BRP Reviews First Year as Independent

EDITOR’S NOTE: On Dec. 17, 2004, Jose Boisjoli, president and CEO of Bombardier Recreational Products (BRP) and Pierre Pichette, BRP’s vice president of communications and public affairs, met with editors and executives of Ehlert Publishing Group’s Powersports Business magazine, and several of its watercraft, ATV, and snowmobile magazines.
The purpose of the meeting was to discuss BRP’s progress in the first year after it was spun off as a separate corporation from Bombardier, Inc., the multibillion dollar international manufacturer of planes and railroad cars, among other things. Here is a transcript of that meeting, edited for clarity and brevity. For articles specific to the outboard market, see the March issue of Boating Industry magazine.
BRP was sold to Bain Capital, the Bombardier family and Caisse de depot et placement du Quebec. Bain owns 50% of BRP; family 35% and Caisse de depot et placement du Quebec,15%.
BRP comments are from Boisjoli unless otherwise indicated. The second part of this report will appear in the Feb. 14, 2004, issue of Powersports Business.

First of Two Parts

BRP: For the first few months there was some uncertainty, but I would say in the last few months we’ve had a lot of communications. When we discuss business and the internal work process, it’s clear that the Bombardier family takes the lead. When we discuss more financing and debt, Bain Capital and Caisse de Quebec have a lot of knowledge. It is a very good balance on the subject. Bain and Caisse, who are new in our business, are challenging on issues we forget about. They bring a new way of looking at the business.
Here is how we are structured today: Pierre Arsenault is VP/GM for snow, watercraft, ATV sport boats and Roch Lambert is VP/GM of the outboard operation.
BRP has been managed by silos in the past. And now what we are trying to do is manage it as a whole company. That’s why outboard has a factory in Mexico. We don’t want each division to take their own silo, but to think what’s best for BRP. We have been gaining a lot of synergy in the last year.
Rotax in Austria manufacturers engines for our snowmobiles, watercraft, ATVs, motorcycles, aircraft and kart.
We have a small factory in Finland that manufacturers the Lynx snowmobile. In Scandinavia we have a very strong position in the snowmobile industry with Lynx and Ski-Doo. We are growing significantly in the ATV business.
Starting in January, the Sea-Doo 3D will be manufactured in Mexico.
We just announced our third quarter results. Obviously, the strengthening of the Canadian dollar in relationship to the U.S. dollar is giving us a hard time. It’s not the first time the Canadian dollar is so strong, but it’s the first time it has gone from 155 (one U.S. dollar equal to $1.55 Canadian) to $1.15 to $1.20 in such a short period of time. In 1991 to 1992, the U.S./Canadian exchange was at $1.15. We’ve been there, but because the Canadian dollar was weak, we have renewed our purchasing of the Canadian dollar more and more. And now we have to go back to find the right balance. That is what we are doing right now. It will take another 12 to 18 months before we regain balance of this.
The YTD revenue is up 9%, which totals to $1.8 billion at the end of the third quarter. Our gross profit margin declined from 20% to 17%. It’s basically caused by the exchange rate situation and the commodity prices. Steel is going up 50% to 70% and that will definitely affect, shortly, the price of our ATV. Aluminum is also going up. Now the oil prices seems to be going down, but it’s still higher now than it was a year and half ago.
This will have an effect on our price. We have been charging $50 per unit in the U.S. and $65 in Canada, since June. Most likely, early ‘05, because this change was not enough the price increase will start with snowmobiles in the beginning off 2005.
Concerning the leverage buyout, we have debt of about C$650 million. We’ve been able to manage our cash very well. We have reduced our receivables. We have done a better job with payables and we significantly reduced the inventory. We have a very strong cash flow position of C$251 million at this time. We will start to reimburse the debt in the following months.

COST REDUCTION PLAN
We have good cost-reduction plan in place based on three pillars:
1. Product Complexity. We have factories all over the world and we must use that to reduce product complexity.
2. Make or Buy including cross country: We already have initiatives in India, China and Mexico. We have no choice but to look at those facts of life. Even if a product is assembled in the U.S. or in Canada, there are many components for it coming from everywhere in the world. It’s a trend that’s getting stronger and stronger in all types of industries.
3. Facilities Footprint: BRP has been managed by silos. But now we will try to manage it as a whole and try to benefit from all the assets we have. I feel we have done a pretty good job this year to reposition the way we do things.
We’ve put up for sale three of our factories. One is a machining factory for outboard components. Another was for electronic module componentry for outboard engines. Basically, all those factories are very well equipped with good equipment, good employees and good facilities, but we are operating those at 25% to 35% capacity. We are hoping a strategic partner can acquire the factories and have a long-term agreement with us. We hope they will fill it up with more capacity and more components. Then our costs will go down.
With the three-pillar cost reduction program we are looking right now to the custom basis of our business to refreshen our business.

SNOWMOBILE BUSINESS
The snowmobile business is a good venture business. We’d like to have a few good, back-to-back years with snow. We all feel that would re-spark that market. The market was about flat the last two years. This year, snow conditions looks pretty good everywhere, except in the Midwest. But now, the weather is cold and we expect some snow activity.
With Ski-Doo we have a very solid position in the industry. I’d say we took a chance when we launched the Rev back in 2002-2003. We did believe in the Rev. We knew it was a better machine in terms of handling and overall riding.
We took a chance, but the team — starting from the design, the engineering, the marketing and the production people — have done an incredible job to have a successful launch. And right now we enjoy a very, very solid position with Ski-Doo in North America.
The Scandinavia market is different than North America. In North America, the market is mainly recreational riding. There is probably five percent utility usage. In Scandinavia, utility usage is probably 25% of the market and 75% is recreational riding. With Lynx, or Nortrac, we focused on building the best utility machine for their market. And we also import some sleds with the Scandic line in North America. And we do their recreational vehicle based on the (Ski-Doo) Rev chassis.
The new 2005 Lynx model uses many components that are comparable to the Rev. The Lynx has its own front suspension, rear suspension and their own ergonomic dressing. That’s the way we build a sled at Nortrac.
The way we position our snowmobile in Scandinavia is the Lynx is the best-made Scandinavian vehicle and Ski-Doo is the best import. We have been very successful with that strategy.

Ehlert: Did you acquire the Lynx brand?
Boisjoli: No, we acquired a company. We acquired about 50% of it in 1988, and we then acquired the other 50% in 1998. From ’88 to ’98 we were not very active over there, but since we own 100% of Nortrac, I’m going there five times a year and managing that factory very closely. We feel because the Scandinavia market is the biggest market outside of North America, it’s important to have Lynx over there to have good knowledge of customer requirements to build a snowmobile to adapt to their market.

Ehlert: Will we ever see a Lynx here?
Boisjoli: Right now, I wouldn’t say the timing is right because to bring Lynx to North America you need to give it positioning and also a different flavor. We already import the utility vehicle in North America. We could import the recreational part, but Lynx was a bit behind Ski-Doo because Ski-Doo was on the Rev platform. It is not a priority for the next two years.

WATERCRAFT BUSINESS
We took the No. 1 position in the watercraft market in the early 1990s. Basically at that time we were focusing on innovation and performance. We introduced a lot of new products and have been able to take over the market. At that time we had decided to only focus on sit-down-type vehicles, and it did pay off. We were really focusing on making the best product in this category.
We feel this market is stable and it should grow slowly going forward.
Obviously, in the middle of the 90s, you could buy a watercraft for $4,000 to $5,000. Today, with all the technology you have in the watercraft with four-stroke engines, bigger boats, Digital Electronic Security System, OPAS idle assistance, watercraft is in a higher price range.
That’s why we introduced the 3D last year. We feel very strongly about the 3D to attract newcomers into the industry. Generation “Y” is looking for extreme activities. The idea was to give to those Gen Y customers a base vehicle that they can adapt to different riding styles, Kart, Vert and Moto. And we have had two new experiences this summer, which is a pole for the Vert experience and the other is for the knees.
We knew of many teenagers who instead of buying a new Honda (car), buy an old Honda and then put $10,000 in aftermarket equipment on it. That’s the idea of the 3D and we want to re-spark the market. We want to convince Gen Y that the 3D is cool. We hope they will bring their father in the store and the family with go into the store and come out with a 3D and an RXP.

Ehlert: How successful has the 3D been?
Boisjoli: It’s a bit too early. We have shipped the product, which was a limited build, last July. TIn many areas it has done well, but in other areas is has not done so well. The last watercraft/boating season, we had a very, very strong spring, but June and July the weather was miserable in many areas. And at the same time, we shipped the 3D in July, and some dealers had good success with it, while for some, the season was over in July in many areas. It was not the best launch we’ve done, but we have a strong marketing plan starting in January with the boat show where we are convinced we will give the 3D a fair chance.

ATV BUSINESS
Being the seventh player entering into the industry is not easy. The way we address that industry is by product, better product, innovation and performance. We’ve learned the way to design ATVs with the Traxter and Quest, (and) the Outlander and Outlander Max are growing significantly.
We feel with the Outlander platform, we have a unique product. You know about our unique frame, the way the suspension is designed, the way our brake system is mounted to the engine. We have a 400 H.O. at this time and it’s performing more than some 500cc (engines) of other brands. The Outlander is very light weight. It is definitely a growing model for us.
And you will see, we are coming out in the next two years with a lot of new models into the ATV business. The Outlander will be our bread and butter, moving forward.
ATV is a good business for us, because it completes the same business as what we have; the same dealer network. We are trying to have a product for all seasons at the dealer network.

Ehlert: What about motorcycles?
Boisjoli: I said last spring, that you cannot be a recreational product manufacturer and not be on the road. BRP will be on the road one day. It’s not the time yet, but we’ll be on the road, there’s no doubt about that.

Ehlert: As far as your sport side of the ATV market, and the DS650, what is the plan?
Boisjoli: The DS is getting old, there’s no doubt about that. We have something in the mill. We will re-spark our position definitely.

Ehlert: As for the Rally, it’s manufactured in Taiwan. You have a factory in China. What’s being manufactured in the plant in China?
Boisjoli: That factory produces components for our outboard engines.

Ehlert: So there are no plans to switch?
Boisjoli: Obviously, I won’t tell you our intentions going forward long-term, but in Taiwan, we have a very good partner manufacturing our mini ATV and now the Rally and we feel it’s a good balance. We are happy with what we are doing there with our Taiwanese partner and going forward. psb

Next Time: The international business