BRP’s initial public offering (IPO) in May came about five years later than originally planned. But the ‘DOO’ symbol has become an instant darling of Canadian investors and financial analysts. The IPO was by far the most successful this year, accounting for about a third of all money raised in IPOs on the Toronto exchange. DOO share prices rocketed 16 per cent in its first day of trading.
The IPO sold 12.2m shares, raising about C$262.3m. An over-allotment option for an additional 1.83m shares added C$39.3m. By late July, DOO had moved from C$18.50 per share to almost C$27. Financial analysts who started coverage expect the stock to rise anywhere from C$29 to C$35. All gave it an ‘Outperform’ rating.
The company has come a long way since Bombardier Inc spun it off in 2003 to Boston-based Bain Capital and members of the Bombardier and Beaudoin family (calling themselves the Beaudier Group). Under Bombardier, the recreational products division was considered a glitzy but distant relative whose financial performance was in no way critical to the health of the parent. Bombardier Inc had much larger earners, and potentially much bigger issues, with its aviation and transportation businesses.
But when Bain (which bought a 50 per cent stake), the Beaudiers (35 per cent) and pension fund Caisse de dépôt et placement du Québec took ownership, BRP was on its own. From the outset, taking the company public was the new owner’s goal, since Bain typically owned companies for about five years before moving on. BRP had been moving toward that goal – divesting its industrial products division, investing in new products and tweaking manufacturing – when the 2008 financial crisis derailed its plans.
“The crisis made the timing poor,” says Pierre Pichette, BRP’s vice president of communications and public affairs. “But we knew we had a good investment proposition, so we waited. When the timing was right, we decided to go ahead.”
Five years after the IPO was intended, BRP was listed in what was arguably not an IPO-friendly period on the Toronto exchange. Tim Horton’s, a coffee shop chain with a wide presence in Canada and the United States, held an IPO just a month earlier that flopped.
BRP is certainly a very different corporation than it was in 2003, when most of its revenues came from North American sales of its Sea-Doo and Ski-Doo brands. Its ATV and Evinrude brands were gathering momentum, with Evinrude just launching its E-TEC outboards. The company was also planning to launch other product categories but a two-product, two-season business model dominated revenues. While BRP built Rotax engines in Austria, and Evinrudes in the US, the bulk of manufacturing remained in the provincial town of Valcourt (Quebec), where Joseph-Armand Bombardier built his snowmobile company in 1942.
Structure and strategy
That has since changed. BRP is moving its personal watercraft manufacturing in Valcourt to a new 600,000ft2 facility in Querétaro, Mexico. The facility will also be assembling Rotax engines for North America. The C$30m investment should be quickly offset by the C$250m annual savings it forecasts by 2017. BRP also has an existing facility in Ciudad Juarez, where it builds ATV and side-by-side vehicles. The facility was launched in 2007.
BRP has moved past the snowmobile and PWC businesses. While Sea-Doo maintains 45 per cent global market share, the personal watercraft field in the US has dwindled from 200,000 units per year to about 60,000. In the last seven years, BRP has grown its Can-Am ATV division, added side-by-side (SSV) off-road vehicles, and launched a new Spyder three-wheeled motorcycle in its own product segment. BRP says that it has gained market share in the PWC, ATV and SSV categories since 2007.
The company also announced last autumn that it was shutting down its sportboat operations in Illinois, and instead investing the money into research and development. While a growing segment, sportboats accounted for three per cent of annual revenues.
Beyond lower-cost manufacturing and new products, BRP sees the international market as key to long-term growth. The company now manufactures in five countries, distributing its products in 105 countries. It has a network of 3,200 dealers in 20 countries with direct distribution. and another 190 distributors sell to about 950 dealers in countries without direct distribution. International sales were about 20 per cent of total sales when BRP was spun off, and 35 per cent of fiscal 2013 to January 31.
For the most part, the changes have been beneficial to BRP’s bottom line. After the downturn began in 2008, BRP announced layoffs of more than 1,000 production and management employees, and slashed production by 20 per cent. That brought employee count to about 5,000. Now, the company says it has about 6,700 workers.
In its pre-IPO prospectus, BRP reported record fiscal 2013 sales of C$2.9bn, a 9.2 per cent gain over the previous year. Its net income was up 45 per cent to C$121m compared to a year ago. Year-over-year comparisons with the two previous fiscal years, with the exception of one quarter, show steadily increasing profits. The US remains as BRP’s largest market, with 42.7 per cent (or C$1.24bn of total sales). Canada, at 22 per cent, accounted for C$641.6m last year.
The momentum has continued into the new fiscal year. First quarter sales were up 12 per cent to C$804.3m, though net income narrowed to C$25.7m from C$54.6m a year ago. BRP said its exit from the sportboat business cost it C$44m in Q1 sales. It expects sales of ‘Seasonal Products’, including personal watercraft and snowmobiles, to gain flat to low-single digits in the remainder of the year. Propulsion systems, including Evinrude and Rotax, are expected to be up by mid- to high-single digits.
Chief executive José Boisjoli has spent the last decade overseeing BRP’s slow but disciplined transformation. The IPO road show he presented to investors in Europe and North America focused on engineering innovation and the quality of its brands.
BRP did not dial back on new product development and launches, even during the downturn: It borrowed C$50m from the government of Quebec for R&D. Last year, its R&D spend was C$128.8m, or 4.7 per cent of annual revenues. It has 750 employees in its various R&D divisions. In the last three years, it has also opened new design centers in Valcourt and at the Rotax facility, Austria. It endowed the University of Sherbrooke with a special department tasked with finding solutions for lower-emissions propulsion.
BMO Capital Markets estimates that its Personal Watercraft business will account for 14 per cent of companywide sales this year, Evinrude (8 per cent), Ski-Doo and Lynx snowmobiles (19 per cent), Can-Am ATVs (15) and SSVs (14), Rotax engines (4) and its Parts, Accessories and Clothing (16). BMO analyst Gerrick Johnson wrote in a report on BRP that because no single product line accounts for more than 20 per cent of sales the impact of seasonality on annual results is reduced. The company’s market share in the PWC, ATV, and SSV categories has grown each year since 2007.
Financial analysts are also bullish on BRP because the recreational industry, as a whole, has seen improvements. Johnson says that demand for ‘replacement products’ is long overdue. “We estimate that the aggregate size of the recreational vehicle industries BRP participates in is about US$21bn at a wholesale level, and we believe this aggregate size can grow to US$27bn by CY2018,” he wrote.
Competitors like Arctic Cat and Polaris have seen their share prices gain 14 to 15 per cent in early summer, as the US economy continues a sluggish recovery. The housing market, key to new-boat sales, seems to be returning to some semblance of health.
Johnson, who gave BRP a target price of C$32, sees the greatest growth potential in its SSV and Spyder businesses. “Side-by-side vehicles are going gangbusters,” he told IBI. “People by nature destroy these off-road vehicles faster than other categories, so the replacement cycle is much higher. That category is growing at 20 per cent per year.”
Johnson is also seeing “a lot of momentum” in the Spyder three-wheel motorcycle line, saying he believes growth will come from a retiring Baby Boomer segment. The analyst suspects that BRP’s decision to exit the jet-boat business last year could be good for its Rotax division. As a result, it is now free to sell jet systems to companies like Glastron, Scarab and Chaparral. Johnson says revenues will be “minimal” this year at US$3m, but could grow to US$20m next year.
Market share expansion
The BMO analyst believes there could also be a “natural outgrowth” for BRP’s Evinrude division with OEM buyers. “They could increase their market share to OEM market, if they’re selling both Rotax and Evinrude,” says Johnson. He forecasts Evinrude sales will grow three per cent this year, 10 per cent next year, and again three per cent the following year. However, he also notes that Evinrude is a “far distant” third player behind Mercury and Yamaha, and that its Evinrude product offering needs to do more public relations work to erase the public conception that two-stroke is a ‘dirty’ technology.
While the jet-boat trend still has at least a year to materialise, Evinrude has been busy shoring up production and investing in infrastructure in its Sturtevant (Wisconsin) facility. BRP last year shut down its Waukegan research center and moved everything to Sturtevant. The company held a ceremony in the spring to celebrate the opening of its new campus, which includes a new engineering facility, after-sales centre, and emissions testing lab. BRP also built a new training centre for its dealers.
“We’ve also brought together engineers who work on both Evinrude and Rotax,” says Alain Villemure, vice president and general manager of BRP’s Marine Propulsion Systems Division. “The knowledge base is quite incredible across the company and we’re making sure there is a lot of sharing between engineering groups. That’s something we can leverage going forward.”
Risks and opportunities
The decline of sterndrive-boat sales could benefit both jet-drives and outboards. Villemure isn’t ready to predict a jet-boat resurgence, but says BRP is fully ready to take advantage of the trend if it materialises.
Yamaha, the only remaining jet-powered manufacturer, has seen retail units rise 25 per cent in the last year. “Let’s just say we’re excited with the opportunity,” says Villemure. “This not only offers a new revenue stream, but positions us as a true leader in the industry offering different engine types. We’re now supplying complete propulsion systems to these boatbuilders. We believe there is long-term value to that,” he adds.
Villemure says that business has improved in the last year. “We’re a ways off from where we were but we’re enjoying an industry that is in somewhat of a comeback,” he says. Evinrude sales over 10hp have returned to 81 per cent of “pre-recession levels,” according to the IPO prospectus. Sea-Doo sales are now at 77 per cent.
BRP sees growth potential for Brazil, Russia, and China. All three markets are ‘under-penetrated’, according to the prospectus. For outboards and PWC, Johnson believes Brazil will offer the strongest growth opportunities. “It is a water-centric culture that likes fast things,” he says. “Sea-Doo already has 50 per cent market share there. By moving Sea-Doo production from Quebec to Mexico, they can now ship to Brazil at more favorable tariff rates.”
But the greatest market share gains across the multiple segments could come in the US, where BRP has 985 dealers (with outboards) compared to competitors with 1,600 dealers. While Sea-Doo and Evinrude are seen as ‘mature products’ areas like the US Southwest could offer potential for BRP dealers selling all-terrain vehicles and side-by-side vehicles.
Despite the rosy future BRP painted in its run-up to the IPO, potential obstacles to growth remain. “Clearly, everything they sell satisfies a need rather than a want,” says Johnson. “If the economy were to have a setback or shock, their C$900m of debt would exacerbate the risk. That is a high load of debt to service if sales and profitability were to suddenly drop off dramatically,” he notes.
The third potential stumbling block surrounds BRP’s ongoing growth initiatives. “Management’s execution of the plan could be at risk should the company experience any operational missteps,” wrote Johnson in his report. Talking to IBI, he added: “But so far everything they’ve attacked has seemed to go well.”
Fit for business
With its rising share prices and the general promise of an improved recreational market, BRP will certainly ride its post-IPO wave. Investors saw DOO’s growth prospects being more important than provisions like special payouts to the controlling shareholders, and the lack of a dividend. Under other terms of the IPO, Bain and the main owners keep 90 per cent of the company along with its multiple-voting share structure. Despite some investors questioning that structure, it allows the company to fund growth initiatives by raising equity capital without taking on more debt. “The Canadian stock market has been oriented towards materials, mining and energy, and those have not been good sectors this year,” says Johnson. “The investors are thirsting for companies with consumer products. This is a Canadian company with strong exposure to the US market, and the exchange rates are favorable. It fulfills a lot of criteria that Canadian investors are looking for.”