Ski-Doo maker BRP to tap into growth in Chinese market with joint venture

Photo: The Canadian Press. All rights reserved.

Employees work on the SeaDoo assembly line at the Bombardier Recreational Products plant Thursday, June 12, 2014 in Valcourt, Quebec.THE CANADIAN PRESS/Ryan Remiorz

VALCOURT, Que. - BRP Inc., the company that makes Ski-Doos and off-road vehicles, is hoping to tap into China's growing outdoor recreational industry by setting up a joint venture aimed at selling new, lower-priced personal watercraft to the Asian giant's growing middle class.

China is a relatively small market for BRP compared with Brazil, Russia and Europe, but that could change quickly, CEO Jose Boisjoli said Thursday after BRP's first annual meeting since becoming a public company last year.

"It has the potential to become big because when things start up in China they can grow fast," he said of the world's most populous country.

The Quebec-based company has operated in China for 14 years and has seen its sales grow more than 30 per cent annually in the last three years. Its most popular products are Can-Am off-road vehicles and Sea-Doo watercraft.

It sees the Spark, a personal watercraft introduced last September which sells in Canada for about $6,500, about half the cost of the larger and more powerful models, as a catalyst for increasing sales in China.

The product is built in Mexico to reduce costs, making it attractive to entry-level buyers and rental operations.

Boisjoli said the rising price of watercraft, driven by technology upgrades, has been an obstacle for some potential buyers. So BRP decided to coming up with a smaller, less costly alternative.

"It's still new but definitely we have new buyers coming into the store for the Spark," he said.

BRP plans to transfer production of all See-Doos to Mexico from Quebec over the next couple of years but will try to keep employment stable in Valcourt, Que., where it makes Spyder off-road vehicles, which require about 1.8 times the labour involved in building personal watercraft.

He said the goal is for workers to be employed year-round instead of eight months, as is the case for many.

BRP said its investment with Smooth Marine Equipment Ltd., effective next February, will strengthen its presence in the Chinese market and accelerate the expansion of its dealer network to 30 within two years from 19. It established a regional office in Shanghai in 2012.

The Canadian company will control 80 per cent of the joint venture, which was announced Thursday ahead of the annual meeting and the release of its first-quarter results.

BRP (TSX:DOO) is maintaining its guidance for the fiscal year despite getting off to rough start by reporting a substantial drop in adjusted profits in the first quarter.

It earned $16.6 million in adjusted net income or 14 cents per diluted share for the period ended April 30. That's down from $53.4 million or 51 cents per share a year earlier but still ahead of the nine cents per share on $752.2 million in revenue that had been expected by analysts.

Revenues decreased six per cent to $758.6 million from $804.3 million in the same quarter of fiscal 2014. The decrease was due to lower sales of year-round and seasonal products, offset by a $49-million currency benefit as a result of the lower Canadian dollar.

Including one-time items, its net profit increased to $28 million from $25.7 million.

"Our financial results for the first quarter were as expected and consistent with our outlook," Boisjoli told shareholders.

He said sales in international markets increased four per cent in the quarter despite political unrest in Russia, which was offset by the impact of a long winter that increased sales of snow machines and off-road vehicles.

BRP anticipates a stronger second half of the year due to strong spring in snowmobile orders, the introduction of the Can-Am Outlander L ATV, the restart of the Sea-Doo Spark manufacturing in Queretaro, Mexico, and upcoming product launches.

"This year we're planning total growth of nine to 13 per cent and we believe that if the economy in the U.S. gets better we can continue that pace for awhile," he said in an interview.

Results in the second quarter are expected to be similar to last year, considering ongoing uncertainty in eastern Europe, which is more stable than previously forecast.

During the quarter, seasonal product sales decreased to $184.6 million from $206.7 million a year ago. Sales of year-round products fell to $365.4 million from $404.7 million.

Sales of propulsion systems and parts increased to $97.3 million and $111.3 million respectively, largely due to currency gains.

On the Toronto Stock Exchange, BRP shares closed up 15 cents at $28.65 on Thursday.

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