Good morning, ladies and gentlemen, and welcome to BRP, Inc. FY 21 First Quarter Conference Call. I would now like to turn the meeting over to Mr. Denis Deschenes. Go ahead, Mr.
Deschenes.
Thank you, Julie. Good morning, and welcome to BRP's conference call for the Q1 of fiscal year 2021. Joining me this morning are Jose Bojali, 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 and 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 erp.com. So
with that, I'll
turn the call over to Jose. Thank you, Philippe.
Good morning, everyone, and thank you for joining us. About 2 months ago, when we presented our year end result, we were off on a we were on a roll. We had incredible momentum with every product line worldwide and we were anticipating another great year ahead. Like the rest of the world, we were faced with the sudden impact of the COVID-nineteen crisis, which brought rapid changes that significantly disrupted our business and operation and forced us to quickly adapt our plan. It began when our dealer had to close their business as the situation worsened in China in January, closure followed in Western Europe in February, where local government enforced severe containment measure.
As you can see on this slide, retail in North America had been strong until mid March, was negative for 1 month and once dealers started to reopen, retail has been strong since mid April. Our manufacturing has reopened or is in the process of reopening, and we are adapting to the present reality. With retail tracking better than expected, we are now focused on getting production back to capacity globally. I am proud of the team's swift action taken to limit the potential impact of the crisis on our business and protect our financial flexibility. Amongst other, we deploy global protocol to ensure that our employee can work in a safe environment and reduce risk.
We adjusted our production plan in line with government health regulation and expected market demand. We implemented cost mitigation measures, notably to temporarily off salary reduction and an exhaustive review of discretionary spending, resulting in overhead saving of up $450,000,000 for the rest of the year. We focus on liquidity preservation, notably focusing our CapEx investment on key projects with high impacted return, resulting in a total CapEx target of $220,000,000 to $250,000,000 for the year, representing a reduction of about $130,000,000 to $160,000,000 from last year level. And we were successful in extending our term loan B by $600,000,000 and maintain our covenant light condition. As a result of these efforts, with our cash on hand and $700,000,000 of revolver availability following the completion of the term loan transaction, we have about $1,300,000,000 of financial flexibility.
While we remain cautious about the future, we expect that these different initiatives will allow us to navigate to the uncertain times, while allowing us to continue investing for the long term growth of the company. However, these measures do not come with sacrifice and one of the toughest decisions we had to make, as we announced yesterday evening, is the discontinuation of outboard engine production. As you have witnessed over the last few years, despite its innovative technology, our outboard engine lineup has been losing share in a market that was already difficult. Our strength was in the Early Power segment, while the industry growth was driven by the package sector, which led to continued share erosion. Given this trend, our outboard engine had fallen behind in terms of profitability and cash generation potential.
As the current situation forced us to reduce our investment plan and review downward our growth expectation for the business, the path to profitability improvement for outboard engine was too long. It became apparent that we had to discontinue production. For our Evinrude employee, let me say that I'm very proud of the part they have played over the past years and in particular the effort over the past 18 months. Although we have made progress, the impact of the COVID-nineteen has left us no choice. I wish to thank them for their dedication and commitment in helping us create the Marine Group.
This decision will allow us to refocus our Marine investment expected return in sustainable projects such as innovative technology and enhancing our boat offer. We remain committed to our marine strategy with an evolution to our approach. Along with the announcement last night, we also announced a global supply agreement with Mercury, which is securing access to engine and is expected to support our dealer network development efforts. Our strategy has always been about building a strong marine business by offering customers a superior boating experience to production to product innovation. The discontinuation of outboard engine production does not change that objective.
The development of Project GOES and Project M are progressing as planned, and we are confident that they will be game changers in the industry. Before we get into the quarterly results, I wanted to provide you with an update on our manufacturing operation. As you know, we suspended or slowed down most of our operations starting in late March until mid May, responding to local government containment measures. This obviously limited our ability to ship product in the first quarter and impacted our financial results. The good news is that we have been able to take extensive measure to protect our people while resuming capacity.
Production as we started or is ramping up in most of our facilities and we are set to be operational everywhere starting next week. As mentioned, our results were significantly impacted by mandatory closure of plant and dealership. However, our retail performance was solid given the current context, with North American powersport retail being up 4% or 10% when excluding snowmobile. Contributing to that strong retail performance was our focus on supporting our dealers as we strive to continue delivering the best in class dealer value proposition in the industry. Ensuring the health of our dealer network is a key priority and we made sure to find solutions to ease the financial burden on our dealer, notably as we extended floor plan support until the end of June adjusted Performax target until the end of July to account for potential reduced demand, we proactively adjusted dealer orders and we extended warranties for all our powersports products.
We also implemented measures to simplify business processes for dealers and to drive consumer demand. The response from our dealer network on these initiatives was very positive and should help us to continue to gain momentum. Now taking a closer look at the North American quarterly retail performance on Slide 10. Our product portfolio performed above our expectation during the Q1. We continued to outperform the off road industry, with side by side retail growing above 40% and ETV retail being up high single digit driven by a strong first half of the quarter and very strong second half of April.
The 3 wheeled vehicle category is suffering the most in the current context since the confinement measures taken have had the most impact on this category, with the closure of riding school and cancellation of demo tours, 2 key projects to support the growth of this sector. I will explain more on this in a moment. Finally, while our boat down for the quarter, Personal Watercraft and Snow Bill outpaced their respective industries. As summer is approaching, there appear to also be a clear trend that people will be staying at home for their vacation or as they say a staycation, which would work in our favor. We added this slide to give you some color on our retail analysis that we did, showing that our retail performance was very strong in regions where access to powersports dealer and playground remained more available during the containment period.
You can see a clear difference between the U. S. And Canada, where the provinces of Quebec and Ontario were completely closed for 6 weeks. The middle graph shows the data taken April 15 and as you can see the gaps in retail between the dealers that were open versus closed and on the right between rural and urban dealers. Retail was up 20% when dealers were open for most of the month of April and up 24% in rural areas.
When dealer are opened, sales remain strong. This bode well for our industry as gradually entered the confinement stages in many regions around the world. Now let's turn to Slide 12 for the year round product highlights. Revenues were up 2%, driven by a strong start of the quarter, partially offset by the impact of the crisis. On the retail side, 10 months into season 2020, the side by side industry was up high single digit.
The demand for Can Am side by side was very strong and our retail was up low 40% season to date. Can Am side by side was also performing well in international market despite the situation with retail for the quarter up over 40% in Latin America and up over 20% in EMEA and 20% in Asia Pacific. Under the current context, these are incredible results. Turning to ATV. The North American NTV industry was also 10 months into the season and retail was up low single digit.
For the same period, Can Am ATV Retail was up low teen percent, notably gaining share in the mid cc segment. We are pleased with the performance of our Off Road business, which had a very strong end of April, and the positive trend continued in May. Now looking at 3 wheeled vehicle. Early in season 2020, the North American 3 wheeled vehicle industry was down low 30%, while we were down low 40%. There are a few factors to note.
1st, we are lapping an excellent quarter due to the launch of the Ryker last year. As I mentioned, the on road industry suffered the most from containment measures due to the closure of riding school and license issuer and the cancellation of demo tours. We also had to cancel our marketing effort since we have no project to support new entrant into the market, a key driver for this category. We have now launched a new marketing campaign that is adapted to the improving situation. As schools are reopening, demand for classes is growing and we are confident we will regain traction.
Turning to seasonal product on slide 13. Seasonal product revenues were down 14%, primarily driven by lower shipment as many dealer were closed. Now looking at retail. The North American snowmobile industry ended its season 2020 on March 30, with retail down mid single digit percentage. Our Ski Doo lineup continued to drive strong consumer demand, resulting in retail that was up mid single digit percentage and ended the season with the highest market share in its history.
In Scandinavia, 10 months into the season 2020, the snowmobile industry is down mid teen percent, driven by unfavorable snow conditions last winter. Ski Doo and Lynx outperformed all other brands, with retail only down high single digit percentage. Our complete lineup and new product introduction, notably the new Summit Turbo models, have put us in a very favorable position in the industry with continued market share gain potential. Although we had to cancel our demo tour, we are encouraged by the level of spring certificate unit sold to customers. Our performance is very similar to last year, which is testament to the strength of our Ski Doo and LYNX brand.
Now turning to personal watercraft. It is still early in the season and the North American personal watercraft is flat, with Sea Doo retail is up low single digit percentage. Given the current situation, which halted manufacturing, plus a cold spring, our retail was affected and we reduced our model year 2020 production plan by 18% compared to last year. However, we decided to advance the cutoff of model year change and we will be ready to ship model year 21 units starting this summer. May retail so far for watercraft has been very encouraging and with our production adjustment, we will be ready to supply the demand as needed.
Continuing with a look powersports, parts accessories and apparel and OEM engines. Revenues were down 15% as a result of dealer closure due to the pandemic. Parts orders, which represent an important portion of our PA and A business, are directly correlated to the ability of dealer to service unit and as a result suffer the most from dealer being closed. As dealerships started to reopen, we saw an improvement in parts sales. Finally, looking at our Marine business.
Revenues were down 26% due to a lower volume of outboard engine and boats sold, partially offset by the impact of the acquisition of Telwater during last year. At the retail level, Alumacraft was down over 20%, resulting from weak industry trends in key markets, while Manitou performed well with retail up low teen percentage. With the confinement measure lifting and spring weather getting better, we see retail improving for both Manitou and Alumacraft. With that, I will turn the call over to Sebastien.
Thank you, Jose, and good morning, everyone. As mentioned, we had a very strong start of the quarter, continuing our growth trajectory from recent years until the COVID-nineteen pandemic led to global containment measures, resulting in dealer closures and suspension of production in most of our sites starting in late March. This impacted our ability to ship products, resulting in revenues that were down 8% from last year and normalized EBITDA down 16%. Our normalized EPS ended the quarter at $0.26 As part of our initiatives to preserve our financial flexibility, we reprioritized our CapEx plan for the year, resulting investments of $43,000,000 in Q1, down 9,000,000 dollars from last year. We managed working capital leading to $100,000,000 of positive working capital contribution and $169,000,000 of free cash flow for the quarter.
And as Jose mentioned, following the end of the quarter, we secured a US600 million dollars term loan with a covenant light structure that matures in 2027. With the added Term B, we have significantly strengthened our liquidity position, allowing us to focus on managing the business through these uncertain times and continuing investing for the long term growth of the company. As I mentioned, our revenues were impacted by our ability to ship in certain markets. Our retail remains strong in the United States as many dealers were able to stay open, allowing us to continue shipping products, which resulted in Q1 revenues that were up 5% for the region. However, the situation was different in other key markets where a higher proportion of our dealer network had to close, leading to retail decline and lower shipments.
This was particularly true in Europe, where we had a very strong start of the year, but the trend worsened early in March as contained measures were more comprehensive and were put in place much earlier than in North America. Our gross profit margin was also impacted by the situation, notably due to the closure of our manufacturing sites in late March and all of April. On a comparable basis, our gross profit margin was up 10 basis points from last year, as the negative impacts from volume mix, pricing and sales programs and production costs and depreciation were more than offset by favorable foreign exchange rate variation. However, COVID-nineteen had a 3 50 basis point impact on our margin, primarily driven by less efficient fixed cost absorption due to production shutdown and higher yard inventory depletion. Turning to Slide 19.
Our quarterly normalized net income was down $30,000,000 compared to last year, driven by negative impacts of $62,000,000 coming from volumemix, pricing, sales programs and $16,000,000 from production and distribution costs, which were partly offset by lower overhead resulting from our cost mitigation efforts, offset in part by higher depreciation for a net positive impact of $38,000,000 lower net financing costs and normalized income tax expense for $3,000,000 and a favorable foreign exchange rate impact for $7,000,000 Also, given the impact of COVID-nineteen on the outlook for our industries, we took a $171,000,000 non cash impairment in the quarter for our Marine business, which is facing more challenging industry dynamics compared to when we acquired them. This amount accounts for the revaluation of the boat companies we have acquired over the past couple of years and the impact of the decision to discontinue the production of outboard engines. This amount has been excluded from our normalized metrics. Now looking at network inventory on Slide 21. Our network inventory was up 7% over the same period last year, well positioned despite the current situation as we experienced better than expected retail trends across most of our product lines.
The increase is primarily driven by 3 wheeled vehicle as it was the most impacted product line within our portfolio due to the closure of riding schools, demo tours and more dealers being closed in urban areas. SSV Industry was also up as we had positioned the network inventory early in the year for the expected continued solid retail growth. This allowed us to support the strong consumer demand we experienced with retail being up over 40% for the quarter, despite that we had to suspend our production due to the pandemic. Our number of days of inventory are lower than usual for both SSV and ATV, which may lead to certain models being difficult to access in certain regions. But with our operations restarting, we expect to be able to sustain the continued strong consumer demand for our lineup.
Our network inventory growth was partly offset by a lower level of inventory of PWC due to the production shutdown. Still, we believe the level of inventory is appropriate for the expected demand and as Jose mentioned, we will be able to produce and ship model year 2021 earlier than usual if there is other additional demand. And lastly, for snowmobile, we ended the season with a healthy inventory position, allowing us to start the next one in a good place. Finally, turning to Slide 22. The coming weeks months will be determinant in how our fiscal year 2021 will play out.
As many regions of North America and Europe are deconfining and restarting their economies, we will get greater visibility on the potential impacts of the pandemic on consumer demand, which will be impacted by the severity and length of the economic uncertainty, the agility of the global supply chain and its ability to adapt and resume operations in a safe and sustainable manner, and people's confidence, which will undoubtedly be linked to the evolution of the virus and will impact both demand and workforce availability across multiple industries. Given the uncertainty related to these elements, we are not in a position to provide a guidance for fiscal year 2021 at the moment. However, we are sharing with you our high level view on how we expect the year to progress. This outlook assumes the restart of our manufacturing operations as scheduled, no further closure of operations in our factories or suppliers in our dealer network, and continued positive consumer demand in North America, but lower year over year overall demand in other regions of the world. Based on this, we anticipate a challenging second quarter as revenues are expected to be down about 40% due to the production suspension across most of our sites during April May and then a progressive ramp up to resume full capacity and replenish yard and dealer inventories and the impact of the discontinuation of outboard engine production.
We expect the trend to progressively improve for Q3 and Q4 as we complete our production ramp up. However, revenues are still expected to be down year over year 10% to 20% in the second half of the year due to to We expect CapEx for the year to be $220,000,000 $250,000,000 depreciation of about $265,000,000 dollars net financing cost of about $135,000,000 and the effective tax rate to be between 26% 27%. And finally, end the year with a diluted share count of about 89,000,000 shares. While our results for the year will suffer from the pandemic, the fundamentals of our business remain solid as we continue to outpace our industries and gain market share. Furthermore, our ability to secure our financial flexibility is allowing us to continue investing in our growth initiatives to put the company in a solid position for the rebound in years to come.
With this, I'll turn the call back to Jose.
Thank you, Sebastien. These are not easy times, but what makes me happy and proud is the agility and resilience of our employees, suppliers and dealers. I would like to thank them for their efforts and continued dedication. Going forward, our priorities are focused on Tooting, how we manage in response to the current environment and making sure we are prepared for what the future holds. As always, we are committed to ensuring a safe working environment for our employees globally and now more than ever.
We are also focused on staying agile. Our agility allow us to react quickly to the crisis and now to successfully ramp up again, while making sure our dealer network is healthy and ready to be back in action. We will maintain our market leadership through our best in class marketing, go to market and retail strategy. There has never been a better time to promote the customer experience writing our product. Now to prepare for the future, we need to continue our growth objective adapted to this new reality.
Although we reduced our CapEx, we are protecting our key growth projects and initiatives to maintain our momentum in the industry. And to do this, we will need to rethink now how we do business and adapt to the new normal in our operation, our strategy and our mindset. We believe this new reality will give us opportunities to demonstrate our leadership as things will continue to evolve. For example, we believe the way people purchase has definitely changed with more interest than ever in e commerce. With global travel remaining restricted in the short term, more staycations, prolonged social distancing and fewer large gathering and events, consumer will look for activities that can be practiced closer to home.
With our product, our know how and our solid financial flexibility, we are well positioned to navigate through the crisis, respond to new trends and emerge stronger than ever. Lastly, I would like to remind you we'll make the high deal product for social distancing. On that note, I will now turn the call to the operator for questions.
Thank Your first question comes from the line of Steve Archer with RBC Capital Markets. Please go ahead.
Yes. Thank you very much. I'm wondering if first if we could just get a little bit more color on what you're seeing with some of the retail trends into May. In the U. S, it sounds like a strong recovery starting in late April and continuing, but just any comments on what you're seeing now with dealer traffic levels, the restrictions that they're working through and such in the U.
S. And also the patterns that you're seeing emerging now in Canada and Europe?
Good morning, Steve.
Obviously, for competitive reason, we'll not give you all the data that we see, but I will give you some. First, our dealers right now about 90% of our dealers are reopened in United States. There is still some states in the East and in California that are closed, but 90% -plus are open. And in Europe, where everything was closed for a period of time, in Germany, France, Italy and Spain, about 80% of our dealers are operational. Then I won't give you the detail by product line or by country, But since the beginning of May, we are up about 35% worldwide between our product line and our country.
Then we don't know how long this will continue, but definitely a trend that is positive for our type of product.
So I guess just squaring that if retail into May is that strong versus an outlook for down 40% in Q2, is the difference there, I guess just the lag in terms of production versus retail? The production has been down for 6 weeks.
Yes, that's for sure. That's for sure.
Yes.
Okay. Okay. Good point. So secondly, just in terms of the production ramp, I guess at your primary facilities in Mexico, it sounds like they're ramping up now. Just any comments on the level of utilization you're at now and how you see that ramping?
What the limiting factors are, whether it's local restrictions or supply chain or just matching demand?
But in Mexico, the government gave us the okay to restart on June 1, which is next week. And we've been working on the ramping up the production for the last 2 weeks. And we're allowed to let our people in and prepare for ramping up. That's what we're doing right now because you don't just flip the switch on us, but we will be fully operational in our 3 factories starting next week. Obviously, we expect to have some difficulty here and there with suppliers because we're managing about 550 key supplier around the world.
And I think we will go through some difficulty overall for the rest of the year. But as we speak right now, everything looks good that everything will be operational next week.
And just a final one. Thank you. Final one on operating costs and overhead savings. So we've been pretty aggressive with that, looking at a $450,000,000 reduction. Presumably, as things start to ramp back up, some of those costs come back online.
But any sense of how much of those savings might be permanent or structural in the business now and therefore support longer term margins?
Yes. Good morning, Steve. What we've communicated is we have plans in place to reduce our expenses up to $450,000,000 versus what we were planning initially for fiscal year 2021. Obviously, we will remain agile and adapt our plans. We'll see how things are trending.
One thing I can tell you is with the discontinuation of the outboard engine business, that's a reduction of about $80,000,000 of overhead. And so that's going to be recurring year over year. And as things evolve, we'll be nimble as we've been in the past and in the last few months, and we'll balance the short term financial priorities with our long term aspirations. And so the good news is we have flexibility to adjust accordingly.
Okay. Thank you very much.
Your next question comes from the line of Craig Kennison with Baird. Please go ahead.
Hey, good morning. Thank you for taking my questions. Seb, I think you just mentioned some metrics regarding the engine business that you're exiting. Could you share with us the annualized revenue and margin profile of that business so we can try to exclude it from future results?
Yes. Well, actually on the OE business, there's actually 2 components. There's the unit business and there's the parts business. And the parts business is a business that we're going to be continuing. Obviously, we're going to be servicing our dealers for warranty, but also for our consumers that are no longer under warranty, but need service.
So that business is going to keep going on. As Jose mentioned, the unit business, so the actual engine was a business that we were subscale. We've been losing markets for over the last few years. And from a margin perspective, it's a business that was almost breakeven. And from a profitability, it was a business that was actually at a loss position, and that's why we took the decision to discontinue it.
When you look at OE in terms of the whole portfolio of our marine segment, the engine business is about 45% of total revenues. So, if you carve that part out, it should give you a good appreciation of what the remaining business is.
What would you estimate your market share to have been in that
In the mid single digit.
Thanks. And then going back to the comment on May retail trends, which appear to be really strong, Is there any way to look at that data and deconstruct it for whether you're seeing an influx of first time buyers or there may be some kind of catch up demand from earlier periods where dealers were closed. Just trying to get a real feel for the extent to which this outdoor theme is really capturing new eyeballs.
Yes. We've done some survey about the customer who purchased our unit in the last month, and we see a more new entrant than typical. Typically, we have about 20% of our sales is to new entrant. From our survey, and again, it's a small sample, but we are more around 30% right now. Then there is definitely a trend there where some people who was not considering our type of product, we see them entering into our type of industry.
Then this is very positive. There is obviously a lot of money in the system, a lot of government invested in economy. And with, again, the staycation and the social distancing, canceling vacation and travel restriction, there is definitely hype there. Then this phenomena is there. We can see it.
We can feel it. On the other hand, we cannot ignore that the unemployment rate is going up. Consumer confidence is low and the housing start has reduced, then all of this at one point will catch up. Then we feel pretty confident for the next few months. But how this will play on the second half of the year, that's a bit difficult to predict.
Great. Thank you.
And your next question comes from the line of Derek Johnston with BNL Capital Markets. Please go ahead.
Hey, good morning guys. A couple of questions. First, you're talking about lower demand in the rest of the world. Just why aren't folks elsewhere looking for outdoor recreational products just like we're doing here in the U. S.
And North America? Is this just a North America phenomenon?
I think, Eric, there is some timing. Like LATAM right now is down, but the COVID hit Brazil and Mexico later than in Europe and in Canada and U. S. And I think it's just a question of timing. Those countries were upbeat later than North America than Canada, U.
S, sorry, and now they are in the middle of it, then it's I think it's only a question of timing. I think the phenomena is exactly the same.
Yes. But aren't your markets bigger in Europe and Asia compared to Latin America? What about those markets that
Yes.
Obviously, what we're seeing is that the confinement measures were more, don't want to say, drastic or severe. And so, is there a bigger aftershock event there for the consumers? We're not seeing the pickup that we're seeing in the US in terms of retail.
Okay. Going back, say, 2 years ago, would you have acquired these boat brands if you did not have the Evinrude business?
Absolutely. I mean, when and you saw the few presentation we've done about the boat strategy, but BRP is a diversified company and we are I think this is one of our strengths and we needed to diversify outside powersport. Marine is a good complement to what we do and you see how many customer who buy ATV, Sea Doo or snowmobile are buying boat And we see a big opportunity in the boat industry. Obviously, our thinking is about creating new experience by pushing innovation and technology, and that's what we're doing right now by redesigning the complete lineup of Alumacraft, Manitou and Telwater both. Then for us, it's a bit sad that we discontinued the production of the Evinrude, the outboard engine, but we will continue to invest in new technology in the new boat because we believe that our long term strategy make a ton of sense.
Okay. So Project Ghost was not reliant on you having the outboard engine technology?
Project Ghost and I won't tell you the detail about it, but Project Gose and Project M are ongoing right now.
Okay. Okay. I'll leave it at that. Thank you very much.
Thank you.
Your next question comes from the line of Praveen Farley with UBS. Please go ahead.
Great. Thank you. I have two questions. First on the off road business, you mentioned well, I guess you didn't give a specific product line, but you mentioned sales up very strongly so far in May, and we're assuming a lot of that in Off Road. But with the restart just taking place next week, I guess, how long or do you think that retail from here going forward is going to be lower than it would have been?
In other words, is there not enough product that it's going to impact your retail negatively in the next month? And then is it by 6 weeks from now that you feel like you would have enough inventory in the system to be able to meet the level of retail demand or sort of how long will that period last? Thanks.
Well, as you saw, Robin, at the end of Q1, our inventory was up in the network about 7%, and part of that was driven by side by side. So year over year, side by side at the end of Q1 was up mid teens. And so we had a good level of inventory. Obviously, the retail is very strong, but we had anticipated strong retail when we started the quarter and we had, I guess, filled the network with some inventory. It might be tight for a few models in some regions, but the retail in May continues to be strong.
And as Jose mentioned, next week, we're going to be in full production and we're going to be starting shipping units to dealers again. Obviously, we'll be shipping the units that are in high demand. And so we believe that we'll be able to meet consumer demand and continue driving strong retail in the second quarter as well.
Okay. I guess just
looking at if side by side inventory is up mid teens, but in theory, retail is pacing seems to be pacing up 40% still in the month of May. Is that and I know those are on different basis, right? The retail pace and the inventory base are different numbers. So do you have enough inventory? Is the mid teens increase at the end of Q1 enough to support that kind of retail through Q2?
It's enough to support strong retail. We're going to finish Q2 probably with inventory down year over year. As I said in my prepared remarks, we might run out of certain models in certain regions. And so unfortunately, some consumers may not necessarily have the choice of color they wanted, But we believe that there's going to be enough inventory in the network to meet the overall demand. And as we rebuild our as we restart production and refill the pipeline, we believe that we'll be able to sustain that momentum.
So are we losing retail maybe in the Q2? Yes. But, we believe that with our production ramp up, we'll be able to catch up pretty quickly.
Okay, great. No, that's very helpful. Thank you. And then just other question, we had thought that the Alport Engine business was operating a loss and you kind of confirmed that. Can you quantify what addition to EPS you get just from maybe taking that loss out?
In other words, how much does that add to the bottom line?
Yes, good question. When I look back to fiscal year 2020, and I carve out the OE business, I'm looking at a $0.60 to $0.70 negative EPS impact.
Great. Very helpful. Thank you.
Your next question comes from the line of Mark Sedgwick with CNBC. Please go ahead.
Hey, good morning. I just wanted to follow-up on 2 things. First, with operational constraints and social distancing on manufacturing, does that ultimately impact your sort of capacity or throughput? Or do you expect to be able to ramp to previous levels?
Good morning, Mark. No, I mean, obviously, we're lucky enough to restart engineering in Canada about 5 weeks ago because we needed to plan the transition from model year 2020 to 2021 and we could not lose the momentum we had. Then we developed a lot of good measure to make sure that our employees are safe. And right now, we are implementing this protocol everywhere where we have factory. And we believe that in term of assembly and all the manufacturing operation, we will be as efficient as before.
That being said, as Sebastien explained, we need to rebuild the inventory, our own inventory to be efficient in shipping. You need a certain level of product and we are lucky we have many product lines. And right now when we ship, we have a mix of watercraft, ATV side by side. We're optimizing the load for few dealers in certain area. This will take a time to rebuild.
Then in the factory, our efficiency will go back quickly. I think it will take a few months before we are overall as efficient as before.
Okay, thanks. And then wondering if you could just give any other comments around sort of the type of demand that you're sort of seeing at the dealer level in terms of price points and the type of product and then maybe by least within side by side like Rec Sport Utility, how the demand profiles or the sales performance varies by those subcategories?
I would say it's all over. The demand is strong for every product line. It was a bit difficult for 3 wheel because we had to stop all our different activity to continue momentum. Even today, you cannot have a license or you cannot plate your vehicle because license office are still closed. But except for 3 wheel and now it's ramping up, I think we will recover the year.
But the demand for all the product lines are strong.
Okay. And then just the last one. Seb, you had mentioned sort of the positive working capital flow through for Q1. Just wondering about expectations for the balance of the year as production ramps up and inventories get moved around?
Yes, I'm expecting Q2 to be a consumer of cash on the working capital side as we pay off suppliers, we rebuild inventory. So that's going to be a negative probably in the range of $100,000,000 And then for the back half of the year, I'm expecting things to stabilize as they were in prior years and prior quarters.
Okay. Thanks a lot guys. All the best.
Thanks. Thank you.
Your next question comes from the line of Tim Conder with Wells Fargo Securities. Please go ahead.
Thank you. Good morning, gentlemen. A couple of items, just wanted to clarify and confirm prior question here. So, Seb, you said that for fiscal 2020, the impact of the engine business that you're discontinuing was about $0.60 to $0.70 in earnings?
Yes.
Okay. And then, gentlemen, can you kind of talk about the potential incremental investments you may be making in e commerce either at the company level or with the dealer network that has maybe as you said, as you've re examined things through coming through the trough of COVID and now on hopefully the continued positive slope of recovery. So we maybe need some more additional investments on e comm here, both again at the company level or at the dealer level?
Yes. And Tim, it's more rebalancing our portfolio of IT investments. Obviously, we believe that there might be a continued phenomenon of people working from home, of people preferring to obviously, everyone sees that have seen the trend of people shopping online. And so how do we make sure that we have the best tools for consumers or dealers? So, it's shifting of money, but it's not a huge capital investment that we're talking about.
It's more pre prioritized.
Okay. Okay. And then Jose or Seth, whoever wants to take this, the pricing and promotions, can any way to bucket what you're seeing, what you saw in Q1 and are expecting here over the balance of the fiscal year into what may be, let's call it normal promotions ex COVID and then COVID related, what you're having to do because of COVID? Any way to I mean, it's maybe a difficult question, but any way to sort of parse that?
Yes. It's a difficult question. Let's say that promotion was quite aggressive on noncurrent, like it always do. Off road, obviously, everyone want to benefit of the situation. On current, I would say it's about similar to what we see from some of our competitor over the last few years.
Then I would say no big change before and after the COVID. Non current, very aggressive. And some model on the current. We were aggressive on retail promotion for consumers with very good financing offer, 0 interest for 5 years and that definitely helped the retail because 2, 3 weeks ago, we didn't know how this would play. Then overall off road, watercraft, I would qualify it as normal and 3 wheel as normal.
Going forward, it's very difficult to predict. I think right now, if OEM are chasing capacity and want to make sure to ramp up, then most likely people will be maybe a bit less aggressive on program, but very difficult to predict what will happen in the coming months.
Okay, okay. Helpful. And then two last questions. 1, do you see any furtherance of a working relationship with Brunswick outside of the supply agreement on the marine side? And then, lastly, your thoughts on the potential of when you could potentially return to fiscal 2020 levels in terms of revenue or I would think profitability may have a quicker ramp given at least the $80,000,000 of structural savings on the engine side that you've eliminated?
On your question about Brunswick, Brunswick obviously is the perfect partner for us because they don't compete in powersports. Then it's a very good complement. We obviously are happy with the Avanrood, the outboard supply agreement that we have with them, and we could in the future exchange technology, but we'll see how this will play in the future.
And on your question, obviously, I'd love to give you an answer this morning to you and to the rest of the organization at DRP. There's obviously, as you can appreciate, there's still a lot of uncertainty, how things will pan out, how the economy will react to massive job losses. And so today, I'd say it's much too early to call when we believe things will come back to normal. The good news is, again, at BRP, I believe, we are in a much better position than we were back in 2008 and 2009 with the Great Recession. You guys understand well the leadership positions we have in all our brands and we believe that momentum is going to continue as we are seeing it continuing when things come back to normal.
So do we believe we'll come back to fiscal year 2020 levels someday? Absolutely. But today, it's too early to give any outlook.
Thank you, gentlemen.
Your next question comes from the line of Benoit Poirier with Desjardins. Please go ahead.
Yes. Thank you very much and good morning gentlemen. With respect to the engine contribution in fiscal 2020, was this 0.60 dollars $0.70 on EPS was positive or negative contribution?
It was negative, Benoit.
Okay, perfect. And now with respect to the Bose project and the Project M, I understand the timing is unchanged, and whether there's exclusivity or is Mercury does Mercury need to build a new engine for this particular project?
Good morning, Benoit. Obviously, Benoit, for competitive reason, I cannot go into detail of your question. The only thing I can say is Project GOES and Project M are ongoing, and we are confident about our reoriented our strategy.
But it will be an internally sourced technology, Benoit.
That will be manufactured by Mercury or We
won't go into the detail, but it's again, our partnership with Brunswick is for the supply of traditional outboard engine. And our plans for Ghost do not change and our plans for Project M do not change as well.
Okay, perfect. Okay, that's great color. And Jose, you mentioned that CapEx will come back and will be reduced obviously and the spending will be made on key projects. So would you maybe share some color on what you would consider as key projects right now? And maybe if you could share some discussion you had with the dealers following the announcement around the electric bikes last fall?
Thanks.
Benoit, I mean, we had before COVID an incredible momentum with all our product lines around the world. And in those reductions that we made, we then make sure that we protect as much as we can our 5 year lineups for all product lines. There is some adjustment here and there, but globally, we are very confident with what we're planning for the years to come. A lot of CapEx was related to plant, maintenance, equipment, turnover that will slow down for a period of time. But we protected our 5 year lineup.
Electrification is ongoing. And again, we didn't disclose when those products will be offered, but we'll see how all of this will play and how fast we can come back to the level that we had before the COVID-nineteen.
Okay. Perfect. And now when we look at your kids lineup, could you let us know how this product line is doing these days? And how would you compare your kids' product lineup against your peers right now in terms of product offering?
You're talking which product line, Benoit?
No, I'm talking about the kids lineup. So the DS90, the DS70, 225, I believe. So you have on the ETV side, you don't have your snowmobile for kids anymore. But just wondering whether you've seen more momentum around the kids products and whether you have the good offering as opposed to peers?
I think we have a competitive lineup in every segment that we are competing. And we decide to compete. And overall, I mean, we didn't see any drastic change with what happened in the last 1.5 months for those product lines. Like I said before, right now, the surge in demand is touching every single product line, every price point, low end, high end, then we didn't see a surge on the youth product, product for youth people.
Okay, perfect. And last one for me.
Hi, Dan. We need to move to the next caller on the line.
Perfect. Thanks.
Your
next question comes from the line of Greg Badishkanian with Wolfe Research. Please go ahead.
Hey, guys. Good morning. It's Fred Wightman on for Greg. Just one quick one from us. If we look at the share gains in side by sides in the quarter, that was
a big acceleration versus what we've seen over the past few quarters. So how should we think about that gap going forward? And what is driving that? Is it really just product availability in the channel? Or is it something else?
I mean, again, we have I believe we have very good competitive product. And the Can Am brand is more and more known. The awareness is improving. People like the quality of our product and how they ride, then I think it's all those things that are happening. Then again, good product, dealer making good money, better margin with our product line, then it's a combination of all this that created the momentum.
And your next question comes from the line of Derek Glee with Canaccord. Please go ahead.
Yes. Hi, guys. Just a quick one for me. Just in terms of your dealer network, have any of them decided not to reopen due to the financial distress that was caused to some of them over the past month or 2?
We've been very lucky. None of our dealers have defaulted on their obligations with either their financial institution or the floor plan partners. The dealers came in to this in a very good financial position because obviously our business with them has been growing and they've made a lot of money with us. We've been proactive as well early in the COVID-nineteen by supporting our dealers with extended floor plan, working with TCF also to provide extended payment terms on interest that may be due. So, they deferred payments by over 90 days.
And now with the retail that we're seeing, obviously, that's providing good cash flows for the dealers. So as of now, we're not seeing anything concerning on the dealer health side.
And is that more specific to you guys, the fact that you had 0 of them have to close or what did you see overall in the industry?
Well, obviously, we know what our dealers how our dealers are performing and how other dealers it's not I a business that we're looking at closely. But obviously, we work hand in hand with TCF. They're very proactive in assessing dealer health. And overall, I think, as I said, given that the dealers have made money with us and maybe had a period of 2 to 3 weeks where things were tougher, but things restarted pretty quickly, I'm sure that brought a breath of fresh air to a lot of our dealers.
Okay. Thank you very much.
Your next question comes from the line of Jamie Katz with Morningstar. Please go ahead.
Hi, good morning. Thanks for taking my questions. I'm curious piggybacking on Tim's question, since we don't know when we get back to 2020 levels, are you guys basically tabling the 2025 plan for now and rethinking it? Or do you think that there's enough sort of road ahead of us that we can that you guys can get back on track to achieve those goals? Thanks.
No, I mean, we don't know. We are the pillar of the M25 plan are still there. But before the situation stabilize and the situation we have a better view on when we'll go back to what we call new normal, we don't want to commit on anything. Then at the right time, we'll definitely, if there is a need, realign M25, but for the time being, it's too early.
And Jamie, when we announced M25 last fall, we did get the question, what will happen if there's a recession and what we said then and it's still relevant today as well. If a recession happens, maybe it's going to slow us down by a year or a year and a half, but the ultimate goal does not change. And today, that's still our position.
Okay. And then at the end of the MD and A discussion, there was some commentary that internal controls for financial reporting were ineffective, and it looks there were no material restatements surrounding that. But I'm curious what the timeline for the mitigation of that is just to sort of get my head around what the timeline of maybe anything down the road that might come up with a restatement?
Yes. Obviously, when we listed in the U. S. On NASDAQ, we were obligated to comply with the SOX requirements over the control environment. Related to financial reporting, obviously, we've always had clean audit opinions as you have seen.
And so there are the quality of our numbers still remain and Jose and I sign them every quarter and we stand behind them. Related to the material weakness that was noted is around access controls around our systems. Obviously, we have compensating controls, but the nature of the preventive controls need to be strengthened. And the timeline to do this is over the next 2 years. Our objective is for fiscal year 2022 to be fully compliant.
Your next question comes from the line of Cameron Doerksen with National Bank Financial.
Yes, thanks. Good morning. Just really one question for me just with regarding gross margins. And you talked about in Q1 a 3 50 basis point impact from, I guess, COVID-nineteen related stuff. How should we think about gross margins in Q2 with revenue down 40%?
And I guess maybe also if you could talk a little bit about what the second half of the year gross margin profile might look like on lower revenue, but on the offset, you've got outboard engine that's not going to be there. So just some commentary about gross margins in Q2, but also the second half of the year.
Yes. Well, I'm expecting gross margins to be impacted quite significantly in the Q2. Obviously, our plants are going to be closed for a month out of the full quarter. Inventory ramp up should help a bit on the margin side, but obviously with a significant reduction in volume, margins will be hit. When I look at the full year, and I'll go through probably the EBITDA margin there.
Again, if hit those revenue numbers that I talked about, I'm expecting my EBITDA margin probably to be in the range of what we reported back in fiscal year 2018, fiscal year 2019 there. Those would be the numbers that I'd expect it to meet for the full year, Cameron.
Okay. No, that's very helpful. I'll leave it there. Thanks very much. Thanks.
Your next question comes from the line of Brian Morrison with TD Securities. Please go ahead.
Thanks very much. I'll keep this quick. I appreciate your comments on working capital. Just in terms of free cash flow the year based on what you've given us, is it fair to say that you're looking at breakeven
to slightly positive?
Well, free cash flow, we'll call it free cash flow from operations, Brian, yes, breakeven. But obviously, with the discontinuation of outboard engine, there will be a cash outflow coming with that. The expected cash outflow is about $60,000,000 to $85,000,000 that we reported in our financials. And so that's going to be a headwind to cash generation. So I'm expecting to burn cash this year with the closure of outboard engine.
Okay. Thank you. And then just market share with the growth that you've had in side by side vehicles, specifically utilities, can you update us where you think you are?
Can you repeat your question? The sound is bad.
Sorry, Juste. Just in terms of your market share with side by side vehicles, what do you think your current market share is with the growth that you've had and specifically in the utility side?
But obviously, for competitive reason, we don't disclose the detail, but we are around 20% market share globally.
Thank you. Thank you very
much. And your next question comes from the line of Brendan Voley with Marcos Research. Please go ahead.
Good morning. Thank you for squeezing me in here. Our conversation with dealers exiting Memorial Day weekend indicated a lack of inventory in 4 to 6 seat units for side by sides just from a surge of demand of families wanting to get into ORVs. Could you talk about, I guess, the timing for production ramp up for those units? And any risk you see from maybe families going to alternative, maybe going to boats or RVs or going away from RVs because of a lack of inventory of those larger seated units?
Thank you.
Yes. I mean, like Sebastien explained, for sure, there is some customer who will show up at the dealership and will not have the exact model that he is looking for. He won't have the blue or the red that he is looking for. No doubt about that. If the customer want exactly what he needs, he might be unhappy.
That being said, we try to encourage transfer of inventory between dealership. And again, like we said, we're ramping up production. We're restarting production this coming week, and we will try to refill the pipeline as fast as we can. But again, we know that in some area, some model will be out of some product.
Okay. Thank you. And there was some fears that one of your competitors was ramping up production maybe a week 2 before you and they have product in the field. Do you see that as a concern at all?
For sure, I
mean, like Sebastien presented, our inventory level at the end of the quarter was higher than last year. Then we feel that we have sufficient of inventory. And we believe that for restarting the factories, we are all about at the same timing because we're all waiting for government to give us the green light to restart then maybe a week apart. But overall, we are in the same situation.
Okay. Thank you for that color.
And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Great. Thank you, and thanks everyone for joining us this morning. We look forward to speaking with you again for our Q2 call on August 27. Thanks again. Have a good day.
This concludes this conference call. You may now disconnect.