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Good morning, ladies and gentlemen. Welcome to the BRP Inc.'s FY 2019 Earnings Conference Call.I would now like to turn the meeting over to Mr. Philippe Deschenese. Please go ahead, Mr. Deschenese.
Thank you, Maute. Good morning, and welcome to BRP's conference call for the first quarter of fiscal 2019. Joining me this morning are José 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 that are subject to a number of risks and uncertainties. I invite you to read BRP's MD&A for a listing of these. Also during the call, reference will be made to supporting slides, and you can find the presentation on our website at brp.com, under the Investor Relations section.So with that, I'll turn the call over to José.
Thank you, Philippe. Good morning, everyone, and thank you for joining us. I am pleased to report that fiscal year 2019 is off to a strong start. Despite a spring season that was late to arrive, we have continued our strong retail momentum and are outperforming in all product line. We are globally outpacing the industry in most of our market and all our projects, whether it is new product or increasing production capacity, are on plan.We have delivered results that were above our expectation, which, coupled with better-than-planned final spring break dealer orders for snowmobile, has allowed us to increase our guidance for the end of the year.Now let's turn to the financial highlights of the quarter on Slide 4.Our revenue grew 16% to reach $1,137,000,000, a record level for our first quarter at BRP. The growth was driven by the continued strong demand for our side-by-side and personal watercraft lineup and their extensive accessories offering. Our gross profit margin was up 160 basis points, leading to a 26% increase in normalized EBITDA, which reached $127 million and a 37% increase in normalized earnings per share, which ended at $0.52. As you can see, we have continued to deliver strong result. Despite the weather condition in April, which slowed down spring sales, we had a strong retail performance in February and March, especially in Canada and the U.S. Midwest region. We've delivered a solid 12% growth for our Powersports product in an industry that was down to mid-single digit in the quarter. As you can see on the chart, we largely led in our sector with another solid quarter for our Can-Am off-road product, a strong end of season for Ski-Doo and a good start of the season for Sea-Doo. Additionally, retail in May is catching up and we're seeing sign of good momentum. I will get into more detail in the product category review section.Another highlight of the quarter was the completion of the Phase 1 of production capacity increase at our Juárez 2 facility. As you know, our side-by-side business has been growing rapidly over the last 2 years since we introduced our second generation of side-by-side and has been exceeding our capacity. This first phase will allow us to maintain our strong momentum as it is providing us with an additional 30% of production capacity. The production ramp-up is completed and the additional capacity has been running smoothly since May 1. The second phase will add another 30% of production capacity. It is on schedule and will ramp up in Q1 next year.Before I get to the highlight for Year-Round Product, I wanted to share with you something new for us. The result from an independent study that are evident that our efforts to engage our dealer are bearing fruit. For the first time, the U.S.-based independent retail measurement index, Pied Piper, conducted an analysis of side-by-side dealer in which we're ranked first place. This company is known as a highly respected benchmarking firm that collect results anonymously as mystery shopper in various industry. This is the first time that they have studied this industry with a focus on elements such as engagement and customer service. And we are pleased to see that our unique dealer value proposition is gaining traction. This is clearly a factor in our retail success.Turning to Slide 8 for the Year-Round Product highlight. Revenue were up 33% for the quarter, driven by continued growth for side-by-side and higher shipment of Spyder compared to last year. In term of retail, our off-road business continued to outperform the industry. 10 months into the season -- into the off-road season, the ATV industry is down low single digit. For the same period, Can-Am ATV retail is up high single digit driven by continued market share gain in the mid-CC segment.Turning to side-by-side. The North American industry retail is up high single digit for the season to date. Thanks to our solid lineup and the momentum we have with our dealer network, Can-Am side-by-side continued to outperform the industry with retail up in the mid 30% for the season to date, gaining market share in both the utility and sports segment. Our recently introduced model are also performing very well and contributing to our success. Retail sales for the Maverick Trail, the Defender LONE STAR, the rock-crawling Maverick X3 and our moderate [ D ] Maverick X3 and Defender are trending positive.Our side-by-side business is also growing rapidly in international market with retail sales in Western Europe, Latin America and Asia Pacific region all growing above 20% in the quarter.Our side-by-side business is firing on all cylinders. There is strong demand for our lineup, and we are ramping up our production capacity to meet increased demand. Overall, we feel we are in good position to continue the same kind of robust growth going forward.Now looking at Spyder. 6 months into the 2018 season, the North American 3-wheel motorcycle industry is down low-teen percentage, notably impacted by unfavorable weather. Can-Am Spyder retail was down low 20% over the same period, with a slow start to the season due to the lack of availability of certain models in the network along with poor weather. Retail has improved in May with the arrival of the spring, and we expect the pickup in sales to continue over the months ahead.Also we are making progress with our different initiatives. In particular,, we have handed the 3-wheel driving lesson to 115 schools so far and early results from that initiative look promising, with good conversion rate of student who go on to purchase. And the development of Project S is on plan and expected to launch this fall as scheduled.Turning to Seasonal Products on Slide 9. Seasonal Products revenue were up 8% driven by higher volume of personal watercraft. Looking at retail sales for snowmobile, the North American industry ended its 2018 season with retail up mid-single digit percentage, driven by the success of the new Gen 4 platform. Ski-Doo outpaced the industry ending the season with retail up low-teen percentage and reaching its highest market share in history. Even more impressive, Ski-Doo achieved the #1 position in all industry segment both in Canada and in the U.S.In Scandinavia, looking at the last 12 months, the industry is up high-teen percentage. Retail sales of both Ski-Doo and Lynx snowmobile were also up high-teen percentage over the same period. Inventory in the network in this region is very low, which is good sign for the upcoming season. We recently closed our spring customer order for the season '19 models above expectation. And as a result, we have increased our Seasonal Product revenue guidance for the year.Now a look at personal watercraft. The season ended strong in counter-season market with double-digit retail growth in the quarter for both Brazil and Australia and New Zealand. In North America, 7 month into the season, the personal watercraft industry is relatively flat season to date since it was also negatively impacted by late spring. Sea-Doo retail was up high single digit over the same period. The demand for the new platform is excellent and based on positive feedback from the boat show, we are seeing optimistic sign as we head into the peak of the retail season. Overall, despite the late spring, the watercraft business is looking promising.Now looking at Propulsion System on Slide 8 (sic) [ Slide 10 ]. Revenue for Propulsion System decreased 11%, primarily driven by a lower volume of motorcycle engines sold as we are coming to the end of our supply agreement with BMW as previously announced. If we turn to Evinrude retail sales, 10 month into the season, the outboard engine industry is up low single digit. For the same period, Evinrude retail is down mid-single digit, lagging the industry growth that continued to be driven by new boat sales. And also we tend to sell better in inland or freshwater market such as the Midwest, which was hit hardest this year by the weather.Turning to Parts, Accessories and Clothing. Revenue increased 9% in the quarter, driven by a higher volume of side-by-side and personal watercraft accessories sold. This is the result of growing sales of Defender and Maverick X3 and the new personal watercraft platform, which are successful in driving a superior accessories attachment rate.And with that, I will turn the call over to Sebastien and will return for closing remarks.
Thank you, José, and good morning, everyone. As you have seen, we have delivered solid results on the first quarter. On the back of continued strong demand for our Can-Am off-road products, a strong end of season for snowmobile and despite a feeling that winter will never end, a promising trend for our summer products ahead of the peak retail season. This resulted in revenues that reached $1,137,000,000 for the quarter, up 16% over last year. The growth came from all regions driven by Year-Round Products, Seasonal Products and PAC. Our gross profit margin was up 160 basis points to reach 24.8%, driven by favorable product mix resulting in part from our new Sea-Doo lineup with the introduction of the new platform, favorable production costs and a net positive impact coming from higher volume and sales program.The normalized EBITDA was up 26% to $127 million and the normalized EPS grew 37% to $0.52.Finally, we invested $49 million in CapEx, notably as we completed the first phase of capacity increase at our Juárez 2 facility. Also, last week we successfully completed the refinancing of our credit facilities, notably increasing our term loan by USD 111 million and reducing its pricing by 50 basis points, increasing the availability under our revolver by $100 million and reducing its pricing by 25 basis points and extending both facilities' maturity by 2 years. This is providing us with additional financial flexibility to continue investing in our growth plans.Turning to Slide 13. Our normalized net income grew $11 million in the quarter resulting from a net favorable impact of volume, mix, pricing and sales programs for $52 million and a favorable impact of $6 million from production costs, driven mainly by efficiencies coming with the new PWC platform, partly offset by higher operating expenses for $21 million as we continue to invest in marketing and R&D.Higher financing costs, normalized income tax expense for $12 million and unfavorable foreign exchange rate impact of $14 million.Now moving to network inventory position on Slide 14. Our network inventory is up 8% over last year's first quarter level, resulting from a higher level of personal watercraft inventory ahead of the peak retail season, driven by the strong demand of the new Sea-Doo platform and from increase in inventory of our new Can-Am SSV models to support continued growth in consumer demand. Partly offsetting these elements was a reduction in snowmobile network inventory, resulting from the good season we had and by an overall reduction in the rest of the lineup. Our network inventory position is very healthy for all product lines.Finally, turning to Slide 15 for an update of our fiscal year '19 guidance.As I mentioned during our year-end conference call, starting with the first quarter of this year, we are adopting the new IFRS 9 and 15 accounting standards and we are implementing them retrospectively to fiscal year '18. As such, the basis of our guidance are the restated figures for fiscal '18. Please note that as we progress through our implementation during the quarter, some minor adjustments were done to the preliminary restated fiscal year '18 figures compared to those presented on March 21. So the unaudited restated fiscal year '18 figures are revenues of $4,453,000,000 normalized EBITDA of $536 million and normalized EPS of $2.27.You will also find quarterly restated numbers for fiscal year '18 in appendix of this presentation and in our MD&A.And now on to the guidance. As mentioned, we achieved solid first quarter results, driven by the combination of continued strong demand for our Can-Am SSV, a good end-of-season for snowmobile, solid momentum for personal watercraft business and sustained strength of our accessories business.We successfully completed Phase 1 of capacity increase at Juárez 2 facility and production is fully ramped up since early May, allowing us to produce 30% more SSVs. Furthermore, we ended the snowmobile season with a good network inventory position, and our snowmobile spring orders came in ahead of plan, improving our outlook for next season. These elements more than offset planned increases in marketing investments for the second half of the year and headwinds coming from higher commodities and logistics costs, allowing us to review upward our guidance for the year. So we're increasing our revenue guidance for Year-Round Products, Seasonal Products and PAC leading to a revised total company revenue guidance of up 6% to 10%, increase from up 5% to 8%. Our normalized EBITDA growth has been reviewed upward by 1% and is now expected to be up 17% to 19%. Resulting from this increase and a few adjustments to depreciation, financing cost and share count, our normalized EPS is now expected to be up 24% to 30%. Our ability to grow and increase our guidance in a challenging inflationary environment is a testimony to the strength of our product portfolio and the benefit of our diversified business.With this, I'll turn the call back to José.
Thank you, Sebastien. To summarize our perspective on our best-ever first quarter, we can say that overall, retail is excellent with good momentum across the lineups and we continue to gain in most market. Moreover, we are feeling especially optimistic for the upcoming retail season over the next quarters.One of the things I'm most proud of is that we have built a truly strong team who are executing seamlessly on many strategic fronts and all according to plan. I would like to take this opportunity to thank the men and women of BRP around the world who are working hard to keep this company performing and growing at its remarkable pace.With the current economic and weather condition, even with hurdles such as commodity and transport costs, we are confident that we'll be able to deliver our increased guidance.Again, you can see that the strength of our diversification in our product offering, geographic sales and manufacturing footprint is certainly paying off. And on that note, I will turn the call over to the operator for questions.
[Operator Instructions] Our first question is from Robin Farley from UBS.
Great. 2 questions. First is just thinking about how quickly your new production capacity can be absorbed. Can you give us a little bit of a sense of the kind of order backlog that you have with dealers now and versus where you think that can go or what your target is to get that down to? And then I think, my other question, I think in your introductory comments, you mentioned something about plans for increased marketing in the second half that you're still able to raise guidance because of the initial snow orders being higher. Can you put a little color around the plans for increased marketing spend in the second half?
Robin, I will answer the production capacity, and Sebastien the increased marketing. The production capacity, we ramp up our daily production rate by 30% starting May 1. Then -- and right now, we're planning to go at that rhythm till the end of the year. Then you can count about 3/4 of 30% capacity increase because Q1 was done at 30% less daily capacity. And if -- the increase in capacity of about 25%, this is on normal hours. We have some flexibility if demand continue with weekends. But for the time being, it's about 25% increase, if you look at it on the fiscal year. Now in term of backlog, it's difficult, but we believe that in average, we have a month of backlog between when the dealer would like to get the unit and when we can deliver. And we believe that we will be able to catch up on the back end of H2.
Robin, this is SEB. On the -- on your question on the guidance, there's 3 key variables that impacted the guidance this quarter. One, the incremental volume, which brought, again, depending on the range between $20 million to $25 million of additional EBITDA to the bottom line. Then commodities and logistics costs are a headwind to the full year. So that reduces the -- that lift that we get from the volume by about, let's say, 12% to 15%. And then the incremental marketing investments is, we're looking at an extra $5 million to $8 million for the year -- for the back end of the year.
But I'm just wondering what the incremental marketing is aimed at, at which segment?
It's targeted towards more of the off-road products.
Our following question is from Martin Landry from GMP Securities.
Wondering you are showing that the industry has declined mid-single digit in the quarter. Do you think that is attributed to the weather or is there anything else? Is it like -- or would it be more economic related?
Martin, it's more weather related. Basically if you talk to dealer, they had good February and March. Snowmobile was strong in the Midwest because of the long winter. But basically if you talk to dealer, April, they were shut down. Then there is dealer who typically deliver watercraft in April, and they could not deliver almost anything. Then we believe that the long winter help the strong season and for Ski-Doo in the Midwest. On the other hand, it delay the summer product. But what is good is, right now we see a very good retail momentum in May and -- weather related.
Okay. And my next question is on your snowmobile early orders. You mentioned that you've had really strong early orders in -- can you quantify that or can you give us a range of the delta between last year and this year?
It's about the same level than last year in term of dealer. You understand its unit that are presold to consumer. And because the inventory was higher in the Midwest, we had planned slightly lower than last year and the long winter in the Midwest and the fact we retail all or many of our model year '18 and '17 the dealer and the feedback. And I think it's the testimony of the strength of our lineup. There is lot of excitement around 900 suitable Gen 4 snowmobile and that what permit us to increase our guidance for the Seasonal Product.
So you're saying that it's stable year-over-year, but you're increasing your guidance. Is it mix related?
No. It's stable year-over-year in term of what is presold to consumer, but we had plans for less, and we're happy with the result.
The following question is from Mark Petrie from CIBC.
Obviously, your efforts in terms of trying to improve productivity in the U.S. dealer network are clearly paying off. Could you just sort of rank order or give us a sense of what you think the various drivers of that have been? I mean, has it been predominantly the expansion of the product portfolio or have there been other factors pushing that along? And then maybe just give us a sense of what the priorities are in terms of continuing to drive that productivity over the course of the next 2 years or so?
Mark, I think it's a mix of -- it's very difficult to qualify #1, #2, #3. And again, it's a mix of all this that is coming together. First, if you come -- if you go back to our dealer value proposition, you have the right number of dealer right now in North America than dealer compete against -- competition thus again in other BRP dealers. Our product are extremely competitive. More technology bring more opportunity to upsell. Dealer make money with accessories, and our product is easy -- it's easy to sell -- upsell a lot of accessories. The certification program if the dealer keep growing, gain additional margin under PerforMAX program, then it's all this program that have been put together in the last 4 years, that have -- are paying off right now. And it's very difficult to say or to point out it's one versus the others. I will say that the combination of the program that is resulting on the momentum we have. And just, as you know, for your information, we mentioned a few times, on multiline dealership, right now our momentum is twice as single-line dealership. And this has been the case for the last 5 quarters, I think.
Okay. Appreciate that. In terms of the -- just in terms of off-road overall, could you just talk about -- obviously, it sounds like your inventories are extremely clean, your perspective on the industry overall just in terms of noncurrent of the last year and that kind of thing?
I think the industry, I mean, if you look season to date, the industry is up high single digit. And I think the industry is getting better. Some of our competitors have cleaned up a lot of noncurrent. We see the promotional environment going down, except for the mid-cc ATV where it's very aggressive because this is a big segment in ATV and everyone is taking -- trying to take share. Except for the mid-cc ATV segment, the promotional activity on the rest of ATV, the high-end ATV and the side-by-side are less than it was. And that's why we believe that the number of new model from all the OEM coming to the industry. Now the promotion is getting less, we believe that this industry is well positioned to continue to grow going forward.
Okay. And just last quick follow-up. SEB on the guidance, the second factor you called out in terms of commodity and logistics costs. Would you say you have pretty high visibility to those costs through the balance of the year? Or that a number of that could still bounce around a bit?
We do have very good visibility. Obviously, we track our commodities exposure. And as I talked about in the call in March, we are hedged quite a bit for these commodities. The hedging for this year is probably at a level of 80%. So we've seen -- we had factored in some commodity increases in our guidance. We see some commodities continue to move this quarter. But most of the impact that I talked about coming from logistics and commodities is actually logistics costs, which are moving upward more in that one we're not as hedged as we are for commodities.
The following question is from Derek Dley from Canaccord Genuity.
I just want to switch gears a little bit here. Just regarding your announcement of going on the direct model in Russia, can you just give us an update on the Russian market? I mean, have you started to see that market turn? Obviously, it's been very challenging over the last 3 years. And then in terms of your market share over there, I mean, from my understanding, some of your peers did really exit that market. Do you believe you've got a higher market share now in Russia than you did 3 or 4 years ago before we saw the ruble start to decline?
Yes. Derek, okay. First we've been in Russia for more than 15 years and our longtime distributor had a financial difficulty. And we had appointed temporary distributors for a period of time and we decided to go direct. We have right now about 100 dealer in Russia, longtime dealer, all over Russian market. And we're very happy because we didn't lose many into the downside with the depreciation of the ruble. Then right now, I would say, our market -- if you remember the market declined by almost 70%. And now we see an increase, I would guess, about 15% this year. And we believe this will continue to grow. And today, we are north of 50% market share in every single product line we have there, because like you see, many have exited. And we see Russia has -- and that's why we decided to go direct. It's not the most stable country in term of economic environment. But on the other hand, it's a country that resemble a lot like Canada. You have 4 seasons, people like recreational product, a lot of riding space and that's why we decided to go direct. We felt that the timing was perfect.
Okay, great. And I think a few years ago, Russia was your largest international market. Where does it stand today? Can you give us an update on the size of the market for you guys?
It wasn't our largest. It was an important one in terms of country. We had over -- almost $200 million of revenue. But Scandinavia is a very big market for us. And today it's probably 1/3 of what it was back then.
Yes. Today, you have Scandinavia, you have all the Western Europe. But also Brazil -- Brazil is on the good momentum right now. China is growing. And Australia, New Zealand then. That's the beauty of our business. I mean, we have a lot of good dealer worldwide and right now, we have quite a good momentum in many of those remote country.
Following question is from Gerrick Johnson from BMO Capital Markets.
I have a question on snowmobile and then one on Spyder. On Spyder, what models were you short on? And your shipments are up in the quarter. Are you including in those shipments those -- the new value Spyder or is that in later quarters?
No. Gerrick, we were late. Last year, we shipped a lot of F3 and RT in Q4. And this year, we've delivered the one with the new gauge, the new VIP gauge that we have on the F3 and RT. We've delivered them in Q1. It was perfectly okay with the -- for the dealers, but the delivery was a bit later than last year. And obviously, the slow April didn't help the retail in the quarter. And that's the story. And now we're seeing the pickup coming back in May.
Okay. And none of the value price Spyder shipped, is that -- where they in that quarter shipment?
No. The new Spyder will be announced in club in September. So we'll get shipments in Q4.
Okay, great. On then on snow, I know Polaris ended with a lot of carryover inventory. Seems like they'll be discounting heavily and that has the potential of maybe kill the retail market for you guys in the fall and winter. How are you planning your retail at that point in the fall? And how does that change your outlook?
First, we are happy because we finished our dealer inventory lower than last year than we have less noncurrent. And right now with the novelty and the popularity of the Gen 4 platform and that the level of spring break orders that we have from consumer, we feel very confident about our snowmobile lineup and the competitivity of our snowmobile. Then for sure, we will see how the season -- the retail season evolve. But we're quite confident that -- we're confident we'll be able to have a great retail season again.
[Operator Instructions] Following question is from Jean-Francois Lavoie from Desjardins Capital Markets (sic) [ Desjardins Securities ].
I was wondering if you could discuss a little bit more about the performance in the Propulsion segment mostly in -- with Evinrude, please.
Yes. Then Evinrude, there is a trend in the industry where there is more -- the repower business is shrinking. And that's why we put a lot of emphasis in the last few years to sign as many OEM as we can. And this is not helping our mix. The other thing that happened, Evinrude always been strong in the freshwater in the Midwest and this is the area where the spring season, the late spring hit the hardest. Then if you look at the map in our retail by state, we monitor that on a monthly basis. We're doing quite well in the South and Southwest, but we're significantly behind in the Midwest and the East. And we believe that this will -- we will catch up in May, June with the Evinrude business.
Okay, great. And maybe a last one. I was wondering if you could provide any details about your initiative on the next growth vector?
No comments, Jean-Francois. There, we're still working in different plans, but nothing new that I can share.
We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Deschenese.
Great. Thank you, Maute, and thanks, everyone, for joining us today and for your interest in BRP. We look forward to speaking with you again for our second quarter conference call on August 30. Thanks again, everyone, and have a good day.
Thank you, Mr. Deschenese. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.