We hosted investor meetings with BRP management. In attendance were Sebastien Martel (Chief Financial Officer) and Philippe Deschenes (Director, IR). Topics in focus included the health of the consumer/the macro backdrop, the promotional environment, inventory levels across BRP's segments/categories, the company's Marine strategy, outlook for the SSV segment, and the longer- term electrification opportunity. We summarize key takeaways below:
Several pillars supporting growth over the coming years – Management remains confident in BRP's growth outlook, supported by: 1) the potential for share capture in the SSV market beyond the company's original 30% target; 2) gaining ATV share as BRP takes advantage of the Can-Am "halo effect" that comes from greater SSV market share; and, 3) the positive reception of the Sea- Doo Switch thus far. On SSV share capture, management believes that continued/increased support from BRP's dealer network will be key to the next leg of growth, and as a result, management remains focused on dealer profitability (which would incentivize dealers to increasingly support BRP's offerings). We believe this strategy is prudent, as each additional 1 p.p. gain in SSV share equates to ~$200MM of incremental top-line at what we believe to be an attractive GM% (i.e., above company average). SSVs also offer more of an opportunity to "accessorize" vs. categories like ATVs (recall accessories generate materially higher GM% vs. the base business).
Core customer remains healthy despite uncertain macro backdrop – BRP's core customer generally remains in good shape, with the average household income for BRP's customers +40% vs. pre-COVID levels. We note that the company's recent growth has reflected benefits of volume/mix and (to a lesser extent) pricing (all of which reflect the positive impact of innovation that BRP has brought to market across its categories). With that said, in the event of an economic slowdown, there is opportunity to reduce costs and postpone some projects. Management noted, however, that any potential reduction in spend/investment would be in areas that are not likely to impact BRP's long-term trajectory. Said differently, investments in innovation/R&D would likely still be a priority as these would improve the company's competitive positioning coming out of a downturn (and could help increase the innovation "gap" versus peers that may cut spending across the board during an economic slowdown).
Promotional activity below pre-COVID levels, inventory in the channel in good shape – On sales promotions, management commentary indicated that promotional activity across the industry remains "stable", while overall incentive levels remain below pre-COVID levels. On dealer inventory levels, management characterized dealer inventory as being in good shape as dealers are operating with lower days of inventory vs. pre-pandemic (as they manage higher MSRPs and higher floorplan financing rates/ costs). Overall, we believe the reasonable inventory position and good visibility into retail sell-through de-risks the outlook to some extent.
Looking for improved YoY Marine segment results in F2025 – Following some challenges in the Marine segment through F2024, BRP reduced top-line guidance for this segment for the current year in conjunction with recent Q2/F24 results (see our note here). This should help the company ensure a cleaner inventory position for this segment heading into next year. This was a prudent decision, in our view, given that F2024 was already a challenged year due to industry- and company-specific factors. While the broader Marine industry has been challenged due to higher price points coupled with elevated interest rates, and a weak spring season (poor weather), BRP also had issues with its supply chain which impacted its ability to deliver products. Looking ahead, the company has put new leadership in place and will leverage its learnings from the last year to improve its product availability/ supply chain into next year (while also lapping the limited availability from this year). Management is committed to the significant opportunity in Marine and to becoming a more significant player in the growing Pontoon segment.
Making progress on electrification – BRP intends to have 1-2 electric vehicles across each of its product lines by 2027, with the first launch being the company's electric motorcycles in 2024. As part of this journey towards adding electric offerings, BRP plans to fully integrate its electric manufacturing process, which includes the development of a proprietary battery pack. Developing an in-house solution for the electric offerings should better position the company to scale its offerings in a cost-effective manner over time (think of this as being akin to the Rotax engine, which become a key element of the company's successful pivot to modular manufacturing).