BRP Inc. (DOO-T) went into the coronavirus crisis expecting the worst, slashing spending and suspending investor payouts in a bid to shore up cash as it braced for a potential sales collapse of unknown proportions. What it got instead is a revenue bonanza that might play out for months to come.
For the maker of Ski-Doos, Sea-Doos and Can-Am all-terrain vehicles, the pandemic provided a chance to showcase its outdoor products to people looking for an outlet for their leisure dollars. And its chief executive says the resulting boon to its business isn’t over yet.
“COVID is bringing our business to a level we never dreamed of,” CEO José Boisjoli said in an interview in late December, adding things are so good the company decided not to tap any aid through Canada’s Emergency Wage Subsidy program despite being eligible to receive about $30-million. “We are fortunate.”
Seventeen years after it was cut loose from plane maker Bombardier Inc. to forge its own path, Valcourt, Que.-based BRP now finds itself largely benefiting from a unique set of circumstances it has never before seen and might never see again. A global health calamity that has closed borders and forced people to limit personal contact has shifted their spending patterns toward things they can do near home. And almost no sector has benefited more from that change than powersports.
For many, snowmobile rides have replaced resort vacations. Personal watercraft excursions have supplanted fancy dining. The off-road trip is the new road trip. Whether any of this is sustainable over the longer term is a matter of debate. Analysts such as Jaime Katz of Morningstar say the boom will end when the coronavirus crisis eases, which will bring more balanced supply-demand dynamics to the industry and push it back to its more historical flat to single-digit growth trends.
These days, though, you don’t have to go far to see evidence of the boom in powersports popularity. Weekend mornings in Rigaud, near Quebec’s border with Ontario, the local Esso gas station is a magnet for all-terrain vehicle owners filling up before heading out into the nearby trails. Many of the machines here, like one BRP Commander (starting retail price: $13,599), are as new as their rookie drivers.
BRP’s internal data underscores the trend. A survey conducted in the first week of October with 2,400 recent BRP buyers found that roughly 72 per cent of new powersports vehicles sold were to people buying BRP brands for the first time and 34 per cent to people buying a powersports machine for the first time. The numbers were even higher earlier in the year. Newcomers to the industry historically make up just 20 per cent of new sales.
The trend is certainly boosting BRP’s bottom line. The company’s North American retail sales were up 16 per cent year-over-year during its latest quarter, joining gains of 22 per cent in the Asia Pacific region and 16 per cent in Latin America. That helped drive net income to $198.7-million or $2.22 a share for the three months ended Oct. 31 on revenue of $1.67-billion – a 49-per-cent increase in per-share profit over the same period a year ago.
Earnings per share excluding special costs and non-recurring items will now be at least $5, and as much as $5.25 for BRP’s current fiscal year, which ends Jan. 31 – up 37 per cent from previous projections, the company said in late November. Total annual revenue should slip 1 per cent to 5 per cent from last year’s $6-billion, a decline mostly caused by the fact the company was forced to suspend production at factories for several weeks during the spring. That left BRP with less output to sell and the company still hasn’t been able to rebuild inventory levels to meet demand.
BRP always understood that it was part of the larger leisure industry, competing for discretionary consumer dollars against entertainment purveyors including cruise companies, airlines and amusement parks. But it never quite knew how big the numbers were in absolute terms, or how strong the impact would be as consumers moved their money from one pursuit to another, Mr. Boisjoli said.
“Some investors believe that when life comes back to normal, all those [powersports newcomers] will run away and there will be too much inventory out there,” Mr. Boisjoli said. “We feel differently. We feel that we had an opportunity to expose our product to more people and our job [now] is to make them lifetime customers. That’s why we feel we are better positioned now than we were pre-COVID.”
Many experts believe it will take three to five years for air travel and other big-ticket leisure activities to return to previous levels, Mr. Boisjoli said. That’s a window for BRP to further cement its offerings in the minds of consumers, according to the CEO.
Early in the year as the seriousness of the coronavirus crisis became clear, BRP’s board and management took steps to prepare for a major revenue and cash-flow fallout to their business. In quick order, the company suspended its dividend and slashed operating expenses and capital spending, and in early May was able to secure a new term loan worth US$600-million.
“I learned in 2008, 2009 that when you go into a crisis, you need to go fast and deep [in your response],” Mr. Boisjoli said. Back then, BRP was “not fast enough,” he said, alluding to a 40-per-cent decline in revenue and steep profit drop at the time that he has called “a bloodbath.”
In the spring, during the first lockdown, governments in Quebec, Mexico and elsewhere ordered BRP and other manufacturers of non-essential products to close their factories for several weeks. When they were clear to reopen, the company promptly cranked production back up to speed to capture ballooning demand.
Not everything in this operational acceleration has gone off without a hitch. For one, the company continues to experience supply-chain problems.
Ships coming to North America from Asia are facing long delays getting unloaded in ports such as Los Angeles. In some cases, BRP has turned to airplanes to transport key parts and equipment – at much higher rates – to keep its factories on schedule, Mr. Boisjoli said. He said extra expenses such as these are costing the company about $1-million to $1.5-million a month, which is being offset by savings on a pullback in the retail incentives it normally offers.
BRP’s suppliers are also facing their own challenges, including periodic COVID-19 outbreaks in their facilities that trigger temporary shutdowns. All this wreaks havoc in the manufacturing chain, Mr. Boisjoli said, and has forced BRP to be flexible in searching for solutions. In one case, a seat supplier in Mexico was having trouble with materials and BRP decided to produce only two-seater side-by-side off-road vehicles for a time instead of the usual two- and four-seaters in order to limit production disruptions.
“It’s a bit fragile because the supply chain is the difficult part,” Mr. Boisjoli said. “Every week there’s something new.”
How long the sales momentum will last is also unclear. The successful rollout of a vaccine and loosening of restrictions in the months ahead could trigger another major shift in consumer spending that will lure potential powersports vehicle buyers away. And despite a projected rebound in the economies of big BRP markets such as the United States and Europe, many forecasters say employment will remain under pressure, which will limit growth in the industry.
The sheer demand from dealers to restock, however, should boost BRP’s wholesale revenue through 2021 (BRP’s fiscal 2022) and beyond, even if there is a softening of retail demand, according to National Bank of Canada analyst Cameron Doerksen. He says BRP’s aggressive strategy to keep rolling out new products will also help it win share from rivals regardless of the economic backdrop.
More first-time participants in powersports mean and expansion of the market over all, Mr. Doerksen said in a research note. “A larger market of buyers that are also skewing younger bodes well for BRP’s long-term growth prospects as we believe at least some proportion of the new powersports buyers will continue to be active customers in future years,” he said.
Mr. Boisjoli, a bespectacled engineer who grew up riding dirt bikes, acknowledges there are big unknowns that could thwart his best-laid plans, including stricter lockdowns. But he remains optimistic. He says the company’s research and development teams are busy working on new designs while existing vehicles remain in high demand. It won’t be until the end of 2021 before the company takes orders from dealers instead of giving them specific allotments based on what it’s able to produce.
By that time, he says the company will begin feeling new tailwinds from its new all-terrain vehicle factory in Mexico, currently under construction, and its new marine strategy. It will also try to apply new marketing strategies – including creation of a mentorship club for its three-wheel Spyders that lets prospective women buyers talk with existing female customers on social media – to other product lines.
BRP, controlled by Bain Capital and the company’s founding Bombardier family, jumped back into boat building last year with the acquisition of three manufacturers that make aluminum fishing boats and pontoon watercraft. It is developing a new family of boats with better integrated engines that it hopes will bring innovation to a multibillion-dollar industry.
It’s also working on battery-powered vehicles, although demand for them remains tepid at the moment. The company has decided it wants to develop the entire power pack, including batteries, engines and starters, and limit its dealings with partners in part to preserve profit margins. BRP will introduce some products with electric versions within the next three years, Mr. Boisjoli said.
“When we look at the big picture, we’re confident” for the future, the CEO said. “I think we’re well positioned to take advantage of this whole situation.”
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