most successful one was now mobile because this is part of the history of snowmobile and customers like to reserve their special model for the upcoming season. But lately, all product lines are going with a shortage of product, all consumer -- many consumers are placing more orders than on snow watercraft and feel it exists for many years. Now we introduce it on the ORV, but different than some of our competitors, we said to the dealer presell only unit that has been allocated to you. Then right now, the dealers know how many off-road they will receive in December, January, February, and they are allowed to presell those units, not the thing that they believe they will sell in July because we want to -- we want to give to the consumer a good idea of when they will receive their unit. That's part of customer satisfaction.Then obviously, on snow watercraft in 3-wheel, we have the data to compare, but it's brand new that we just started on November 8. But I can tell you it is going very fast right now. Dealers are somewhat securing the consumer to make sure they get their units in the next 3 months. But we don't have any specific number.
But the new system that started in November is still only allowing dealers to presell the sort of next quarter of shipments? Is that...
Exactly. Exactly. Yes.
Your next question comes from Fred Wightman from Wolfe Research.
The 14% decline on a year-over-year basis for the semi-finished inventory. Can you put that into context with where that was exiting the second quarter?
As I said, the total number of retrofit units is about 2.5 higher -- 2.5x higher than when we were at the second quarter. But what's important to note is when I look at the total units shipped to dealers this quarter, that's including the complete units and also the semi finished units. Total deliveries are equal to where we were last year, obviously, wholesale is impacted because we have retrofit units than we had last year. But the good news is we're on plan in terms of production. We're on plan on overall shipments to our dealers this quarter. It's just the mix that's a bit different versus what we had initially anticipated.
Perfect. And as we think about that new entrant mix or the new customer mix, you guys quoted a year-to-date figure of 36%. I think that was in the low 40s last quarter. So is there anything to call out from a timing perspective or anything unusual going on there? I know it's still above sort of that 20% pre-COVID, but any other color?
Yes. The new entrant ratio, very depending product line, the 2 highest products that have the highest new entrant is watercraft and 3-wheel then because it's going more in the half season in Q3 and Q4. That's why we had a slight decrease on new entrant level. But if you look at it on a 12-month basis, were pretty well in line with what we were last year.
Your next question comes from Jaime Katz from Morningstar.
I'm hoping, first, we could dive a little bit into 3-wheel vehicle performance because I think the commentary surrounded share gains for the year, but it looks like for the quarter, they were down. So -- was there anything time-wise to see into that? Or was there something else leading to that seeding share?
Yes, 2 things. We had no inventory. We have almost no inventory left in the network. Then obviously, level is very, very low. The lowest we never had in the 3-wheel vehicle business history. And second, like Sebastien explained. In Q3, we shipped -- we produced some 3-wheel that we shipped to dealer, but we prioritized ORV and watercraft counter season model versus snow mobile and 3-wheel. And this is why the -- we missed units on the last, I would say, 1.5 months of the quarter because of inventory level.
Does that prioritization continue then as we move into the next quarter or 2 by products line and then sort of normalizes into the middle of next year when the supply chain starts to unstrangle?
But the way we prioritize is always depending on the riding season. Then in Q3, like I said on my remarks, we will prioritize ORV and Snowmobile because snow is here and 3-wheel and watercraft and will be heavily prioritized in Q1.
Okay. And then for capital expenditures next year since there is more investment looking like it's coming up, should we expect that, that figure should remain elevated through fiscal 2023 sort of at a similar level? Or should that start to decelerate?
You should expect it to be at a similar level as what we have this year in the updated guidance.
Your next question comes from Benoit Poirier from Desjardins.
Yes. Congrats again. With respect to the 3-wheel vehicle sales, obviously, you triple the sales over the 2018 season. So now that you've reached initial expectation, what should we expect for this segment throughout the fiscal year '25?
Like we said, we're very, very proud of what we have accomplished with 3-wheel with the Ryker introduction because when Jose Perreault and the team launched the Ryker, we came out with a new initiative, new focus on the Rider Education Program. Like I said, 44,000 people have took advantage of the program in the last 3 years. I'm pleased with the ratio of new entrant at 55%. Women, 38% of the people come to 3-wheel are women. And the ratio of customer under 55 and the minority is very high. Then for us, we learned with Spark and we learn with Ryker, how to talk to a different customers. And now we're applying those, I would say, recipe to other product line, and we're quite optimistic about the future. Then Again, we believe that 3-wheel has a good potential to grow. We're not this morning, give you a target number for fiscal year '25, but we believe that there is more runway on 3-wheel to grow going forward.
Okay. That's great color. And could you -- with respect to the opportunity to purchase 2 manufacturing plants in Mexico. Could you talk about the reasons behind this capital deployment?
Yes. Well, first, we had a right of first refusal to buy these buildings and the owner of the buildings, put them on market. And so we decided to exercise that right and match the offer. There is definitely a cash flow benefit. The borrowing cost is obviously much better than the cap rate on these leases. But strategically, we're in Mexico, to stay in Mexico. These sites are purposely built for us. Our intention was not to move out of these buildings when the lease term would expire -- So from a long-term perspective, it was a good thing to do as it provides us with more flexibility and it's -- we're continuing to invest in these sites and grow these sites. So long term wise, it was the right move to make.
Okay. And through the pandemic, obviously, a big trend has been towards digital. Could you talk about your ability to capitalize on the strength of your website to potentially drive e-commerce sales? Just wondering how you're progressing with this initiative?
Yes. I believe we're doing very well. I mean, you saw our website visit going up 60% versus last year on off-road. But more and more, we have great ambassador that we -- that promote our brand. And we've learned that this has a lot more benefit when an ambassador talk about our product versus us, then that's why we're using a lot of the ambassador to promote our product. And on our side, we try to guide them well that they do well. This is one. The other thing we do well is the how to video where we showed the customers how to ride the product, where to ride the product, and this is impressive. We've done more than 90 video how to ride and use the product. Obviously, we promote more and more the experience. And we have right now 58 rental operator in the U.S. doing on charter society. and we're building the community, building strong community and the Woman of off-road -- On-Road community with 12,000 members after 1-year is very impressive. Then I believe there is definitely a trend there. And we are very happy with all those initiatives and the results.
Your next question comes from Craig Kennison from Baird.
Thanks for coming back to me. Hopefully, this connection is better. But I was going to ask just a follow-up to Robin's question on and product availability at the dealer level. Consumers are showing up, the product isn't there. Do you have any data on what that consumer is choosing to do I mean their choices would be to switch to another BRP product, to buy another brand, to buy used, to buy a production slot now or just walking away. Do you have any sense of what that consumer who's unable to get a product today is looking to do.
Craig, a lot clearer than the first call, the first question. Yes. Then I'll give you an example. We informed some customers who had purchased a spring break snowmobile that will have about a model on the delivery of their unit. We offer to those customers to transfer their deposit on next year model, but most of them hold to their orders. Then we hear a few customers decided to move to next year to wait, but most of them, so far, what we're hearing are holding to their orders, waiting for the product.
Your next question comes from Mark Petrie from CIBC.
I just wanted to ask, Seb, you highlighted how you adjusted your marketing spend and approach in Q3, and I think we had heard that earlier this year as well. So I just wanted to ask about how you're thinking about marketing plans for fiscal '23. Does that sort of do you think that looks a lot like fiscal '22? Or is it more like sort of pre-pandemic?
Certainly not pre-pandemic. Obviously, we'll modulate along with our inventory availability in our retail forecast. But for sure, we want to make sure that we stay relevant in the minds of the consumers. And so investments in marketing and brand awareness and product awareness are required, and we'll certainly continue investing. And so that's why when I look at my overall operating expense next year as a percentage of sales should remain in line with what we saw this year. So a good percentage investment, probably in around the range of 6% to 6.5% of overall marketing spend would be a fair estimate.
[Operator Instructions] And your next question comes from Gerrick Johnson from BMO Capital Markets.
I'm curious about price increases and the MSRP. Are you -- Are you -- what was the average price increase? If you take your entire portfolio, the average price increase implemented? And how would that break out between the increase in MSRP and additional freight surcharges?
Well, when we look at the -- how we approach pricing, obviously, in this environment, we look at it in 3 ways. One, the short-term disruptions that we're seeing from production, i.e., we need to pay over time, we need to debase special freight. These are costs that we've decided to absorb as a company because, obviously, we don't want to be knee-jerking with pricing. If it's a midterm impact, i.e., higher freight costs from either maritime or outbound freight for our units special price increases that we're getting from suppliers because they are incurring higher costs and they say, well, it's going to be for 3, 4 months. So these midterm inflationary pressures we're seeing, we're addressing it through surcharges, and that's where the majority of the price increases are happening. And then the latter which are more longer-term inflationary trends that we're seeing that we're driving through price. So I'd say probably 2/3 of the pricing increase that we've done have been done through surcharges, 1/3 have been done through permanent pricing increase. We've announced some pricing increase in the middle of the summer, about 1.7% overall increase in pricing surcharges and an additional 1% coming from pricing. And we'll be announcing more in the next month as we are continuing to see higher inflationary costs, Gerrick.
On keeping direct to complete Sebastien answer. If you go on our website, you will see we're displaying now for each model, the MSRP and the commodity surcharge and the dealer know that it could go up or down depending on the cost. But since we display the commodity surcharge customers are the -- most of the customer understand and they accept it.
Yes. notice that. I think that's a great idea.
And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Thank you, Julie, and thanks, everyone, for joining us this morning and for your interest in BRP. We want to take the opportunity to wish you all a safe holiday season, and we look forward to speaking with you again for our fourth quarter conference call on March 25. Thank you again, and have a good day.
This concludes today's conference call. You may now disconnect.