BRP Inc. (DOO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to BRP Inc. Fiscal Year '25 Third Quarter Results Conference Call. [Operator Instructions] I now would like to turn the meeting over to Mr. Philippe Deschenes. Please go ahead, Mr. Deschenes.

Thank you, Sylvie. Good morning, and welcome to BRP's conference call for the third quarter of fiscal year '25. 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 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&A for a complete list of these. 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 this release reflect continuing operation only, unless otherwise noted. Also note that you 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 third 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. Our retail performance was as anticipated, reflecting a challenging market dynamic due to soft industry trend and high level of promotional activity on noncurrent 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. 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 results on a continuing operation basis and our guidance reflects 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. Revenue reached $2 billion, normalized EBITDA was $264 million and normalized EPS was $1.16, all above expectation. One 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 shipments this year. More importantly, in ORV, it is down 22%, achieving our objective 1 quarter ahead of plan. We have also seen noticeable improvement on 3-wheel vehicle, personal watercraft and Switch pontoons. This put us in a favorable position to capture market opportunity when the industry rebounds and to foster long-term profitable growth. Turning to Slide 7 for an update on the global powersports market. The third quarter was consistent with trends observed since the beginning of the year. In North America, our powersports retail was down 11%, in line with expectation, with Canada continuing to outperform the U.S. market. From an international perspective, EMEA 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. And Asia Pacific saw mixed performance depending on the country with the retail flat on average. Overall, these counterseasonal 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 noncurrent units 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 the better end of season than anticipated. Let's turn to Slide 9 to circle back to the ORV market dynamic. As you can see, about 2/3 of side-by-side vehicle and close to 90% of the ATV industry units retail this quarter was noncurrent. This dynamic is the result of intense promotional activity by other OEMs who had higher level of noncurrent units. In our case, we had limited noncurrent 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. We expect this dynamic to persist at least through the fourth quarter, 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 EICMA, 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 Pulse and Origin motorcycles. The launch is well underway. We are approaching our targeted number of dealers globally. Production is ramping up in December and shipment will start at the beginning of fiscal '26. We look forward to our first 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 billion, primarily reflecting reduced shipments. At retail, Can-Am side-by-side was down mid-single digit, slightly lower than the industry due to the noncurrent 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 points 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. Looking at 3-wheel vehicles. 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 products on Slide 12. Revenue were down 29% to $616 million, primarily reflecting lower shipments. In snowmobile, we proactively reduced production level given higher inventory following last winter's unfavorable snow condition. Our retail is performing in line with the industry early in the season, despite lower level of noncurrent 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 #1 position in the industry and a 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 shipments for the upcoming season. As for the Sea-Doo Switch, we ended the season with retail down mid-40% as we are -- as we were lapping the strong success of our first 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 million, primarily due to lower shipments of snowmobile PA&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. With that, I turn the call over to Sebastien.

Thank you, Jose, and good morning, everyone. Our third 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 continue 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 continuing operations as our Marine business has been reclassified as discontinued operations. Now looking at the numbers. Revenues were down 18% to $2 billion, primarily due to lower shipments and higher sales programs. We generated $430 million 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 million 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, the third quarter 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. Looking ahead, while our Q3 results came in above our expectations, they benefited from the timing of shipments of snowmobiles between the third and fourth quarter. 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 to our shipments and sales programs as we continue to prioritize the rightsizing of network inventory levels. Consequently, we are reaffirming our guidance for the year and are maintaining the same guidance range. 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 $7.6 billion and $7.8 billion, normalized EBITDA to end between $1.020 billion and $1.070 billion and normalized EPS to end between $4.25 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. 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 two that our continuing operations are expected to generate about $130 million 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 million 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. 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.

Thank you, Sebastien. BRP has once again proven to be an agile organization in this transition year. We were the first 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. Even though it is too early to give detail for next year, we will enter fiscal '26 with a strong product portfolio and an improved inventory position. Driven by our solid business fundamentals, we are uniquely placed to capture opportunities when the market rebounds. 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 tariffs. Looking to the long term, we remain focused on solidifying our position as a global leader in the powersports industry. You can expect us to continue pushing technology and innovation. We have repeatedly proven our ability to design award-winning product, and we recently took home 6 new design awards in Australia, Japan and the U.S. These distinctions stem from our sustained investment in R&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 Instructions] Your first question will be from Sabahat Khan at RBC Capital Markets.

Jose, 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 three Powersports segments and anything on seasonality as we look ahead to fiscal '26. 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 really great.

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 noncurrent than some of our competitors, but we have very strong product lineup with the off-road business. And you can expect from us next year to introduce, again, a 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're counting on next summer season to rebalance the inventory. And the parts and accessory business is quite resilient. The parts business is doing quite well. Accessory is typically is in line with the sales of the unit. But overall, we are well positioned to be very competitive within the industry.

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. 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. 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 rightsize 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. 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.

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

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.

Next question will be from James Hardiman at Citi.

So 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 wash between Q3 and Q4. But I guess what I'm wondering is if inventory rightsizing seems to happened -- 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, and then it looks like the tax rate came down as well. So it kind of feels like the landing point for earnings should be at least modestly better. Maybe help us tease out those factors.

Maybe I will start with the -- and let's [ start with ] 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 at. The big question between now and when we talk in March will be snowmobile. We're planning, obviously, a retail season that is with a 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. Good progress, like I said in my intro, on Switch, 3-wheel products, very, very happy of the depletion there. And watercraft, we will 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 noncurrent at discount.

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. 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?

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. When I look at all of the other product lines versus Q2, all the product lines were 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.

Next question will be from Joe Altobello at Raymond James.

Just wanted to follow up on James' line of question there a little bit. If you think about '26 at a high level, and again, I understand no guidance today. 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?

Well, two reasons, as I indicated. I think the -- well, 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. 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 -- if we do see a bigger uplift in wholesale, it will be in the second half of next year.

Okay. And just a follow-up on that. The noncurrent 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?

We believe that most of it should go out in Q4. Maybe certain area center dealers, maybe some in Q1 next year. But we believe in the next 2 quarters, most of the noncurrent should be flushed out.

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

Next question will be from Benoit Poirier at Desjardins.

Just with respect to the launch of the electric motorcycle, I was just curious to -- obviously, shipments will start fiscal year '26 early, but what kind of a 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.

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 were hesitant to be a dealer first 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 silence, the performance and the overall experience of the product. And so far, we are on plan. We are also on plan to sign the dealer count. We said we're targeting 300 dealers first year. We will be there when we start shipment. And overall, this will be the first rollout. But again, first year, we are somewhat limiting the production to a level that we believe is healthy. And it will be a small number to start with, and we will grow from there.

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

That's great color. And just for the follow-up, when we look at the powersports 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 exiting the snowmobile market. So a question mark around Arctic Cat. 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&A that would complement your current product offering?

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&A or different possibility. There is hundreds of possibilities out there. But the industry is going through a transition. There is some OEMs 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 powersports, I think we will accelerate our plan.

Next question will be from Robin Farley at UBS.

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

There hasn't been much change in the overall dealer count, Robin. 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 982 dealers covering all the product lines.

Okay. Great. 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 kind 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? 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.

Yes. As you know, Robin, we're closely -- obviously monitoring the situation. And at this time, there is hundreds of different possibilities. 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 requirements between Canada, U.S. and Mexico, but also between other country around the world. We've always been able to navigate the changing -- 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 if it's top of mind for many investors, 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, hundreds of different possibilities. And I just want to say to you and to the investors, 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 employees and the shareholders.

Next question will be from Cameron Doerksen at National Bank Financial.

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 the U.S. dealers because we have had, I guess, some more aggressive interest rate reductions in Canada versus U.S. So I just -- and it does seem as though your retail performance in Canada is maybe doing a little better. So I'm just wondering if you can 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.

I think the dealers recognize first that we were 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 lines, but they see the progress that we're doing there. The question is snowmobile. We had the inventory of 2024. We're shipping 2025. Production is almost done. Then the 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. They just -- we just need to go over the hump of the snowmobile season. 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 shipments of 2025 to make sure we end the season clean. And 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. The only thing I would say in Canada, every single dealer almost sells snowmobile. When in U.S., the dealer in the South feel already better with the reduction we have done on ORV.

Okay. So that's helpful. And maybe just a quick maybe modeling question for Seb. Just wondering about the G&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.

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'd 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 rightsized. 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 to '26.

Next question will be from Craig Kennison at Baird.

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, just to help those of us trying to guess at that impact?

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 that, but it's certainly something we could do. And from a Mexico point of view, over 70% of our production stems out of Mexico. But obviously, we're in Mexico, yes, for their cost advantage as we took the benefit 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 would not be the same company had we not have that footprint in Mexico.

And then on 2026, again, I 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.

I would not have accepted to lose the same amount. That's fair.

Next question will be from Martin Landry at Stifel.

I want to go back to a previous answer you -- on the noncurrent models. You seemed optimistic to -- that the noncurrent inventory, I believe that was the industry you were talking about would 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 noncurrent versus historical level. If you can provide that, it would be helpful. And then what -- why are you optimistic that all those noncurrent models will clear out in a short order?

Well, what we said, Martin, was that some noncurrent 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 sit with inventory and no dealer likes to sit with noncurrent inventory as well. So usually, when we look at historical patterns, Q4 and Q1 are big quarters where noncurrent units get cleared up. And in terms of visibility, we don't have industry information on the current noncurrent inventory.

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

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. 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.

Next question will be from Xian Siew at BNP Paribas.

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, gross margin ex Marine next year? What are some of the puts and takes there?

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

Okay. 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 -- 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?

Well, two things. One, we've recently launched two new ATV platforms covering all of the segments, around 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 a word. And so that's a big plus. And on the ORV side, the side-by-side Maverick R 4-seater was certainly well received and the Defender CAB current models are in high demand, and that's been fueling our retail growth.

Next question will be from Jonathan Goldman at Scotiabank.

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?

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 industries. 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 waiting for the election, 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 comment a few times.

Next question will be from Jaime Katz at Morningstar.

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.

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

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?

Today, the assumption we have is a current interest rate 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 as well on the short term is going to help floor plan financing costs and our financing costs as well on our balance sheet.

Next question will be from Luke Hannan at Canaccord.

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 a 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. 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?

I think the dealer -- many dealers have to somewhat rightsize their business the way we're doing it. And the dealer in the U.S. very often carry 5, 6, 7 OEMs, and they need to rightsize their business. What I mean by that, decide with who they prefer to work. 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 turnover and prove to the dealer that when they sell a BOP product, they make more money than selling other brands where they carry more inventory. Then I would say many dealers 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. And then as my follow-up, Seb, 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?

Well, obviously, every year, we challenge the team is on being more efficient and requestioning the way they do their business. Again, we expect a modest top line growth next year. And so most of the impact, I'd say probably 50-50 comes from operating leverage and the other one from cost efficiency.

Next question will be from Tristan Thomas-Martin at BMO Capital Markets.

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?

Yes, it varies. There's two 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. And so that's the main form it takes.

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

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

And our last question is from Brian Morrison at TD Cowen.

I appreciate all the details on the puts and takes of next year. A 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 million. Can you provide the metrics for the PWC and Switch for -- as the season ended?

I wish I could, but I don't have a backup with me, Brian. So I have to take it offline.

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

Yes. But the theory that -- and the philosophy that we have, dealers know that selling current product is more profitable than noncurrent product. Then 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 starts, it's normal to have a certain level of noncurrent, which is happening right now. 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.

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

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 -- noncurrent, they 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, 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. I just wanted to understand the dynamic. I appreciate the comments.

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

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.

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.